Automobile Industry: What the investors are failing to see!

The Auto Sector has become the talk of the town lately, especially after the government issued its amended Finance Supplementary Bill of 2019. The newly altered mini-budget allowed for certain policies which appeared to be a blessing to the majority, when in fact they were more than just a blessing in disguise.  

The step by the government to remove ban on non-filers to purchase vehicles irrespective of engine capacities was highly appreciated and welcomed by the general public. Previously, it was proposed that non-tax filers were allowed to buy vehicles up to 1300cc only.

However, the imposition of 10% Federal Excise Duty (FED) on locally manufactured vehicles with engine capacity of 1700cc and above has sent up a trial balloon for the sector. Earlier, a 10% FED was imposed on 1,800cc and above vehicles, which was almost neutral for the auto sector as approximately 4% of the sector’s sales were in the 1,800cc and above engine category.

The Automobile companies as usual, in response to this policy, hiked the prices of their cars to pass on the impact of FED on consumers. Indus Motor Company increased prices of its 1,700cc and above engine capacity vehicles by 10%. 2017.

This is the fifth time the company has hiked car prices since January 2018 as shown in the graph below, which also illustrates the susceptibility of the prices of different Toyota car models towards PKR devaluation. The largest change in car price since January 2018 was witnessed by 1.8 Altis MT model by 31%, whereas XLI saw minimum change of 13%.

It is important to note that the removal of the non-filer ban will be majorly positive for Indus Motors, since all its variants (except Corolla Gli/Xli) are above 1,300cc, and the management of the company has indicated that more than 30% of its customers are non-filers.  

Honda Atlas Cars Limited also revised up the prices by 11.5% of two of its motor vehicles following the second amendment of Finance Supplementary Bill 2019. Similarly, this is the fifth time the company has increased car prices since the rupee started losing its value massively in December 2017. The Civic VTEC M/T model witnessed the largest change in prices by 30%, while prices of Honda BRV grew by merely 6% since January 2018.

However, the question now arises that can these companies really afford to continue relying on passing on any impact emanating from rupee-dollar parity, soaring petrol and diesel prices, higher interest rates and government imposed duties on to the consumers? The answer is no.  

The continuous shameless hike in car prices coupled with growing supply in the market with the entry of new players is only going to affect auto sales in the coming months, negatively.

This view can be supported by the sales data released by Pakistan Automotive Manufacturers Association (PAMA), which shows that total sales in the month of February declined by 27% MoM to 19,661 units, mainly due to PKR devaluation, the purchase restriction on non-filers for above 1000cc vehicle, and increased financing cost from higher mark-up rates.

As per the data, Indus Motor stood out as the only company which posted positive sales growth of 9% in 8MFY19, whereas PSMC and HCAR posted declines of 11% and 5% respectively. This decline in sales is expected to continue in the coming months due to recent increase in prices.

Another important point to note is that a lot of tax filers have labelled these new government policies as unfair, because these policies have not only allowed non-filers to purchase cars regardless of engine capacity, but have also imposed FED on both filers and non-filers. These changes have mitigated the added benefit of being a filer and blurred the line between the two parties.  

What’s worse? Fitch Solutions recently revised down its forecast for new vehicle sales in FY19 and FY20 to a 2.4% contraction and 1.3% growth respectively, down from 7.3% and 10.6% growth forecast previously. The research house attributed this downward revision to the supposition that Pakistan’s auto sector is likely to struggle in FY19 and FY20 as the sector’s over-reliance on Chinese investment has come to fruition.

The change in government’s policy would only offer marginal support to the demand for passenger vehicle sales as the majority of non-filers remain poor and unable to afford new vehicles, the report added.

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Posted on: 2019-03-15T16:04:00+05:00