September 2, 2019 (MLN): The performance of the Automobile industry in the last few quarters was not something to write home about. However, the results posted by all the major auto players around this time have finally depicted a very, very depressing picture.
It is understood that Automobile, along with other dominant sectors of the country, has been on the hit list of an ever declining economy. While some sectors fell prey to the adverse economic conditions instantly, the auto sector took its time.
The Auto industry has become a victim of various economic challenges, including rising interest rates, depreciating currency (biggest drawback as auto companies rely on import of car parts), economic slowdown as well as increase in Federal Excise Duty (FED).
While some of the challenges mentioned above are systematic in nature, which means they cannot be controlled by the sector alone, it is unfortunate that auto companies have almost every time resorted to increasing prices to prevent themselves from taking on any burden of these challenges.
We have probably lost count of all the times we have mentioned that the continuous hiking in prices has and will continue to damage the well-being of auto sector, lest no other levelheaded measures are implemented on time.
To demonstrate our point of view more statically, below is an analysis of the financial results released by major auto companies, including Indus Motors (INDU), Honda Cars (HCAR), Atlas Honda (ATLH) and Pak Suzuki Motors (PSMC), for the quarter ended June 30, 2019.
|
Automobile Industry – Profit and loss statement for the quarter ended June 30, 2019 (Rupees’000) |
|||
|---|---|---|---|
|
2019 |
2018 |
% Change |
|
|
Net sales |
111,767,837 |
116,752,221 |
-4.27% |
|
Cost of sales |
-104,122,924 |
-104,070,650 |
0.05% |
|
Gross profit |
7,644,913 |
12,681,571 |
-39.72% |
|
Distribution expenses |
-2,108,683 |
-1,688,255 |
24.90% |
|
Administrative expenses |
-1,344,563 |
-1,295,671 |
3.77% |
|
Other operating expenses |
-943,671 |
-581,177 |
62.37% |
|
Workers' Profit Participation Fund and Workers' Welfare Fund |
-307,900 |
-530,216 |
-41.93% |
|
Other income |
1,640,943 |
2,143,158 |
-23.43% |
|
Finance cost |
-465,951 |
-64,629 |
620.96% |
|
Share of loss of equity accounted investee |
1,204 |
9,617 |
-87.48% |
|
Profit before taxation |
4,116,292 |
10,674,398 |
-61.44% |
|
Taxation |
-119,296 |
-3,899,942 |
-96.94% |
|
Profit after taxation |
3,996,996 |
6,774,456 |
-41.00% |
As evident from the table above, the profits of the auto sector have come down by 41%, from Rs. 6.7 billion to Rs. 3.9 billion. The sector saw an adverse change in revenue growth, perhaps due to the fact that consumers could no longer afford vehicles at such high prices.
For some odd reason, the cost of sales remained static at Rs. 104 billion in the said period, despite higher import cost resulting from persistent PKR devaluation. However, the impact of a highly weak currency can be seen in the gross profits, which have slumped by 39% during the quarter.
In spite of increase in interest rates, the noncore income of the sector went down by 23%. This signifies that the auto companies reduced their investments in short term interest bearing instruments.
Company wise, PSMC emerged as the only company that declared losses as it appeared to be more vulnerable to adverse movements in exchange rate as compared to its peers. It announced losses of Rs. 544 million (LPS: Rs. 6.62) for the aforementioned quarter.
On the other hand, INDU stated the highest profits amongst its competitors for the said period, as it totaled Rs. 3.4 billion (EPS: Rs. 43.99). Nonetheless, this amount was 16% lower than the earnings of same quarter of last year.
The largest decline in earnings, apart from PSMC, was reported by HCAR, as its profits dropped from Rs. 1 billion in same period of last year to Rs. 241 million (Rs. 1.69) this year. The company has not really shocked the market with its performance, as it is already on a losing streak.
Latest volumetric sales data says it all!
Auto sales in Pakistan during the month of July fell by 41% on year-on-year basis and 28% on month-on-month basis. These declines were on the cards even before the results were announced by Pakistan Automotive Manufacturers Association, all thanks to persistent price hikes, increase in Federal Excise Duty (FED) as well as energy and fuel cost.
Going by the data gathered by PAMA, the major decline in sales was endured by Honda Cars (HCAR) at 66% YoY. Indus Motors (INDU) and Pak Suzuki Motors (PSMC) followed lead by posting declines of 56% YoY and 23% YoY respectively.
A forlorn hope
In our earlier reports on auto sector, we mentioned that auto companies are trying their best to remain resilient and strong amidst extremely miserable state of the economy. However, it seems that we might want to rethink our earlier opinion, as the sector is definitely not fighting profusely against all the adversities.
Going forward, the demand for vehicles is likely to remain passive with a deteriorating economy. However, the tables can still turn around if PKR continues its stability against the US Dollar while government keeps a check on inflation, interest rates, and other factors that have the potential to impact auto sector considerably.
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