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Automobile Sector Review – Rotten luck!

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November 15, 2019 (MLN): Pakistan’s economy has shown a laudable amount of recovery in the last few months, with many economic indicators finally moving on positive trajectory. While many sectors are already benefitting from this improvement in economic setting, the same cannot be said for the Automobile Sector as it continues to bite bullets, precisely due to the faults of its own.                                                                                    

To demonstrate our perspective more rationally, below is an analysis of the financial results released by major auto companies, including Indus Motors (INDU), Honda Cars (HCAR), Atlas Honda (ATLH) Pak Suzuki Motors (PSMC) and Millat Tractors (MTL), for the quarter ended September 30, 2019.

Statement of Comprehensive Income for the quarter ended September 30, 2019 (Rupees in '000)

 

2,019

2,018

% Change

Net sales

81,900,358

116,366,145

-29.6%

Cost of sales

76,494,998

104,049,168

-26.5%

Gross profit

5,405,360

12,316,977

-56.1%

Distribution expenses

1,706,961

1,763,009

-3.2%

Administrative expenses

1,481,982

1,511,537

-2.0%

Other operating expenses

97,953

499,786

-80.4%

Workers' Profit Participation Fund and Workers' Welfare Fund

131,867

408,942

-67.8%

Other income

1,075,584

1,791,145

-39.9%

Finance cost

672,567

63,314

962.3%

Profit before taxation

2,389,100

9,861,659

-75.8%

Taxation

695,148

3,167,606

-78.1%

Profit after taxation

1,693,952

6,694,053

-74.7%

As apparent from the table above, the net profit of the sector stood at Rs. 1.69 billion, i.e. down by 74.7% as compared to the same period of last year. It is imperative to mention that the decline in overall profits would be 56.7% if we exclude the losses incurred by PSMC from the analysis.

The dismal performance of the sector was driven by a number of factors, including the fall in consumer spending owing to the ongoing economic slowdown, excessive documentation drive by the government, rise in auto financing, higher inflation and most importantly, persistent increase in prices!

The net sales stood at Rs. 81.9 billion during the period, down by 29.6% as compared to SPLY. This drop was caused by a number of factors, including fall in volumetric sale amidst higher prices, the imposition of Federal Excise Duty as well as additional custom duties.

The biggest setback came in the form of finance cost, which augmented 9x as compared to the same period of last year. This can be attributed to higher interest rates as well as an increase in overall borrowing by the major players.

Another appalling factor in the abovementioned results is the decline in non-core income by 40%, due to fall in short term investments by the major players.

Nonetheless, the cost of sales fell by 26.5% due to stability in local currency as well as a decline in the prices of steel.

Indus Motor Company: INDU suffered a decline in its earnings from Rs. 3.5 billion in last year to Rs. 1.3 billion this year, i.e. down by 62.4%. Clearly, the company continued to face the wrath of unrelenting decline in the volumetric sale on account of higher prices, as well as the adverse economic situation of the country.

Unsurprisingly, the gross profits fell by 59.5% due to the company’s inability to pass on the impact of PKR devaluation onto the consumers. The non-core income also fell by a considerable margin of 34% due to fall in short term investments as well as fall in bank deposits. The company also paid an Interim Cash Dividend for the aforementioned period at Rs. 7 per share i.e. 70%.

Pak Suzuki Motors: PSMC reported losses of Rs 2.68 billion (LPS: Rs. 32.64) for the half-year ended on September 30, 2019, against the profits of Rs 1.39 billion earned in the same period last year, mainly on the back of higher production cost and the inability of the company to pass on the rising costs to customers, as volumetric sales already on a downward trend.

The gross margins of the company shrank from 7% to 1% on account of currency depreciation and higher duties on the imported raw material. Furthermore, the finance costs of the company skyrocketed by 771% YoY owing to a rise in borrowings to meet the working capital requirement.

Millat Tractors:  MTL posted net earnings of Rs. 456 million (EPS: Rs. 10.3) for the quarter ended September 30, 2019, i.e. 65% lower than the numbers of the same period last year.

The topline earnings of the company fell by around 45.6% despite an increase in the prices of tractors. This fall in revenue can be attributed to the decline in volumetric sales. Similarly, the gross profits of the company fell by 53.3% owing to local currency devaluation which led to higher input costs.

The non-core income of the company also declined by a considerable margin due to a fall in dividend income from subsidiaries as well as lower interest income from bank deposits.

Atlas Honda: ATLH announced earnings of Rs. 1.4 billion (EPS: Rs. 11.38) for the half-year ended September 30, 2019, i.e. around 27.2% lower than the earnings reported in the same period of last year.

The gross profits of the company slumped by 19.7% on account of persistent Rupee devaluation. Moreover, the finance costs increased by 25.8% due to the hike in interest rates.

On the brighter side, the non-core income surged by 24% whereas the non-core expense declined by 22.5%. The company also announced an Interim Cash Dividend for the above stated period at Rs. 6.5 per share i.e. 65%.

Honda Atlas Cars: HCAR reported net earnings of Rs. 751.4 million (EPS: Rs. 5.26) for the half-year ended September 30, 2019, i.e. around 64% lower than the earnings reported in the same period of last year. 

A lot of factors played a role in the bleak performance of the company, including a drop in volumetric sales which resulted in a 40.5% decline in revenue, a decline in non-core income and colossal rise in finance cost. Nonetheless, the fall in income tax expense by approximately 70% proved to be a source of respite for the company.

Volumetric sale continues to crash!

The overall volumetric sale by the auto sector showed no improvement, as the total number of units sold during the quarter was lower by 41% as compared to the same period of last year. As stated earlier, the decline was prompted by higher prices, lower spending by consumers owing to economic slowdown and higher auto financing.

According to a monthly review conducted by Pakistan Automotive Manufacturer’s Association (PAMA), INDU suffered a 57% decline in overall sales owing to less demand for its Corolla Variant. This comes as a serious shock as well as a source of apprehension for the company, as Corolla is known to be the highest source of earnings for INDU. Apart from that, the sale of Fortuner and Hilux also declined considerably by 43% and 32% respectively.

HCAR followed INDU’s suit by posting a decline of 68% in volumetric sales during the period, which by the way, is also the highest amongst its peers. As expected, Civic and City caused most of the damage as their sales went down by 66% on account of higher prices.

PSMC also failed to surprise spectators with its performance as its sales went down by 18%. The decline was mainly caused by a fall in the demand of Wagon-R variant, as consumers found themselves more interested in Alto and also the newly launched Picanto by Kia Motors.

The performance of auto sector continued to diverge from that of the KSE-100 index, as apparent from the graph above. The performance fell sharply during the month of July, picked up slightly in August and then remained somewhat stable in September.

All in all, the sector snatched approximately 181.77 points from the benchmark index. Company wise, INDU got stripped off by 60.7 points, PSMC by 31.96 points, HCAR by 9.55 points, ATLH by 8.5 points and MTL by 71.02 points.   

Federal Cabinet drops another bomb on the sector…

Just around last week, the Pakistan Association of Automotive Parts & Accessories Manufacturers had taken a strong exception to the Federal Cabinet’s decision for giving its consent to an “ELECTRIC VEHICLE POLICY” without taking the auto industry on board.

Chairman PAAPAM had noted with concern that instead of supporting the already troubled local Auto Industry these type decisions send wrong signals. With an active Auto Development Policy in place already and with over 16 licenses issued to potential investors and new Auto Electric vehicle policy will only create more confusion.

He further reiterated that defective policymaking results in industrial disasters. It is these types of ad-hoc decisions that result in excessive External debt creations and transfer of jobs to other countries rather than in Pakistan. Any policymaking must evaluate the full value chain and cross value chains of other industrial supply chains.

What’s next?

It’s needless to say that the induction of Electric Vehicles in Pakistan might prove to be another nightmare for the auto sector, as it is already fighting tooth and nail to revive its standing. Despite the grave criticism and resentment shown by PAAPAM, the electric vehicle manufacturers and assemblers have established Pakistan Electric Vehicles Manufacturers Association (PEVMA) to promote Electric Vehicles and its allied product in Pakistan through joint ventures. This might just add to the hurdles and challenges currently being faced by the sector.

On the brighter side, the Pakistani Rupee has shown a great deal of stability against the US Dollar in recent times, indicating that there wouldn’t be any further hiking in prices in the near future. Nevertheless, the auto sector still has a very long way to go when it comes to luring customers to buy cars that are completely out of their league in terms of affordability.

Taking into account the above stated frivolities, it is likely that the sector will continue to depict depressing performance for the remaining part of current year, as consumers will mostly prefer newer models. Nevertheless, an improvement in volumetric sales can be expected in the second half of current Fiscal Year.

Copyright Mettis Link News

Posted on: 2019-11-15T14:59:00+05:00

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