Profit margins down, another price hike, yet the Auto industry continues to thrive

It has been only three months since the start of the New Year but the Automobile industry is leaving no stone unturned in hitting the headlines repeatedly. While there have been various positives, this does not mean that the industry has not been cutting corners to remain on the front.

An overview of the sector for the outgoing quarter

The analysis is based on the financial results of top five car assemblers in the auto industry i.e. INDU, ATLH, MTL, HCAR and PSMC. These companies have 80.78% share in total market capitalization of the automobile sector.

As shown in the table above, the overall net profits for the sector stood at Rs. 4.9 billion, i.e. 42% YoY lower than the same quarter of previous year. The fall in profitability was reflective of poor growth in revenue, increase in cost of production, fall in non-core income as well as massive surge in finance costs,

The sector’s revenue showed a meager growth of 6% in the outgoing quarter, which was majorly attributable to the highly impressive performance of Indus Motor Company, as its revenue went up by 30% while the remaining companies’ sales either declined or more or less remained the same. Moreover, volumetric growth as well as price hikes by the auto companies also helped in lifting the sales revenue margins of the sector.

As expected, the cost of sales went up by 12%, and the gross profit margin declined by 33% which is a result of PKR devaluation of around 26% between Dec-2017 and Dec-2018.

The financials cost also increased massively, mainly due to the weak cash position of the sector on declining profitability.

Company wise, INDU emerged as the clear winner in terms of revenue which grew by 29% YoY in 2QFY19, as a result of brand loyalty of customers towards the company’s products, especially the Corolla and the Fortuner which are a key success factor for the company

Despite an increase in the sales revenue by a good margin, the company’s net profits still declined by 8.9%. This was because of a relatively larger increase in company’s cost of sales by 38%.

PSMC posted a Loss after Tax of Rs. 94 million (LPS: Rs. 1.15) for the 4QCY18 as compared to profits of Rs. 728 million (EPS: Rs. 8.86) in the quarter reported last year. Unfortunately, the company failed to meet the market anticipations and performed below expectations.

The major hit in the bottom-line was a result of deterioration in gross margins which tumbled by 56% YoY to PKR 989 million in 4QCY18 on account of PKR devaluation of 12% in the out-going quarter.

Millat Tractors posted a net profit of Rs. 507 million for the 2QFY19, which was around 70% YoY lower than the results of same quarter last year. The reason behind such an awful performance was a decline of 42% YoY in the company’s sales revenue, due to weak agricultural growth and plant maintenance shutdown.

Moreover, the gross margins of the company fell by 61% in the period under review, explained by PKR depreciation.

Similarly, HCAR stated its net profits for the 3QFY19 at Rs. 601 million, i.e. 58% lower than the same period of last year. The company’s earnings were down amid rise in cost of sales owing to PKR devaluation which shed the gross margin by 28.5% YoY in the out-going quarter.

Despite multiple price hikes since Dec 2017, net sales of the company fell by 2% YoY due to 11% YoY fall in volumes during the outgoing quarter. Decline in volumes was led by 61% YoY lower BR-V sales in 3QMY19, while city and civic variants showed 6% YoY growth in the same period

The decline in the company’s other income was a result of lower cash and short term investments due to reduced advances from customers available to the company.

Other factors to drag earnings down were surge in distribution and marketing expenses as well as other operating expenses.

Blatant price hiking continues!

We recently witnessed another hike in car prices by two of the major industry players, namely Pak Sukuzi Motors and Honda Atlas Cars. While PSMC increased car prices in range of 10000 to one lakh rupees on different variants, Honda Atlas Cars announced to increase prices of Honda Cars with effect from 1^st April 2019.

As stated by these companies, the prices were raised due to the impact of unfavorable movements in exchange rate on the existing prices. HACPL in its notice even went on to say that it didn’t pass any impacts of exchange rate to the customers since last rupee devaluation on the back of rupee stabilization hopes, but at present it is not possible to maintain current prices.

The worst part is that the new RSP will be applicable on new booking and on those who have already booked a vehicle with partial/ full payments. This is going to be the sixth time that Honda has increased prices since the rupee started losing its value massively in December 2017.

As rupee continues to depreciate against dollar, these companies are finding more and more reasons to make their products appear more costly to the customers. Whether the increase in prices only accounts for the impact of rupee devaluation and interest rate hike, or is a mere excuse to earn more from the consumers, is something which can be deliberated upon.

However, some experts have presented the flip side of the story as well. According to them, any unfavorable movement in rupee-dollar exchange rate raises cost of imports, which puts immense pressure on the vending industry as it relies heavily on imports. Since the imports of raw materials are continuously thriving, the resulting increase in cost of production has made price hiking inevitable.

So far so good

In spite of entry of new entrants and models in the market, the demand for the automobile is expected to remain passive due to fragile economy along with rising inflation, higher interest rates and PKR devaluation.

Nevertheless, the entry of new players and debottlenecking of existing plants would not only improve production and competition, but also pressurize some of the companies to keep their price hiking tradition at bay.

Recently, a Senate Standing Committee on Industries had also said that the government should devise policies for growth of the auto sector including formulation of standards for car parts. Besides, the government recently tightened the noose on imported car segment by further regularizing the payment mechanism. This should again be a positive sign for the industry.

Moreover, with the drastic curtailment of used import CBU’s, the premium segment manufacturers could further entice demand from the re-sale/import market, maintaining market share in the process.

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