June 24, 2021 (MLN): Pak Suzuki Motors Company (PSMC) – one of the largest auto manufacturers in Pakistan is likely to be the major beneficiary of the incentives provided by the government to the automotive sector under the federal budget for FY22.
The budget for FY22 has kept the upbeat of the sector intact by the proposed abolishment of FED which was 2.5% previously. Moreover, the sector will also be benefitted from a reduction in sales tax from 17% to 12.5% on locally manufactured/assembled vehicles with engine capacity up to 850cc.
The announcement of these incentives has created a strong positive vibe throughout the industry as it would help the industry players to maximize their margins and improve competitiveness as well.
Given these specific incentives on the locally assembled cars up to 850cc, PSMC would be the major beneficiary as three out of its six completely knocked down (CKD) vehicles fall under the 850cc category; namely, Alto (660cc), Bolan (800cc) and Ravi (800cc), a report by BMA Capital said.
It is estimated that combined sales of Alto, Bolan and Ravi to reach 72K units, surge by 101% YoY in CY21, with major uplift witnessed in 2HCY21 as ex-factory prices are expected to decline by 6%. The total unit sales of PSMC should climb 109K units, up by 84% YoY during CY21, Taha Madani, Research Analyst at BMA Capital highlighted.
While, lower taxes will not likely be applicable only to Ravi, since it falls under a separate PCT code and is classified as a commercial vehicle, a report by JS Global pointed out.
Going in to the details, the research by Fortune Securities highlighted that the 8th generation Alto is likely to be the star product for PSMC given its contribution to the overall sales volume of PSMC. Falling in the same price bracket and features, Prince Pearl and United Bravo are direct competitors of Suzuki Alto.
The research further illustrated that despite the competitors having greater engine capacities while targeting the same market segments, Alto enjoys a competitive edge due to Suzuki’s brand image, lower maintenance costs, a wider dealership network, availability of parts, and better post-sales services as compared to the competitors.
Traditionally, the sales trend of registered auto manufacturers in Pakistan depicted that PSMC dominated the passenger car market with an average market share of 58% (FY13-FY20). Whereas INDU and HCAR maintained an average market share of 25% and 17% respectively.
The introduction of new entrants and a shifting trend to SUVs have been driving the market share away from the Big Three. However, the incentives in budget FY’22 for cars under 850cc are expected to supplement PSMC’s market share as it is the sole listed OEM to benefit from this incentive, research highlighted.
On the capacity front, PSMC produces 150k units per year on a double shift basis to fulfill any demand-supply gap in the short to the medium term where new entrants like Proton (25,000 units) and Changan (30,000 units) might not be able to cater masses with their current capacities.
The research believes that higher steel prices led by the commodity supercycle are likely to increase raw material costs for PSMC, where the management intends to pass the majority of the incremental costs on to customers to maintain their profit margins.
It is therefore expected that GP margins will be 7% for CY21 (1QCY21A: 6.12%) and 8% in CY22 with stabilizing at 7% in subsequent years.
The report also underlined that CY21 is likely to show significant improvements in terms of volumes due to overall economic recovery, higher GDP growth, high purchasing power, and low/single-digit interest rates. Sales volumes showed significant growth of 34% during 11MFY21 (units sold: 82,926) and are expected to maintain this upward trajectory.
According to Ahmed Lakhani, Senior Analyst at JS-Global, “the company intends to fully pass on the reduced cost impact to customers. This will have a positive impact on demand, given lower prices of certain models.”
At the same time, this does not allow the company to retain some of the advantages of lower taxes to boost its profitability via higher margins, he added.
The overall scenario will certainly help PSMC to reap maximum benefit out of the given incentives/tax cuts and abolished FED. Plus, the expected launch of the new Swift‘21 model will be the cherry on the top.
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