New Year effect in play: November 2010 saw industry volumetric sales decline by 15% MoM, a trend attributable to New Year effect and anticipation of reduced car prices in 2011 (RGST to go down to 15%). YoY sales bucked this trend, jumping 18%, thanks to a recovery in 800 and 1000cc segment sales. This took total 5MFY11 sales to 58,802units.
Despite slower MoM sales, PSMC remains market leader: PSMC’s market share jumped to 54%, owing to its domination of 800 and 1000cc segments and the ongoing YoY recovery in volumetric sales in the said categories. This was also a result of attrition in INDU’s market share (down from 39% to 36%), due to weaker Corolla sales.
Imports of 5-year old cars allowed could mean greater competition for local producers: Approval of proposal allowing import of 5-year old cars could ramp up competition for local auto producers, and induce a substitution effect, but it’s difficult to determine the extent, as PKR/Yen parity has touched new lows.
Year end effect to keep Dec 2010 sales muted: While sector outlook remains clouded, volumetric sales have still demonstrated strength. We expect to see a slowdown in Dec 2010 due to New Year effect. But PSMC which has already sold 72,410 units CYTD should easily equal, and quite likely surpass our sales forecast of 75,473units. We maintain our ‘HOLD’ stance on the scrip, with June 2011 PT of PKR77/share (CY10E EPS at PKR5.91).
New Year effect in play
Industry volumetric sales suffered a broad based slump on MoM basis, falling 15% in November 2010. While weaker Corolla sales (down 26% MoM & 9% YoY) contributed to this trend, main reasons underlying the slowdown include year-end effect (consumers prefer January registered cars), and possibly, anticipation of lower prices in 2011 due to a reduction in RGST rate (from 17% to 15%). Despite MoM decline, sales jumped by 18% YoY, reflecting a strong upward trend, driven mainly by recovery in 800 and 1000cc segments (increased 32% and 27% YoY respectively). This took total 5MFY11 sales to 58,802 units.
Despite slower MoM sales, PSMC remains market leader
Despite a 9% MoM decline in sales, owing to its monopoly in 800 and 1000cc segments and given the ongoing YoY recovery in volumetric sales in the said categories, PSMC reigns supreme with a 54% overall market share (up from 50% in Oct-10). This was also a result of attrition in INDU’s market share (down from 39% to 36%), due to weaker Corolla sales.
Imports of 5-year old cars allowed could mean greater competition for local producers
Finally, after being delayed numerous times, the Economic Coordination Committee (ECC) recently approved MoI&P proposal, allowing import of 5-year old vehicles. We expect this to ramp up competition for local auto producers, which in face of rising costs (raw material costs and PKR/Yen weakness) have so far refused to back down from hiking prices. Revised import policy could trigger a substitution effect; however, it is difficult to ascertain its extent as PKR has depreciated considerably against USD and Yen since FY07 (42% & 108% respectively), which makes imported cars today more expensive than they were back in FY07.
Year end effect to keep Dec 2010 sales muted
While rising costs, uncertain regulatory environment and overall macroeconomic weaknesses remain dominant factors that cloud outlook for the auto sector, overall volumetric sales have demonstrated strength. December 2010 will most likely see a slowdown due to New Year effect, as consumers postpone buying decisions to January 2011. Nevertheless, PSMC, which has already sold 72,410 units CYTD should easily equal, and quite likely surpass our sales forecast of 75,473 units. We maintain our ‘HOLD’ stance on the scrip, with June 2011 PT of PKR77/share (CY10E EPS at PKR5.91).
Economic & Political News
Failure to implement power sector reforms: government may have to raise subsidy by PKR100bn
The government may have to increase subsidy for power by PKR100bn for the current fiscal year due to failure of the Ministry of Water and Power and the Planning Commission to implement reforms in the power sector in an effort to minimize tariff differential as per the conditions of multilateral agencies. PKR30bn was earmarked as subsidy for power sector in the current fiscal year’s budget which was recently increased to PKR67bn largely due to failure of power reforms aimed at minimizing production and tariff recovery differential cost. The subsidy for power sector, an official of the Ministry of Finance said, is most likely to be increased by PKR100bn owing to PKR136bn to PKR156bn anticipated loss on account of tariff shortfall. The government is raising tariff by 2% each month effective October 2010 and will continue to do so for the remaining six months of the current fiscal year to bridge tariff differential cost of around PKR3.0/unit.
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