Sales To Recover But Production Faces Challenges
BMI View : The recovery in the new passenger car segment, due to the Pakistan government's decision to reduce the age limit of imported used cars from five to three years , has helped Jul y vehicle sales grow 1.0% y-o-y. This play s out our view for a mild recovery in auto sales for FY2013/14. Production , on the other hand , will continue its decline this fiscal year as headwinds in the form of higher taxes and rising input costs cast a shadow on local automakers .
According to the Pakistan Automotive Manufacturers Association (PAMA), auto sales in July rose 1.0% year-on-year (y-o-y), to 10,740 units. The passenger car segment handily outperformed the commercial vehicle (CV) segment, growing by 3.3% y-o-y, to 9,288 units. In line with our view for a tepid recovery in the autos market for FY2013/14 (July-June), the sector has started the fiscal year on a positive note and we are happy to maintain our full fiscal year forecast for vehicle sales growth at 2.5%, to 140,000 units.
New Car Sales On Recovery Trail
The government's decision in December 2012 to reduce the age limit for imported used cars from five to three years has provided much needed respite to local manufacturers. Indeed, the second half of FY2012/13 saw a gradual decline in used car imports and for the full FY2012/13, imports were down about 20%, to 45,378 units.
|Mild Recovery Expected|
|Pakistan - Passenger Car Sales, Units (LHS); % Chg y-o-y (RHS)|
We believe the continuing decline in used car imports together with improvement in auto financing from banks, will sustain the nascent recovery in car sales for FY2013/14. BMI forecasts car sales for the current fiscal year to grow 3.0%, to 120,000 units.
However, it is important to note that while used imports have fallen by double-digits, we do not expect that to translate into a big rise in new car sales. This is due to some of the reasons we have previously flagged up; the rise in car sales taxes and the lack of affordable hybrid options in the market to take advantage of rebates ( see 'Budget Brings Short-Term Pain But Long-Term Gain', June 28).
Another crucial reason is the discontinuation of the production of the Suzuki Alto and Daihatsu Coure models by Pak Suzuki Motor Company and Indus Motor respectively. Sales in the 1,000cc and below segment form about 50% of the car market and the dearth of models in this segment has hurt sales. Furthermore, with global oil prices spiking we believe it is imperative for automakers to introduce new models in this category to provide affordable options to the Pakistani consumer.
The story for Pakistan auto manufacturing is not as positive. Although vehicle production contracted 22.4% in FY2012/13, we expect production to continue declining this fiscal year due to persisting headwinds in the sector. We forecast car production to decline 2.5%, to 117,000 units and CV production to fall 5.1%, to 17,000 units. The new car segment will still face ferocious competition from the used car segment, despite the fall in the latter's imports.
|Revival Will Take A While|
|Pakistan - Domestic Auto Production|
We expect auto manufacturing to continue struggling from higher input costs from rising oil prices and weakness in the local currency. The hike in electricity tariffs and general sales tax rate recently would also have a detrimental impact on local automakers' operations. However, as excess capacity exits the industry and the new government spurs capital investment in the coming years, we expect vehicle production to concurrently see a revival over our 2013-2017 forecast period.