Industry

Autos: profits suffer despite robust volumes

Karachi, August 31, 2022: The auto sector’s combined PAT declined to Rs1.6bn (-67% QoQ) during 4QFY22 despite stable volumes, rising other income and rounds of price increases.

The profits were dragged down by lower gross profits and imposition of super tax. Despite sequential improvement in margins for PSMC/HCAR, sector margins were dragged due to deterioration in margins of INDU which faced the delayed impact of higher production costs.

“We expect industry volumes to suffer a decline of more than 25% during FY23, while sector margins are expected to improve QoQ as a rebound in margins is anticipated for INDU in the next quarter,” said Wasil Zaman at JS Research.

Price hikes and model launches drive growth in net sales

Demand for autos remained elevated during 4QFY22, sequentially up 4% QoQ to 68k units amid aggressive pre-buying by customers in Jun-2022 and recent model launches.

Additionally, auto makers resorted to aggressive price hikes of up to 20% in Mar/May-2022, to combat escalating production costs. As a result, net sales for the sector grew to Rs167bn, up 14%QoQ.

Delayed, but not avoided: INDU’s margins suffer

Sector margins trimmed further as INDU posted record low margins (barring COVID quarter) in more than a decade of 1.2% as against 7.7% during the previous quarter. PSMC and HCAR saw a similar erosion of margins during 3QFY22 which notably improved in 4QFY22.

“We believe higher inventory levels at cheaper rates helped INDU sail through 3QFY22 with stable margins at a time when its peers faced the brunt of higher production costs, however, as evident from the result, the impact was delayed rather than avoided,” added Wasil.

Healthy cash position softens impact of super tax

Tax charges during 4QFY22 more than doubled to Rs5.1bn (up 115% QoQ) despite a 7 % QoQ decline in profit before tax, owing to imposition of super tax by GoP.

The impact was, however, softened by the inflow of other income which saw a jump of 56% QoQ to Rs6.8bn. Cumulative cash and the STI balance of the automakers (listed space) now stand north of Rs172bn as per the latest accounts, which have mostly been collected as advance payments from customers providing healthy support the bottom line in times of rising interest rates.

Outlook

“With growing concerns such as multiple cost led price hikes, rising interest rates, adverse steps taken by the regulators and the impact of recent floods, demand for autos is likely to suffer in the upcoming quarters where we foresee a drop of more than 25% in FY23.

“On the supply side, SBP has limited import of CKD kits for auto makers. Maximum CKD imports are now capped at 70% (Sept-2022 onward) of average imports over the last 4 months. As a result, automakers are facing non-production days in an attempt to smooth out the production process.

“After having dipped to record lows in 4QFY22, we expect margins for INDU to post a recovery in the next quarter (a similar trend to what its peers have witnessed this quarter) whereas we expect margins for PSMC/HCAR to remain range bound in the next couple of quarters, having passed on the benefit of respite in PKR/US$ to customers,” said Wasil.

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