EUR 27.70 For Business Accounts Only

Pakistan Autos – Thematic backdrop favors local OEMs - Initiating Coverage

• We initiate coverage on the Big-3 Pakistan Auto manufacturers with a Marketweight rating. We are selectively positive on INDU (TP: PkR1,112/share; Buy) and PSMC (TP: PkR443/share; Buy) due to relatively stable margins, growth prospects in 1300cc or below segment and access to small-cap EM space. We are Neutral on HCAR.

• Car & LCV sales (normalized; ex-imports) are estimated at 159k units in FY15 (up 18%YoY) and 154k units in 10MFY16 (up 23%YoY). Demand growth is expected to stay buoyant over the next few years, although we conservatively factor in PkR weakness, firming Yen and slightly higher steel prices, leading margins to witness some trimming.

• The new Auto policy explicitly wants to attract new entrants; we see no impact for incumbents in next 2-3yrs and only a modest risk beyond. That said, this threat coupled with higher currency risk post Brexit, could prevent too much of a cyclical valuation premium where the Big-3 trade at forward P/E of 8.5x vs. 9.0x for the KSE-100. On the flipside, local parts manufacturers may enter a sweet spot over the medium term.