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Pakistan Automobiles: Lifting outlook on Pak Autos to Over-Weight; Low interest rates, farmer liquidity to drive sales; ‘BUY’ INDU and HCAR

• We lift our stance on Pak Automobiles to ‘Over-Weight’ from ‘Under-Weight’ earlier, where our optimism stems from greater-than-expected monetary easing by the Pak Central Bank. The Central Bank has reduced the Policy Rate by 6.25% to 7.0% over the last five months, which has resulted in commercial banks revising their car financing schemes to more favorable terms for the consumers. Historically, car financing accounts for 35-45% of the overall sales, which goes beyond 45% in a low interest rate scenario.
• Our market survey and channel checks reveal that delivery periods on most models range in between 1-5 months, while ‘own’ money (premium paid over list price) has also increased to Rs100-500k (5-10% of list price) for receiving immediate deliveries of vehicles.
• The recent uptick in demand for automobiles is mainly owing to availability of (1) low cost car financing, (2) pent up demand from last couple of years (down 16% YoY in FY19 and down 55% YoY in FY20), (3) improving rural liquidity and (4) potential launch of new models, in our view.
• Hence, we are revising up our car sales forecasts by 5-8% for FY21E-FY23F. In absolute terms, we now expect car sales of the industry to clock in at 169,231 (+35% YoY), 216,890 (+28% YoY) and 253,150 units (+17% YoY) during FY21E, FY22F and FY23F, respectively (including KIA, Hyundai and imported). Our revised car sales estimate for FY21E still remains 49% lower than the highest sales recorded in FY18.
• As a result, earning estimates for Topline Car Assemblers Universe (INDU, HCAR and PSMC) are revised up by 11-272% for FY21E-23F primarily on the back of improved outlook for car sales, which in turn will lead to better margins due to their high operating leverage and better inventory management.

Based on our revised outlook we (1) reiterate ‘Buy’ on INDU with a new Target Price of Rs1,646, (1) upgrade HCAR to ‘Buy’ from Hold earlier with a new Target Price of Rs310 and (3) upgrade PSMC to ‘Hold’ from ‘Sell’ earlier with a new Target Price of Rs215.