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Pakistan Autos: Earnings revised up; Over-Weight Maintained

• We are revising up our earnings forecasts of Pakistan Automobiles Universe for the next two years by up to 53%, incorporating (1) higher-than-expected unit sales during 4MFY21 and (2) revision in margin assumptions.
• We are raising our FY21 and FY22 auto (cars + LCVs) sales assumptions by 19% (to 201K units) and 5% (to 228K units), respectively.
• We expect auto industry sales to grow by 60% YoY in FY21, which means total auto sales of 201K units. This includes new entrants like Lucky Motor Corporation (formerly KIA Lucky Motors), Hyundai Nishat and used car imports.
• Two driving factors for increase in estimates are (1) faster than expected economic recovery and (2) low interest rates which have fired up pent demand of last two years.
• As per SBP, automobile loans have increased from Rs251bn (Mar-2020) to Rs270bn (Oct-2020) depicting an increase of 8%.
• Sales are still likely to be 40% lower than the highest sales that were seen in Pakistan during FY18, where auto sales clocked in at 329K units.
• Margin assumptions have been revised up as well due to (1) higher volumes as they are likely to bring in economies of scale and (2) recent strengthening of PKR.
• We are maintaining our sector stance of Over-weight on the sector with a Buy Call on INDU, MTL and HCAR while PSMC is a Hold.
• Indus Motors (INDU): We revise up our earnings forecasts for INDU by 4-15% over FY21-FY22 primarily due to successful launching of Toyota Yaris, which is a 1300cc to 1500cc sedan pact with features not offered by competitors at the moment. The timing could not have been better for the launch as Yaris is competing with an ageing Honda City model. This is further evident from stellar sales numbers for Oct-2020 where Yaris outsold City and Civic sales combined.
• With the company entering double shift production since Oct-2020, lead times are expected to reduce in the coming months from a current wait period of up to four months. Additionally, a facelift of Toyota Corolla variants is expected in Jan-2021 along with a price increase of ~Rs50,000, which is expected to improve margins.
• Honda Atlas (HCAR): We revise up our earnings forecasts for HCAR by 3-53% over MY21-MY22 on the back of higher than expected 1HMY21 result, along with the upward revision in industry estimates.
• There also remains a strong possibility of introducing the much awaited new model of Honda City in 2021.
• Pak Suzuki (PSMC): PSMC earning estimates remains intact as the company continues its slow road to recovery as model introductions weighed in on costs and introduced at a time of economic crisis.
• Supply chain issues continue to plague the auto industry as a whole but more so in the case of PSMC. The void left by discontinuation of Mehran is yet to be filled by newer models, mainly Alto and Cultus. After the initial euphoria both models have failed to match Mehran levels.
• Millat Tractors (MTL): Earnings have been revised in the range of 4-6% for FY21-22. Strong margins and volumetric recovery thus far on the back of agricultural demand have been the pre-cursors for the revision. The company has also benefited from improved working capital situation with the increase in volumes and as a result finance cost has come down significantly which is also a function of decline in interest rates.

Additionally, Federal Bureau of Revenue (FBR) has issued a SRO on Nov 23, 2020 which materializes previously announced incentive to legitimate farmers and growers to get sales tax adjusted as subsidy which is expected to keep sales volume upbeat.