Pakistan auto sector to face massive headwinds amid high sales tax, interest rate

Pakistan auto sector to face massive headwinds amid high sales tax, interest rate

Pakistan auto sector is likely to face massive headwinds due to high sales tax and interest rate in days to come, analysts said on Wednesday.

The analysts at JS Global said that with pressure on the demand side post escalation in car prices, rising interest rates, higher sales tax on 1400cc+ vehicles and overall slowdown in the economy, the situation for auto makers is expected to worsen in terms of supply chain issues with further contraction in quotas for import of CKD kits post January 2023.

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To recall, the State Bank of Pakistan (SBP) had shifted the process for opening of LCs to banks under directions to follow a priority list which had no mention of autos. We expect demand slowdown during current fiscal year 2022-2023 to settle close to 50 per cent YoY extending into 1HFY24 as well restricting profits in the sector.

Gross margins for OEMs are expected to remain under pressure in the near term considering the rapid devaluation as the economy shifted from a fixed exchange rate to a free floating one.

As a result, exchange losses are expected to shoot up in the upcoming quarters as well. For perspective, exchange losses for Pak Suzuki Motor Company (PSMC) stood at Rs1.3 billion as of September 2022 which escalated to Rs3.6 billion as of December 2022 and currently stand at Rs9 billion.

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To counter the impact, automakers have increased prices

4-5 times during CY23TD which is expected to partially contain the impact.

The analysts further said that although the three OEMs remain largely debt free, finance costs further swelled to Rs5.3 billion, up by 10 per cent Quarter on Quarter (QoQ) primarily owing to late payments on deliveries made to customers, demurrage charges and exchange losses owing to supply chain issues caused by delay in opening of LCs.

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To note, PSMC accounts for the aforementioned in its finance costs. Support from other income showed a decline as well owing to declining cash balances amid lower advances from customers while higher tax charges of Rs4.4 billion on a profit before tax (PBT) of Rs2.7 billion largely recorded by PSMC further weighed down on sector profits.

Sector margins bounced back into profits during second quarter of the fiscal year 2022-2023 after returning losses on the gross level during previous quarter clocking in at 5.4 per cent vs -0.1 per cent.

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The improvement came on the back of higher prices and volumes along with relative stability in currency. Indus Motor (INDU) managed to contain its gross losses to -1 per cent vs -6 per cent during previous quarter whereas Honda Car (HCAR) and PSMC posted improved margins of 8 per cent and 10 per cent respectively.