The premium for most of locally assembled cars remains high as considerable demand-supply gap continues to persist. High interest rates do not seem to have dampened the consumer sentiment and auto-financing seems to be a marketing priority for most financial institutions, which are still flushed with liquidity.
According to production and sales figures released by Pakistan Automotive Manufacturers Association, which is the representative body of four large-scale motor manufacturers in the country, cars production and sales surged by 26 percent and 23 percent, respectively, as compared to the corresponding period of last year.
This surge in demand shows that consumers still prefer locally assembled cars despite rising imports of new and used cars after duty concessions given in the FY06 budget.
Farhan Aadil, research analyst at Alfalah Securities, said that it was assumed that the increase in interest rates would have a negative impact on cars demand but so far it has yet to cause a major stir.
There were also predictions that import of new and used cars would change the market scenario, and buyers would go for foreign cars. So far, the budgetary decision of cutting import duties on completely built up units has yet to pose any serious threat to the local assemblers, and even many buyers are still reluctant to take the risk of purchasing imported cars, until a spare parts industry is sufficiently developed.
"We expect car sales would continue to show decent growth on the back of positive economic indicators and rising per capita income," Adil said.
Currently, there is a demand-supply gap due to which customers have to wait 3 to 6 months for the delivery of the cars in demand. It is due to this supply shortage that the middlemen are charging premiums for timely deliveries. Once the supply meets demand the menace of premium can be curtailed. The reduction in prices at current levels will only benefit the middlemen who are booking profits to the tune of 20 percent to 25 percent.
Premiums on locally assembled cars are still flying high, between Rs 30,000 to Rs 200,000, depending on the model in demand. Besides, there has been no change in the delivery period, which still dangles around 2 months to 6 months, despite the fact that local manufacturers have expanded their production capacities.
The government had been pressuring car assemblers to take notice of this situation, but no strict action has been taken so far to redress the grievances of car buyers. Besides, car assemblers have also allotted quota to authorised dealers by regulating new car booking as per supply requirement. In this situation, authorised dealers discourage buyers who prefer cash buying.
Premium on Suzuki Mehran, with and without CNG, ranges from Rs 30,000 to Rs 65,000, while on Toyota models, it hovers between Rs 100,000 and Rs 200,000.
Premium on Santro is Rs 50,000 to Rs 60,000 and on Honda Rs 60,000 to Rs 100,000.
"We expect that during the current calendar year the auto industry would be able to produce 165,000 units as against 129,000 units produced during CY04.
This 28 percent surge in production will negate the menace of premium in the future along with further expansion in the industry, which is also expected to come online in FY06," Adil said.
Premiums can only be curtailed once supply meets the demand. It is expected that the production in the industry will grow at a CAGR of 7 percent till CY10, though the industry will be facing challenges and would be under pressure as used cars are being imported.
Auto financing has played a vital role in escalating the demand in the sector. Nearly all banks in the country now offer auto financing schemes In fact, almost 65 percent cars in Pakistan are sold through different financing schemes. The ordeals of buying a car have no doubt become extremely easy via auto financing.
There was a general perception that car sales would decline with the rising interest rates. Though interest rates are on the rise the impact on monthly rentals would only be marginal ie 13 percent-14 percent.
The auto financing market is expected to remain robust in the days to come due to the growing liquidity available with the financing companies.
As on June 30, 2005, total auto loans amounted to Rs 66 billion (which was 32 percent of total consumer loans amounting to Rs 206 billion). Total automobile loans have grown by almost 318 percent since June 2005. Moving forward, it is expected that interest rates would ease off, which would facilitate growth through this avenue.
Faraz Farooq, research analyst at Jahangir Siddiqui Capital Markets, said that contrary to general perception that rising interest rate would negatively affect the local car assemblers, as they caused car leasing rates to go up. Nonetheless, while interest rates haven't had any major impact on auto demand (as witnessed by decent growth in sales volume), the car assemblers have benefited form the rise in interest rates by way of higher interest income due to their holding of huge cash balances.
During 1QFY06, other income of sample companies, which mainly comprises of interest income, grew 223 percent from Rs 124 million to Rs 400 million. Thus, the contribution of other income to the bottom line arrived at 21 percent in 1QFY06 versus 10 percent previously.
"We maintain our 'Over-weight' stance on car manufacturing sector. For full year FY06, we expect local car sales to cross 150,000, an increase of 18 percent. Going forward, margins are expected to show further improvement on the back of yen depreciation (7 percent Y-o-Y from October 2005 to date) and steel price reduction. Moreover, car assemblers have given aggressive entry in the trading side of the business following the duty reduction in FY06 Budget, which will further support the bottom line."
PE of car manufacturing sector is 5.1x based on FY06 earnings against the market PE of 9.4x.
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