The demand for automobiles witnessed a surge in Pakistan in the current financial year amidst the inflationary environment.
According to a research report issued by AKD Securities Limited, in FY22 alone, the prices in the 660-1,000cc segment have inflated 15-30 per cent while prices in the secondary market are even higher than the face value due to the tight supply.
The report said that “automobiles themselves have become an asset class where the consumers, as well as arbitragers, are parking their money, providing them a perfect hedge to inflation, resulting in more demand from original equipment manufacturers (OEMs)”.
“Tight supply or measured supply has been fuelling this behaviour which is also likely to benefit OEMs to wither this period of high inflation environment and posting consistent profitability. The new model effect would additionally drive profits with industry players suggesting Civic booking already passing 2k units,” it said.
“Higher fuel prices have contributed to shaping a move towards newer and efficient vehicles. This puts PSMC (TP: PkR325/sh) in a bright spot with Alto and Cultus among its star products. Similarly, we expect INDUS’s investment in hybrid technology to bear ripe fruits in long term,” the report said.
It said that despite the government’s measure to discourage on-money, the phenomena still persist as middlemen find new loopholes while tight supply from OEMs keeps the problem mounting. “We expect this phenomenon to persist in medium-term since the supply may not normalize amidst the increasing shortage of semi-conductor chips, thereby keeping the delivery times stretched at these levels in CY22,” the report said.
The trend is indicated by secondary market prices surpassing that of the primary market by ~5-10 per cent across various segments. This has been contributing to sustaining demand lately and is likely to continue doing so in the near term, the report said.
The report further said that while the wheat season is around the corner, the upcoming wheat crop looks very much on course to harvest a decent yield despite the fertilizer shortage faced by farmers during the sowing season.
“This relief came in form of several timely spells of rain in the last 4-5 weeks which changed tremendously changed the production outlook. The total cropped area of wheat currently stands close to 22mn acres, which is expected to sustain the production at 26mn MT, slightly lower than last year’s bumper crop (-4.7%YoY).”
On the pricing front, it said, the current market price stands close to Rs2,600/40kg, in contrast, to support the price at Rs2,200/40kg, giving farmers a higher return on their investment. According to our estimates, the farm income from wheat is expected to grow by 20-30 per cent YoY on the back of higher prices. With almost ~20 per cent of the GDP contribution and ~40-50 per cent workforce employment through agriculture, we expect the purchasing power in rural areas to remain buoyed – highly positive for MTL, INDU and PSMC.
Taking all these factors into account, the report suggests that the bigger problem right now is the supply side hindrance rather than the demand side. Moreover, higher fuel prices have further increased the demand for smaller vehicles, especially Suzuki products which are highly fuel-efficient. In addition to this, new Swift has also been well perceived in the market, providing an attractive opportunity to take exposure in PSMC (TP: PkR325/sh), currently trading at CY22 P/E of 4.6x.
The report further suggested a positive response for the new Civic as well whose 2,000 units have already been booked, stretching the order book to December 22.
