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Why stocks in auto sector are rallying

Updated February 18, 2019

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Many at the market are whispering if the price is being artificially pumped. But that does not appear to be the case. —
Many at the market are whispering if the price is being artificially pumped. But that does not appear to be the case. —

A series of ‘upper circuits’ brought the stock price of Pak Suzuki to Rs302 on Feb 15 from Rs174 on Dec 31, 2018 — a whopping gain of 74 per cent in just a month and a half.

It has raised eyebrows. Many at the market are whispering if the price is being artificially pumped. But that does not appear to be the case. Auto-sector analysts contend that there are both ‘technical’ and ‘fundamental’ reasons that could have made the company’s stock price spiral upwards.

Technically, one has to go back to May 2017 when the share was trading as high as Rs936 apiece at the height of the bull market. Then came the great market meltdown and the Suzuki price crumbled 81pc to Rs174 by Dec 31, 2018. It hit the bottom and had to rebound.

Fundamentally, the news flow has generally been good for Pak Suzuki. In the supplementary finance bill presented on Jan 23, the finance minister reversed the earlier decision and lifted the ban on non-filers, enabling them to purchase cars of up to 1,300cc against a penalty. The ban had dented the company’s production and sales by 32pc. It had also put in jeopardy the company’s plan to phase out Mehran and roll out new locally assembled Alto.

Auto-sector watchers expect a period of cooling off for the industry as it faces headwinds of regulatory uncertainty and slower economic growth rate

The Japanese automobile assembler has also shown interest in investing $460 million for setting up a new plant adjacent to the existing one in Karachi. All these measures in favour of Pak Suzuki rekindled the interest of investors in the stock, which climbed by leaps and bounds.

Good time has generally rolled on for the automobile sector, but the industry continues to complain. The latest complaint is that allowing non-filers to buy vehicles of up to 1,300cc will mainly benefit the assemblers of Suzuki and Toyota vehicles without offering anything to the assemblers of heavy commercial vehicles (HCV).

Going forward, auto-sector watchers expect a period of cooling off as the industry faces headwinds of regulatory uncertainties, slower economic growth, weakening rupee and falling purchasing power of customers.

A few big automobile assemblers have enjoyed much of the market share until now. But things are likely to change ahead as new foreign players, some of them being joint ventures with local investors, start rolling out their brand of vehicles. Some of those are greenfield projects, including Lucky-KIA, Nishat-Hyundai, Chinese-United Auto, Al-Futtaim-Renault, Dewan Motors, BAIC-Sazgar and Chinese Regal Auto-Volkswagen-Premier Systems.

In addition, Nissan in a joint venture with Ghandhara Nissan is to roll out three Nissan models in 2020. Master/Foton Motors plans to assemble Iveco trucks, which will be the first Italian brand in Pakistan.

Some of the unscrupulous practices, such as charging a premium on imported automobiles by traders, have also been curbed to a large extent. The Ministry of Commerce revived a condition for the import of used cars that requires that the payment of duties and taxes be remitted in foreign exchange directly from abroad “by the person importing the vehicle”.

Dealers were misusing the imports of used cars allowed under three heads — baggage, gift schemes or transfer of residency — as they imported vehicles in the names of fictitious or unlettered people, such as domestic servants. The new regulation by the commerce ministry has put an end to the practice.

Auto sales were down 4pc year-on-year in January against 1pc increase in December 2018. Sales in the first seven months of 2018-19 were 143,000 units, down by 3pc year-on-year.

Topline Securities research analyst Syed Daniyal Adil says that a slowdown in auto sales is likely to continue despite favourable measures announced in the recent economic reforms package in view of the deteriorating economy as well as multiple price hikes in the past 14 months.

Indus Motors reported year-on-year growth of 16pc in January. It was due to a strong order book led by Corolla variants, up by 26pc on an annual basis. However, sales in Fortuner and Hilux variants declined 45pc and 5pc, respectively. Total volumetric sales were up 17pc on a monthly basis while year-on-year growth was 9pc for July-January.

Honda car sales rose by 3pc year-on-year due to an annual volumetric increase in Civic and Citi sales. BR-V continued its declining sales trend with a year-on-year fall of 2pc. On a monthly basis, total volumetric sales were up 91pc due to the low-base effect along with an expected price hike. Sales were down 1pc for the July-January period.

Automobile scrips are generally blue-chip, which small investors fear to touch. Prices of these stocks run as high as Rs1,293 for a share of the par value of Rs10 in the case of Indus Motor Company, Rs483 for a share in Al-Ghazi Tractors and Rs858 for a share in Millat Tractors. The share of Hinopak Motor bears a price tag of Rs458, Atlas Honda Rs384, Ghandhara Industries Rs203, Honda Atlas Cars Rs233 and Pak Suzuki Rs302.

An automobile company executive said the slowdown in auto sales also hit the stockpile of cash of several companies. “Many companies now deliver cars to buyers within a month as opposed to the previous practice of bookings with advance payments against the delivery after four to five months,” he said.

Published in Dawn, The Business and Finance Weekly, February 18th, 2019