LAHORE
A strong demand in autos may keep the auto sector at a swift lane for fiscal 2017-18, however, exchange rate devaluation risk may leave the sector hanging the in the balance.
Talking to Pakistan Today sector experts believed that the upward growth curve is getting support from low inflation, maintained interest rate (favourable for auto financing), and CPEC projects demand. The sector has been showing underperformance of 11 per cent for the last 3 months, attributed to imminent risk of disorderly exchange rate depreciation, which was not expected as positive for sector margins
Referring the latest August data released by Pakistan Automotive Manufacturers Association (PAMA), showing auto sales accelerated further increased to 13 per cent on a month basis to 22,095 units, the experts said that this had been the highest ever monthly volumes in last decade.
They pointed out that the tractor and HCV sales remained worth noting which were upbeat in the second month of the fiscal 2017-18 that went up to 119 per cent and 17 per cent respectively on yearly basis. They attributed the growth to the favourable impact of pro-agricultural policies for tractors, besides rising transportation requirements (SUVs and HCV demand) due to CPEC projects. Tractors failed to show its progress as of much smaller scale than expected of tractor subsidy announcement by the provincial government, hampered sales in the outgoing month as volumes fell 21 per cent. ‘Farmers may hold off purchases till there is some clarity on scheme implementation,’ they said.
The experts are of the view that while an orderly Rupee-USD devaluation could be passed on by the assemblers without hurting margins much, they marked downside risk, which could stem from a worse scenario of a combination of sharp exchange rate devaluation leading to car price hike as well as fuel cost increase, and interest rate hike. “That could result in a double whammy for current strong demand dynamics, the experts added.
“We hint sensitivity for OEMs for PKR/USD and JPY/USD over and above our base-case estimate of 4 per cent and 3.25 per cent respectively for fiscal 17-18.”
With a built-in assumption of no pass-on to consumers, 5 per cent devaluation over and above, would negatively impact earnings by 7, 17.4 and 17.5 (per cents) for in case of JPY/USD. Auto sales ended the year witnessing a dull note of 25 per cent whereas decline was seen across the board.
‘That can primarily be attributed to seasonal volumes tend to remain low in June, coinciding usual sluggish deliveries during the Holy month of Ramadan, while underperformance by select variants at a company level exacerbated the impact. On a cumulative basis, auto sales in fiscal 2016-17 stayed in at 213 thousand units, registering a decline of 2 per cent yearly; excluding Rozgar units, volumes are up 18 per cent.’
