Good times ahead for car assemblers

[Naveed Yaseen]

By Moonis Ahmed

KARACHI: For car assemblers fiscal year 2009 turned out to be a turbulent year as car sales plunged by 50 percent year-on-year, but month-on-month growth witnessed in the past four months has brightened the ray of hope, and they are likely to have good sales performance this year.

Atif Zafar, an analyst at JS Research in a report on auto sector said that although last fiscal year remained worst ever for the sector due to economic slowdown, inflated commodity prices and security concerns. "But, in the shape of monetary easing and relaxation of stringent car financing terms by banks to stimulate car sales, it is expected that the FY2009-10 will be presenting better performance for assemblers", he said.

Furthermore, assistance from the government has been a reasonable factor, as in the recent times, government has been very kind to the car assemblers, he said.

Government has provided relief in the shape of removal of 5 percent federal excise duty (FED), deferment of Auto Industry Development Programme (AIDP), removal of 35 percent LC Margin and reduction in depreciation rate on imported cars to 1 percent.

Further relief in the shape of reduction in age limit on import of cars is a possibility and such measures will be positive for the car assemblers, he said.

Reduction in car prices may help generate some volumetric sales which in turn will help auto stocks perform strongly, he said Strong volumetric growth in the past has resulted in auto stocks outperformance vis-à-vis the market.

He however, was of the view, though 6 month Karachi Interbank Offered Rate (KIBOR) has come down 378 basis points bps since the start of the year, it has failed to drive car sales as banks have taken a conservative approach towards providing car financing at back of rising Non performing loans (NPLs).

Furthermore, steel prices after dropping to 70 percent from its peak have started to gradually recover and are currently up 21 percent from trough prices. However, price escalation from here bodes negative for the car assembler's margins, as steel constitutes a major portion of the cost production.

He said that as most of the high valued components are imported from parent company in Japan, rupee/yen parity plays a pivotal role in driving gross margins. Yen has appreciated by 9 percent since April 06, 2009 which along with rising steel prices would squeeze margins of the car assemblers.

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