The auto sector profits in the nine months (July-March) declined by 8 percent compared with same period of last year because of higher steel prices and depreciation of rupee against yen, despite healthy growth of 35 percent in sales, analysts said. Farhan Ali, an analyst from Alfalah Securities, said that the auto sector can be termed as 'unfortunate' as the benefits of 35 percent volume-led growth in top line failed to translate into the bottom line, due to unusual jump in production cost. The sector's net profitability declined by 8 percent to Rs 2,375 million (EPS: PkR9.43) against Rs 2,536 million (EPS: PkR10.27) in the same period of last year.
The overall gross profits decreased by 2 percent, to Rs 4,649 million, as against gross profit of Rs 4,760 million in the same period of last year. Gross margins in the industry reduced by 200 basis points to 8 percent from 10 percent.
The assemblers with higher deletion levels seemed to be better off as they avoided the exchange rate hit largely on locally produced parts.
"We believe the future prospects of profitability are bright owing to (1) recent increase in prices and (2) healthy future order booking. However, the risks of disproportionate change in tariffs and custom duties in upcoming budget and popularity of imported units remain," he said.
During the 9 months under review, the boom of the auto sector sales continued unabated owing largely to (1) availability of easy lease financing, leading to improved purchasing power of the customers, (2) popularity of new models, and (3) better marketing efforts by the manufacturers.
The premium on early delivery of cars continued owing to the demand and supply gap. During the period, total units sold by automobile companies stood at 97,329 as against 75,605 units sold in the same period of last year, showing a growth of 29 percent. Pak Suzuki with its market share of 53 percent remained the market leader and sold 51,837 units. However, its share in the 800 cc segment declined by 6 percent, which was eaten away by Toyota Motors.
Farhan said that shortage of steel and adverse movement in exchange rate made its pronounced impression on the auto sector. The average cost per unit of the sector increased by 8 percent to Rs 690,000 from Rs 638,000. Steel prices are estimated to have risen by 40 percent while Pak rupee lost 7 percent against yen during the period. Manufacturers having higher deletion levels escaped relatively unhurt as depicted in better gross margins.
Faraz Farooq, research analyst from Jahangir Siddiqui Capital Markets Ltd, said that profitability of other sectors depicted a growing pattern (eg banking, cement, E&P, etc), auto sector posted a lacklustre performance during Jan-Mar 2005.
Based on the database of four sample companies, auto assemblers sector profitability during Jan-Mar 2005 declined by 38 percent to Rs 474 million, from Rs 761 million during the corresponding period of last year. Lower earnings primarily resulted from subdued performance at the gross level, where sector gross margins plunged by 490 basis points, from 9.4 percent, to 4.5 percent. The sharp squeeze in gross margin resulted from the dual drag of strong Japanese yen (particularly for Japanese manufacturers) and higher raw material prices. The impact of price hike by auto assemblers has not been fully reflected due to the built-in delivery lag in industry.
During the period Jan-Mar 2005, Japanese yen appreciated by 8 percent on average basis compared to the corresponding period of last year. Moreover, international steel prices depicted a rising pattern on the back of growing demand from China, world's largest consumer of steel.
According to global steel price index, average steel prices during Jan-Mar 2005 surged by 32 percent compared to the average prices of corresponding period. Going forward, some ease in steel prices is expected as rise in steel production capacity in China may outpace demand.
Cumulative net sales of four sample companies during the period soared by 39 percent and reached Rs 21,747 million from Rs 15,596 million during Jan-Mar 2004. The increase in rupee sales was due to higher sales volume along with partial impact of increased car prices. In terms of volume, accumulated sales at 36,959 units depicted a 29 percent increase compared to 28,552 units, previously. The upsurge in sales is attributable to the availability of extensive car financing schemes, greater inflow of home remittances and consumer preference for new and innovative models.
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