Despite multiple price hikes—ranging between 9 percent to 22 percent up till Mar-19 and higher thereafter—major automaker Pakistan Suzuki (PSX: PSMC) is now incurring a loss, while Indus Motors (PSX: INDU) is watching its profits free fall (read: “First, stop the bleeding!”, May 7, 2019). Both countries in their quarterly results saw a growth in the top-line due to the price increases (and volumetric growth of 4% in INDU’s case), but it wasn’t enough to save the profits. The trouble is, high cost of imports is now joining hands with a vast slowdown in demand, which was being predicted in the past several months.
Cars and LCV sales in 9M were dropped by 4 percent. Though official numbers have not been published yet, it has been estimated that the volumes for these variants will drop by 6 percent in 10MFY19. The biggest loss to volumes will be witnessed by Honda (PSX: HCAR) and Suzuki (PSX: PSMC). As per a preview published by JS Research, sales for PSMC will fall by 10 percent in 10M and by 11 percent for HCAR mainly due to dramatic reductions in volumes in the month of April. INDU will still show resilience with a growth of 5 percent. However, it is clear that persistently poor volumes for Fortuner and Hilux will eventually land INDU with its peers.
Substantially higher price level, together with rising cost of borrowing inform demand to a great extent. Car financing has reportedly come down according to the SBP. The CPI inflation is at 8.8 percent in April while core inflation that includes non-food and non-energy commodities rose by 7 percent during the month. At higher levels of inflation, there will be less money for consumers to spend on a new car, or a car update even if they were to go into their savings and buy their car on cash. Between locally assembled vehicles of Suzuki, Corolla and Honda, the average price increase is Rs320,000, with price hikes ranging from Rs120,000 to as high as Rs800,000. Can consumers absorb that much more at a time where purchasing power is slowly diminishing? It does not seem so.
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