Indus raises prices
In a much anticipated move, Indus has announced price hike for its Corolla variants by PRs24,000-35,000 and for Coure by PRs20,000-25,000. We view the ~2% price hike as the first round and believe the company needs to increase prices by 4% to fully pass-on the FX cost hike. Although Indus’s volumes have been less sensitive to price hike in the last couple of years, we believe the company may not go for another round until demand stabilizes and the downside from floods is manageable. We expect the price hike impact to be visible in 2QFY10E bottom-line for the company due to delivery periods. From an industry perspective, we expect other automakers to follow suite in next few days though quantum may vary depending on; (1) pricing power and the strategy to retain volumes vs. margins and (2) share of imported components in production cost.
Yen appreciation – the biggest near-term threat…
We see Yen appreciation as the biggest near-term threat to automakers’ profitability. Yen has appreciated by 3.6% to >PRs1.0 level since Jun-10 while US$ has appreciated by 0.3% to PRs85.8. While Japanese government has started intervention to cool-down its appreciation against US$, it remains a wild card. The FX risk remains as >90% of automakers product cost is variable in the form of parts of which >50% are imported, primarily from Japan, providing little operating leverage. We estimate that 1% FX volatility affects Indus’s FY11E EPS by PRs3.1 and PSMC’s 2010E EPS by PRs0.7.
… While floods are another issue
Misery loves company! We expect autos demand to drop by 10% YoY due to the floods that have affected >20mn people in the country in the base-case and flag that volumes can drop by 25-30% in a worst-case scenario. Agriculture sector, whose cash-rich buyers were the leading demand drivers during last couple of years, has been the worst hit from the floods. We see two pronged impact of lower demand on their financial performance; (1) lower production increasing fixed costs, though lower operating leverage implies its impact should not be significant and (2) weaker pricing power as companies scramble to retain volumes.