Thursday, October 04, 2007
By our correspondent
KARACHI: Decline in growth of car sales in Jul-Aug FY08 to 5.75 percent versus 13 percent in Jul-Aug FY07 and 16 percent reduction in combined profits of car assemblers in FY07 have not detered auto assemblers to follow expansion plans.
Although decxloine in growth in sales created some doubts amongst investors regarding future profitability of the sector, factors like capacity expansion, favorable import policies, lower car penetration and higher economic growth in the country present a rosy outlook of the industry, Bilal Hameed analyst of JS Global Capital said.
Auto industry follows the notion of ‘supply creates its own demand’ as sale to production ratio of the industry has remained 100 percent on average in the past 5 years. Continuing with this perception, local assemblers either have already undergone or are currently pursuing expansion, Bilal said.
Pak Suzuki, the market leader, recently increased its annual capacity to 150 thousand units and Indus Motor is expected to expand its capacity to 70 thousand units through de-bottlenecking by FY08. Honda Atlas also increased its production capacity to 50 thousand units while Dewan Farooq is working on establishing a local production plant in collaboration with Mitsubishi, however, the deal has not yet been finalized.
“Considering these recent expansions, we expect the total industry capacity to reach 500 thousand units and production to reach 380 thousand units by financial year 2012 (198 thousand units in FY07), growing at a CAGR of 14 percent over FY08-12,” Bilal opined.
“Though production growth fell to 3 percent in FY07 from 26 percent in FY06, we expect production to pick up higher growth as favorable import policies in Budget FY08 will provide protection to the local car industry,” he said.
Imported vehicles are posing no major threat. Analysis and discussion in the industry enabled us to assume 30 percent decline in imports in FY08 due to age limit reduction from 5 to 3 years. Afterwards, a 3 percent average annual growth is expected over FY09-12 for both used and new CBU imports owing to rising per capita income, he said.
Although the growth in local car sales is expected to weaken against its 32 percent CAGR in past 5-years (FY03-07), growing per capita income, better auto financing facilities and growth potential in terms of low car penetration level in the country will help sales maintain a double digit growth rate, going forward.
Pakistan’s car penetration level currently stands at 8 cars per 1000 people versus 18 in Malaysia, 21 in Indonesia and 25 in Sri Lanka. These figures portray strong future growth potential for the local auto industry. Accordingly, It is expected a CAGR of 12 percent for local car sales in the next 5-years FY08-12.
Local sales, in FY07, stood at 204 thousand units and are expected reach 363 thousand units by FY12. It is assumed that the demand for imports will be enough to absorb its future supply, he said.
Going forward, it is believed that the past trend of high local sales to production ratio will be maintained, however the industry capacity utilization could be slightly reduced as a result of commissioning of new capacities, stated Bilal Hameed analyst of JS Global Capital.