Budget Brings Short-Term Pain But Long-Term Gain
BMI View : The newly unveiled Pakistan budget for the upcoming fiscal year is unlikely to provide any short-term support to auto sales, which remain mired in a downtrend due to weak demand. However, the hybrid car rebate, as well as policies to spur private investment and increase fixed capital formation growth, will prove a boon to both CV and passenger car sales, resulting in BMI upgrading our long-term auto sales growth forecast.
Pakistan's falling vehicle sales trend continues in line with our downbeat outlook on the industry, with sales for the first 11 months of FY2012/13 (July-June) declining 23.9% year-on-year (y-o-y), to 123,774 units. Although demand remains weak in the market, we have turned cautiously optimistic for the medium- to long term, as the FY2013/14 budget unveiled by the newly installed Pakistan Muslim League-Nawaz (PML-N) government does contain some positives for the autos sector.
Budget Is A Mixed Bag
The budget can be broadly seen as a mixed bag. It outlines a broad trajectory of fiscal consolidation in the next fiscal year and includes austerity measures, which we believe will continue to pose downward pressure on auto sales in the short term. However, it aims to revive private sector investment and increase fixed capital formation growth in the medium- to long term, which we believe will be beneficial for commercial vehicle (CV) manufacturers.
Austerity Measures And Higher Taxes Will Hurt Car Sales
With the exception of operational vehicles utilised by enforcement agencies and critical development projects, no new cars will be purchased by the government for the next fiscal year. This will be negative for passenger car sales and pose an overall drag on vehicle sales for FY2013/14.
Furthermore, the car industry faces an ill-timed increase in prices due to general sales tax, withholding tax and federal excise duty on local cars, all poised to rise in the new budget. Locally-manufactured cars already suffer from a lack of demand due to their high costs of production, which translates into high sticker prices. That said, price increases will be in the tolerable range of 2-4% and will be mitigated by cheaper financing options due to falling interest rates ( see, 'Risk Scenario Plays Out, SBP Cuts Rates', June 26) and the weaker Japanese yen.
Hybrid Car Rebate Is Long-Term Positive
The government's plan to introduce a 25%, 50% and 100% rebate on hybrid vehicles above 1,800cc, 1,201-1,800cc and up to 1,200cc, respectively, will provide a long-term boost to the industry. However, there remains a dearth of small engine hybrids in the country and we only expect the positive impact of this rebate to be translated after 2014, when Ruba SEZ Group, one of Pakistan's biggest investors, introduces a 800cc hybrid car in the market. Furthermore, greater hybrid usage by consumers will cut down on expensive oil imports which the country currently relies on.
|Pakistan - Domestic Passenger Car & Commercial Vehicle Sales, Units (LHS), % Chg y-o-y (RHS)|
The hybrid rebate has prompted us to revise our long-term passenger car sales forecasts upwards. We forecast car sales to grow at an annual average of 4.5% over the FY2013/14-FY2017/18 period. For the upcoming FY2013/14, we forecast passenger car sales to grow 3.0%, to 132,000 units, as while we expect poor sales to continue in the next few months, they will get some respite from the low base established in the current fiscal year.
Revival In Private Investment A Boon To CV Sales
We remain cautiously optimistic that the government measures to reduce corporate taxes and spur private investment over the coming years will bear fruit, and are upgrading our long-term CV sales forecast to reflect that.
The chart above also highlights BMI's CV sales growth forecast. We forecast sales to grow at an annual average of 5.0% over the FY2013/14-FY2017/18 period, to hit 24,000 units by 2018. Sales will be led by both light CVs and heavy trucks.
This will then bring our average vehicle sales growth forecast over the FY2013/14-FY2017/18 period to 4.6%, to hit 180,000 units by 2018.