AKD Securities Limited – Autos: Strong CY15 start can extend price performance

Karachi, February 04, 2015 (PPI-OT): Following the increase in automobile demand (e.g. HCAR has reportedly recovered highest ever sales in Jan’15) and continued macro improvement, AKD Securities Limited revisits AKD Securities Limited’s investment cases for INDU and PSMC. In this regard, AKD Securities Limited increases AKD Securities Limited’s volumes assumptions for INDU by ~19% on average through FY15F-FY19F and marginally increased volumes assumptions for PSMC. With the increased volumes amidst a soft inflation environment AKD Securities Limited revises AKD Securities Limited’s earnings forecast for INDU in the 16%-29% range for FY15F-FY19F and for PSMC by 1.3% on average in CY14E to CY18F.

Together with rollover, this results in revised TP of PkR1,102/share for INDU (FY16F P/E: 11.2x) and PkR450/share for PSMC (CY16F P/E: 10.7x) where AKD Securities Limited an Accumulates stance on both. While AKD Securities Limited acknowledges that auto shares have rallied very swiftly over the last year, AKD Securities Limited believes premium valuations are justified where the next 2-3yrs can potentially result in a compelling mix of strong margins and higher volumes. Risks emanate from the upcoming Auto policy, although the final draft is likely to take time to shape.

Higher volumes in 1HFY15: In 1HFY15 industry volumes rose by 10%YoY (Cars + LCVs) where INDU outshone with a growth of 51%YoY with sales of 22,883 units. As a result, INDU’s market share improved to 37% in Dec’14 vs. 22% in Dec’13.

At the same time, PSMC recorded sales volumes of 35,701 units in 1HFY15, flattish YoY with the market share of the company declining to 56% in Dec’14 vs. 67% in Dec’13. Based on a likely strong start in the new year (e.g. HCAR has reportedly posted highest ever sales of 3,231 units in Jan’15; +24%YoY), AKD Securities Limited expects FY15 volumes for INDU to clock in at ~54k units.

Going forward, AKD Securities Limited raises AKD Securities Limited’s volume assumptions for INDU by 19% on average across AKD Securities Limited’s forecast horizon. Conversely, while AKD Securities Limited raises volume assumptions for PSMC as well, in this case the incremental estimate revisions are marginal.

Improved macros: Jan’15 CPI has clocked in at just 3.88%YoY, its lowest since the CPI index has rebased (FY07-08). Together with a stronger external a/c position, the monetary easing process (DR cut by 150bps FYTD to 8.5%) is likely to continue.

This holds positives for auto financing, particularly as the SBP governor has recently hinted at taking regulatory steps to curb banks’ margins. In this regard, the current auto finance growth run rate of 27%YoY can potentially increase. Note that auto financing as a % of outstanding private sector credit stands at 2% vs. ~5% in 2006/07. As a result, for the Pakistan Auto sector the next 2-3yrs can potentially result in a compelling mix of strong margins and higher volumes.

Result previews: AKD Securities Limited expects INDU to record NPAT of PkR2,589mn (EPS: PKR32.94) in 1HFY15 against NPAT of PkR1,352mn (EPS: PkR17.20) in 1HFY14, registering a robust growth of 91%YoY. In 2QFY15 alone, AKD Securities Limited expects INDU to record NPAT of PkR1,462mn (EPS: PkR18.60), registering a growth of 30%QoQ.

Together with the result, AKD Securities Limited expects the company to announce an interim cash dividend of PkR15/share. For PSMC, AKD Securities Limited expects NPAT of PkR2,409mn (EPS: PKR29.28) in CY14, up by 30%YoY. In 4QCY14 alone AKD Securities Limited expects PSMC to record NPAT of PkR799mn (EPS: PkR9.71), higher by 39%QoQ with impetus provided by the Punjab Rozgar Scheme.

Investment perspective: INDU and PSMC have gained 15.7% and 15.1% CYTD, respectively outperforming the broader market by 7.4% and 6.7% in the same period. While the next Auto policy poses risks, AKD Securities Limited believes stakeholders still remain some way off reaching consensus which could continue to delay the policy’s final announcement.

Within this backdrop, AKD Securities Limited expects a likely strong start to CY15 to further buoy auto stocks. At current levels, INDU and PSMC trade at a forward P/E of 11.2x and 7.2x (CY16F: 10.7x) where AKD Securities Limited’s revised TPs are PkR1,102/share and PkR450/share respectively.

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