Pakistan Auto Sector: PSMC; Pedal to the Metal! – AKD Research
We reinitiate coverage on PSMC (CY13F P/E: 5.72x), the market leader in Pakistan’s auto space, with a Dec’13 DCF-based target price of PkR125/share implying an upside of 28%. After a tough run across CY08-CY10, the Gov’t of Punjab Taxi Scheme and Gross Margin at 5yr highs have given fresh impetus to PSMC with CY11 NPAT up 3.8xYoY and CY12F NPAT expected to close out with 2.2xYoY growth. Although the taxi scheme may not extend beyond the current year, potential favorable GoP policy tilt can sustainably turn the tide in PSMC’s favor particularly as the medium-term outlook for both steel and PkR/JPY parity is benign. PSMC is now the sole local assembler producing cars of 1000cc or lower, a segment which has a 60% share in Pakistan’s auto sales and 45% share in total car imports. Revival of auto financing, albeit at a more measured pace, also appears possible given recent monetary easing. Motorization levels remain low but are gradually increasing, which should benefit PSMC given its strong brand resonance, provided the GoP strikes the right balance between local and imported variants.
Benign outlook for raw materials: PSMC’s margins have historically been most sensitive to steel, where outlook for steel prices is soft given the evident slowdown in Chinese manufacturing. Recall that China accounts for ~47% of global steel output while slowdown in China is already visible in iron ore prices which are down 15% CYTD. Outlook for JPY is also benign given recent quantitative easing measures by BoJ.
Underlying growth potential is huge: Car penetration ratio in Pakistan now exceeds 11 per 1,000 people vs. 9 in 2007. However, penetration levels are still one of the lowest in the world, pointing to huge underlying long-term demand potential where PSMC’s strong brand resonance is a key positive. .
Striking the right balance: There was a sharp increase in car imports in FY12 following relaxation in import duties, which resulted in imports growing by 3.3xYoY to 55k units vs. locally manufactured auto sales of 179k units. However, a shift in policy was witnessed in Sep’12 where the FBR has altered the car import depreciation schedule resulting in an increase in imported car prices to the tune of PkR26k-PkR300k across various segments. This should be of particular benefit to PSMC, the sole local assembler in the 1000cc or lower category. With a return to IMF fold a possibility in 2013, auto import policy may become more stringent, to the benefit of domestic players. .
Auto financing can stage a comeback: The outstanding stock of auto loans is stabilizing (at ~PkR45bn) where we believe fresh loan offtake is now compensating for maturities. Considering interest margins are under pressure, banks may be tempted to reenter the auto finance segment, where outlook is brightened by recent monetary easing.
Valuations & Investment Perspective: PSMC has gained a robust 65%CYTD, outperforming the Index by 27% in the process. Nevertheless, at a CY13F P/E of 5.72x, valuations are still not stretched (this is at a 12% discount to the AKD Universe and also lower than the average normalized historical P/E of 6.3x for PSMC). We believe the market is still not fully appreciating the underlying positives where our target price of PkR125/share offers upside of 28%. Buy!