Govt finalises new auto policy

The federal government has finalised new auto policy of the country for next three years which is yet to be announced after approval from the Economic Coordination Committee (ECC), Pakistan Today has learnt.

The draft of the new policy, Auto Industry Development Programme-II (AIDP-II), has recently been presented before the ECC for final approval, said HM Shahzad, Chairman All Pakistan Motor Dealers Association (APMDA). The last AIDP-1 policy of the previous government expired in 2012.

“In the meeting, Finance Minister Ishaq Dar, also chairman of the ECC, has asked to check whether all legal aspects have been considered while formulating the policy,” he said. Dar also suggested that the draft should be made public to seek their opinion.

According to the chairman APMDA, the draft of new auto policy has proposed incentives for new entrants, revival of assembly plants that have been shut down and expanding existing facilities.

He said key points of the policy were incentives for new entrants, predictable import policy, tariff rationalization, human resource development, support fund for technology acquisition and safety and consumer protection.

According to analyst of Topline Securities, the AIDP-I had incentivized new entrants by fixing the tariff on the import of Completely Knocked Down (CKD) kits at 32.5 percent. Now, it has been proposed to reduce this tariff to 27.5 percent over the next five years to encourage investment. This is because 32.5 percent is still a very high rate as compared to 10 percent in India for new entrants. If that happens then entry of new players cannot be ruled out, the analyst said.

In the new policy, the analyst said: “It has also been proposed that import of no more than 3-year-old used cars under baggage, transfer of residence and gift schemes will be allowed. Moreover, no tax amnesty scheme will be offered in future.”

“The new proposal is to encourage existing players to launch new car models at same lower tariff which should be offered to new entrants,” said Muhammad Tahir Saeed, a Topline Securities analyst.

On the contrary, the Competition Commission of Pakistan (CCP) conducted a study to gauge the level of competition and found that AIDP-I had shielded the dominant players at the expense of consumers. Thus, the CCP sought liberalised import of used cars along with increasing their age limit from 3 to 5 years to induct market competition. However, the analyst downplays any such move by the investor friendly Sharif’s government.

After devaluation of Yuan by China in the month of Aug, 2015, Asian currencies fell in the range of 3-8 percent against US Dollar. Pak Rupee jumped from 101.8 to 104.4 against US dollar while Japanese Yen fell from 0.82 to 0.85 against Pak rupee from Aug 1, 2015 to date. Thus, weak currency outlook likely to erode margins of Pakistan auto assemblers.

The analyst revised down earnings forecast of Pak Suzuki (PSMC) by 3-5 percent for fiscal year 2016F/2017F and Indus Motors (INDU) by 4.6-9.0 percent for fiscal year 2016/ FY2017.

Pakistan car sales continue to post healthy growth in Aug 2015, the analyst said. Pakistan car sales increased by 67 percent year on year (36 percent MoM) to 20,479 units in the month of August. During the last two month (July-August) 2016-17, volumetric sales of Pakistan automobile sector grew by 89 percent YoY to 36,388 units led by taxi scheme and overall improving economic situation in the country.

On the other hand, tractor segment posted a decline of 36 percent year on year to 3,649 units as farmers are waiting for the implementation and execution of announced subsidy schemes by provincial government of Punjab and Sindh. The Punjab/Sindh govts in Budget 2016-17 announced subsidy scheme of 25,000/29,000 tractors.

Amongst individual companies, the PSMC sales increased by 98 percent YoY to 12,917 units in Aug 2015 primarily due to Punjab government (taxi scheme). During July-August 2016-17, volumes improved by 107 percent YoY to 9,783 units.

INDU sold 5,524 units in Aug 2015 compared to 4,065 units in the same month last year. During July-August, the company sold 9,783 units, up 89 percent YoY. It is pertinent to note that customers were waiting for the new model of Toyota Corolla in the month of July last year which was the main reason for abnormally low base.

Honda Cars (HCAR): HCAR sold 2,002 units in Aug 2015, up 23 percent YoY. During July-August 2016, the company posted a growth of 33 percent YoY to 4,183 units. Shahzad said the company had shelved its plan to launch Honda City in 2016. Now, it is expected that HCAR will launch new model of Honda Civic which will serve as the catalyst for volumetric and earnings growth.

It is important to note that HCAR is consistently posting sales growth despite the new model of Toyota Corolla launched by its competitor INDU. This indicates that overall market size of Pakistan automobile sector is growing.