Pakistan’s auto sector is facing headwinds, amid fears that high interest rates and the State Bank of Pakistan’s (SBP) tight regulations on auto finance will limit sales growth in 2022. As a result, the industry’s market capitalization has fallen 16% in the past four months (auto sector down 18 percent and trucks down 28 percent), amid concerns over future earnings.
However, all eyes are now on cost pressures as commodity prices are expected to weaken in 2022, which could support the gross margin of the automotive sector, offsetting the impact of lower volumes. In this uncertain outlook on margins and volumes, the best way to value auto stocks is price versus book value (P / BV).
Interestingly, the country’s publicly traded auto sector, including cars and trucks, is trading at a P / BV of 1.6x, almost similar to the P / BV in 2020 when the Covid-19 pandemic hit the ‘Mondial economy.
So, if we exclude 2020 from our analysis, the sector is trading at its lowest P / BV in 2016/19. Meanwhile, autos have underperformed in terms of P / BV as the sector trades at P / BV of 1.6x, a 37% discount from the historic five-year average of 2.5x. .
Pak Suzuki Motor Company (PSMC) is trading near its book value, while Ghandhara Nissan (GHNI) and Honda Cars (HCAR) get a huge 48% to 62% discount from their average P / BV in five. year.
Fierce competition from new entrants, an expected slowdown in demand and the resulting impact on margins appear to be the looming risks to automotive earnings in 2022; however, we believe that such a large discount from their historical P / BV seems unwarranted, especially when gross profit / car is above historical averages.
Despite brutal cost pressures in such a short period (record rise in steel prices, depreciation of the rupee and freight costs), car and truck assemblers are recording better gross profits per unit than their historical averages. . This is despite the fact that most car assemblers have partially passed the recent cost pressures on to consumers, while truck assemblers have already passed those pressures completely.
Farhan Mahmood is Head of Research at Sherman Securities and has over 15 years of research experience. Prior to joining Sherman Securities, he worked at Topline Securities as a research manager. He also worked as a senior research analyst at JS Global.
Farhan was ranked among Pakistan’s best analysts in 2009 out of 25 analysts, according to a survey by the CFA Association of Pakistan. He was ranked second best analyst in Pakistan for two consecutive years (2011 and 2012), according to Asiamoney Brokers Polls.
His major area of expertise is the energy sector, banking, cement and strategy. He has often been selected as top analyst in Bloomberg’s analyst rating section.