Over the past two years, car prices have skyrocketed, some prices surging over 50 percent. The Pakistan Bureau of Statistics’ (PBS’) monthly price index would show, in Sep-22, motor vehicle prices (urban) rose 35 percent year on year against an urban inflation of 21 percent (the index takes into account four car models, specifically an 800cc manual (Mehran or other), a 1000cc (Alto), Toyota Corolla CLI, Honda Civic and Honda 70cc motorbike). Amid this, car financing costs have also ballooned due to higher interest rates. But even if demand suppression was not coming into play, supply restrictions have left a gaping hole in the market with the government having placed limits on the import of CKD kits. Volumes have dried up automatically, and earnings of listed automakers have faded.
In Sep-22, earnings before tax for Honda and Corolla are in the green, but barely; upholstered significantly by “other income” consisting of robust cash advances. Indus Motors’ “other income” during the quarter of Rs5.1 billion was 2.8 times its income (before tax) while the same was 4.9x for Honda (Rs 788m). Suzuki’s other income of Rs1.1 billion could not save the bottom line from crashing into losses.
Costs have shot up on the back of higher input prices and rupee depreciating that in the case of Indus Motors could not be sustained by higher prices. Gross margins for the company turned negative. The company managed to survive with controlled overheads, little to no finance costs and heart other income, turning the negative gross margins to 3 percent net margins.
Auto assemblers have halted new car bookings because they are unable to source the inputs required. But reduced purchasing power and higher interest rates would certainly dent demand for substantially expensive vehicles. If there are customers flush with cash, they probably have cars at home. Those looking for affordable options will have to wait before they venture to new or used car dealerships. Cash-based demand originating from rural regions may also be affected due to floods. The next few quarters may be tough for auto assemblers, but they will bounce back. Eventually.
