KARACHI
The government has presented the mini-budget in the National Assembly and once the mini budget is approved, applicable rate of Federal Excise Duty (FED) will be 5 percent on 1.0-2.0L vehicles (vs existing 2.5 percent) and 10 percent on vehicles above 2.0L engine.
The proposed bill will double the rate of FED on vehicles above 1,000cc whereas GST on 1,000cc vehicles has been reverted back to 17% (vs existing 12.5%), according to a report by AKD Limited.
Once approved, the supplementary budget may also prove to be a blessing in disguise as much of the importance has been stressed upon the curtailment of imports (1HFY22 trade deficit of US$25.5bn, +106%YoY).
One of the top priority items were the imported CBUs, the protective duties on which have been increased and, if approved, the new rate of FED will be levied at 10/30/40% vs existing 5/25/30% on 1.0-1.8L/1.8-3.0L/3.0L+ engine vehicles, the report said.
According to the report, the history of imposition of FED in the current government’s tenure dates back to CY19 when the IMF program started. All thanks to Auto Policy 2021, the rate of FED was slashed to support the industry, resulting in a 62%YoY surge in volumes FYTD. Now that the incentives are being rolled back, we expect the industry growth to slow down soon as the prices are increased.
“In our base case, we expect the volumes in CY22 to remain stagnant at CY21 level where a deviation of 10% on either side impacts the profitability of AKD auto universe by 12%,” said the report.
The ECC has also approved the hike in RD on CBUs (50% vs existing 15%) above 850cc. As soon as the bill is passed, auto assemblers pass on the costs, hence, further increasing the cost of owning a car.
Simultaneously, the growth in volumes to flatten out in CY22 and the growth in profitability to be driven mainly by expanding margins on the back of sustainable currency (after IMF returns), reversal in commodity upcycle (spread of Omicron) and new models in pipeline (INDU’s Hybrid Corolla, PSMC’s Swift and HCAR’s Civic).
The bet can be placed on PSMC’s Swift which may be unveiled this year and could possibly trigger a rally in the stock price (TP: PkR296/sh – 29% upside).
Similarly, the report revised estimates for HCAR (TP: Rs301/share – 29% upside) in light of positive developments surrounding the 11th generation Civic. As for Corolla, there is a need to wait till 2HCY23 (the hybrid silver lining is worth the wait though).
INDU is currently trading at a deep discount (FY22/23 P/E of 5.3/5.4x) with cash and ST investments of Rs1,330/sh making the investment considerably less risky than its peers, providing an upside of 33% (TP: Rs1,645/share) from the last close and expected DY of 13%.
