Stock market prepares for potential shift in industry dynamics

Share prices of Dewan Farooq Motors, Ghandhara Nissan rise; Pak Suzuki falls

KARACHI:

Analysts and brokerage houses were forced to review the country’s auto sector - currently preparing for the changes that will occur over the medium to long term - as the government announced the policy for 2016-2021, invoking reaction from the stock market as prices of two major players fell on Monday - the first day of trading after the announcement.

In contrast, share prices of Dewan Farooq Motors and Ghandhara Nissan jumped quite significantly. The share price of Ghandhara Nissan jumped to Rs168.91, up 5% to close at its upper limit, while Dewan Motors’ share shot up to Rs9.77, up 6.54%.

While the benchmark-100 index closed 57 points or 0.17% down, Indus Motor was down 0.34% and closed at Rs969.82 per share. Pak Suzuki, which has already labeled the new policy a disaster, ended at Rs427.81, down 1.94%.

DESIGN: NABEEL AHMED

However, Honda Atlas Cars gained 0.075% as volumes remained subdued in the wider market. “The reaction of the stock market on new auto policy was not unexpected because the government’s intent was clear that it wanted to promote competition in the auto market,” commented Sherman Securities analyst Sadiq Samin on the slight fall in share prices of Pak Suzuki and Indus Motor on Monday.

However, since the new policy is aimed at increasing competition in the auto market, the existing car assemblers may take a hit in the next one to two years when expected new entrants start production in the country, he added.

“The existing car producers will eventually feel the effects of the new auto policy as it will break their monopoly. However, it will take at least one to two years before any new entrant comes in and starts producing cars in Pakistan,” BMA Capital analyst Babar Mobeen told The Express Tribune.

On Friday, the Economic Coordination Committee approved the Automotive Development Policy 2016-21, clearing months of speculations as to what sort of incentives would be offered to the new entrants in comparison to the existing manufacturers. The hopes of existing carmakers were dashed as they were hoping to get the same incentives as those given to the new investors.

Apart from giving incentives to the Greenfield investment category for new entrants, the government has provided incentives for Brown field investment category as well. This category deals with the revival of existing non-operational or closed assembly and manufacturing facilities since June 30, 2013.

The new auto policy offers 10% customs duty for non-localised parts and 25% for localised parts for a period of three years for Brown field investments. “We believe Ghandhara Nissan (GHNL) and Dewan Farooq Motors (DFML) will be the prime beneficiaries in this category,” Topline Securities commented.

Elixir Securities stated that it viewed the new auto policy “to have neutral to negative impact on the existing auto assemblers.”

“The key focal point of the new policy is to intensify competition between the existing Original Equipment Manufacturers (OEMs) by reducing barriers to entry through tax incentives. In this regard, we eye the new policy as a major shift in industry dynamics in the long run as the new entrants can potentially dilute the existing players’ market share,” stated Elixir Securities in its note.

Published in The Express Tribune, March 22^nd, 2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation