Auto industry bucks SUV trend

Sector faces profit squeeze despite 44% volume surge

KARACHI:

Bucking the popular trend of rising Sport Utility Vehicle (SUV) sales seen in recent years, the Pakistani automotive landscape has exhibited a shift this quarter as economic pressures and changing consumer preferences steer demand back towards passenger cars.

Despite a robust 44% year-on-year surge in overall industry volumes for the third quarter of fiscal year 2026, the sector's profitability is being squeezed by a deteriorating sales mix and rising operational costs. "Stable macros, along with lower interest rates, have supported a surge in auto volumes (+44% year-on-year), as demand continues to grow," noted Optimus Capital Management. "However, expected dip in other income (-9% year-on-year), increase in distribution costs (+23% year-on-year), as well as deteriorating sales mix weigh down on our auto universe's (selected companies) expected net margin, causing it to shrink by about 3.4 percentage points year-on-year to 8.2%."

Data for 3QFY26, compiled by Optimus Capital Management, reveals a significant pivot towards smaller, more affordable passenger models, with the share of passenger car models in the total sales mix jumping to 63%, up from 58% in the same period last year. Leading this charge were Indus Motor Company's staples, Corolla and Yaris, which saw their combined market share improve by 2.2 percentage points to reach 21.8%. This trend was further underscored by internal volume dynamics at Indus Motor Company, where sales of Corolla, Yaris and Cross models surged by 63% year-on-year, while Honda Atlas Cars witnessed a 44% increase in sales for its Civic and City variants.

While the budget segment flourished, the once-dominant growth in high-end SUVs appears to be cooling. The market share for Indus Motor Company's premium Fortuner and Cross lineup declined by 1.8 percentage points year-on-year, with actual volumes for the Hilux and Fortuner dropping 11%. The SUV segment is currently characterised by intensifying competition as new players enter the fray with high-spec models and aggressive pricing. Although Haval continues to dominate this segment with a commanding 59% market share, the broader shift in the mix towards lower-margin passenger cars is weighing on industry margins. Consequently, the industry universe is expected to see a 6% decline in earnings for the quarter, with net margins projected to shrink by approximately 3.4 percentage points to 8.2%.

The road ahead remains cautious, as potential policy changes and rising costs create a challenging environment for assemblers. Distribution costs for the sector have spiked by 23% year-on-year, and a 9% dip in "other income" is anticipated due to lower returns on financial assets and reduced cash reserves. Furthermore, on the policy side, a potential sales tax standardisation of hybrid vehicles may lead to price increases, putting additional pressure on demand. As the industry navigates the remainder of 2026, the focus for major assemblers will likely remain on balancing high-volume demand for budget-friendly cars with the need to protect margins in an increasingly competitive and cost-heavy market.

Meanwhile, Sazgar Engineering Works Limited (SAZEW) reported record-breaking four-wheeler sales volumes in 3QFY26, reporting a profit after tax of Rs6.4 billion. This represents a 60% increase quarter-on-quarter and a 3% increase year-on-year, with earnings per share (EPS) recorded at Rs106.51. The company's improved earnings were primarily driven by a 55% year-on-year increase in sales volume and a 155% surge in other income, which reached Rs761 million due to a significantly improved cash position of Rs33 billion. Alongside these results, the company announced a dividend of Rs20 per share. While net sales grew to Rs47.4 billion, gross margins settled at 26.8%, reflecting a 5.8 percentage point decline year-on-year attributed to a higher proportion of internal combustion engine (ICE) vehicles in the sales mix. However, on a sequential basis, gross margins improved by approximately 2.6 percentage points, supported by a 48% jump in sales volumes compared with the previous quarter. Operating expenses followed the upward trend in volume, with distribution and administrative costs increasing by 63% and 48% year-on-year, respectively.