Weakening yen boosts profits in auto sector

Assemblers find it cheaper to buy car parts from abroad, lowering costs.

KARACHI: A depreciation of 13%in the Japanese yen against the Pakistani rupee January-to-date has considerably improved the outlook for Pakistani car assemblers for the remaining months of the current fiscal year and the year ahead.

For car assemblers, the weakening yen is making imports of car parts cheaper, resulting in an overall decline in the manufacturing cost of vehicles.

“Although, you cannot say exactly how much this depreciation has actually helped decrease the cost of manufacturing, it must be around 7-8% if you keep the cost of manufacturing stable,” Zoya Ahmed, an analyst at BMA Capital, told The Express Tribune.

The basic thing is the increase in margins, not volumes, she said; adding that the increase in volumes may also help local car assemblers in the coming months.

Share prices of all leading car companies have witnessed a big jump since the beginning of the calendar year. For instance, the stock of Pak Suzuki Motor Company closed at Rs148.16 on KSE on Wednesday, up 48% since April 2013.

BMA Capital said on Wednesday that it has revised its calendar year 2013 expected (CY13E) and (CY14E) earnings for Pak Suzuki upwards by 33% and 35% respectively, owing to the depreciation of the yen against major currencies.



The increase in earnings will be primarily due to increase in gross margins by 31%, with CY13E average margin at 5.5%. “Consequently, our target price goes up by 50% to Rs180 per share,” said a report issued by BMA Capital.

The volumetric sales outlook for Pak Suzuki is positive, as the lower threat from imported used cars is expected to put volumes back on track in CY13, Ahmed said.

The decision to reduce the age limit of imported used cars to three years from five years is directly helping local assemblers, as sales are increasing while the import of used cars is on a decline.

“But we also have to keep local inflation in focus,” Summit Capital analyst Sarfaraz Abbasi said. “Any sharp rise in local inflation may significantly dent profits.”

“With the sharp depreciation in the yen, what is important is whether local assemblers are ready to pass on the impact to customers or not,” he added.

Published in The Express Tribune, May 16^th, 2013.

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