Car prices: Rupee gains against yen helps auto industry

Local assemblers see increasing margins in wake of stronger currency.

KARACHI: The Pakistani rupee’s parity with the Japanese yen, which remained highly volatile throughout 2013, has once again tipped in favour of local auto assemblers. The rupee has gained 9% in value against the yen over the last three months (October-December 2013).

The strengthening is going to improve margins for auto assemblers in the country, JS Global Capital said on Tuesday.

Combined with recent rupee gains versus the dollar (+3% over the last month), local assemblers are headed towards a potential margin expansion from the third quarter of fiscal year 2013-14 (3QFY14) onwards, the brokerage house report said.

The expected gain in margins for local assemblers is also expected because of the fact that auto assemblers had increased car prices by 2%-4% during the September-October 2013 period to cover earlier currency losses.

It is pertinent to mention that before these gains, the rupee had shed almost 15% against yen during May-October 2013, resulting in the auto sector’s gross margins contracting by 161 basis points quarter on quarter (QoQ) during the July-September 2013 quarter.

According to JS Global Capital calculations, for every 1% the rupee gains vis-à-vis yen, Pak Suzuki Motor and Indus Motor could see an increase of annualised earnings of 4% and 3% respectively.

Concerns

Despite these encouraging developments, the brokerage house said that it is waiting for clarity on the upcoming Auto Industry Development Plan 2 (AIDP-2) before turning bullish on the auto sector.

The auto industry and investors in the Karachi bourse are keenly following developments in Islamabad, as any relaxation in the age limit of imported used cars in AIDP-2 could badly hurt the interests of local assemblers.

At present, importers can import only three year old used cars in the country – a policy that came into effect in December 2012 when the government reduced the limit from five years. This decision of the previous government resulted in a sharp fall in used car imports during 2013 but has raised the sales of locally assembled vehicles.

The auto policy is expected to be approved after consultation with all the stakeholders on January 9, 2014.

Published in The Express Tribune, January 1^st, 2014.

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