More costly: Pak Suzuki choosing to ride on margins

Analysts say latest price increase may hurt volumetric sales.

KARACHI: Analyst’s on Friday stated that the decision of Pakistan Suzuki Motors – country’s biggest car maker – to raise car prices on the very first day of 2014 is going to increase its margins but it may dampen its volumetric sales.

This was the first car price hike from any of the three leading car makers in the country. All these car producers raised their prices at different occasions in the previous year.

Pak Suzuki spokesperson said that the company took the step to offset the pressure of rupee depreciation against the dollar and other inflationary effects in recent months.

Meanwhile, InvestCap Research report said that the timing of the price increase was ‘surprising’. “The price increase at this time appears surprising and is expected to improve profitability in the coming year,” read the report. “However, considering the already peaked prices of different variants of the company, the recent price hike may limit gains as volumetric sale of the company may somewhat decline.”

Pak Suzuki raised prices by 1.5% (or Rs10, 000 to Rs25,000) on different car variants despite 12.23% year on year depreciation in yen against Pak rupee during 2013.

“Pak Suzuki must benefit from this price hike, this may have come to offset the effects of electricity prices that the government raised in August 2013,” JS Global Capital analyst Atif Zafar told The Express Tribune.

Analysts say local automobile companies benefitted from the depreciation of yen against rupee in the last three months, which has gained 9% against Yen.

However, dollar appreciation against the rupee during this same period did affect margins of auto companies. For instance, dollar appreciated by 4.7% against rupee and 1.7% yen from October to December 2013.

“The depreciation of rupee and yen against dollar in the fourth quarter of 2013 (October to December) is supposed to be the major factor behind the current rise in cars sale prices,” InvestCap Research report added.

Local car producers received positive news last year when the government reduced the age limit of used car imports from 5 years to 3 years. Due to this decision the imports of used cars gradually dropped in the last 12 months and the sales of locally produced cars increased.

Car importers have demanded the government to reverse this age limit and allow the import of cars at least 5years old in order to increase the competition for local carmakers. However, the local industry maintains that any increase in used car imports will hurt the sales of new cars in the country and hence it is damaging for the industry.

Published in The Express Tribune, January 4^th, 2014.

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