Pakistan’s auto sector is facing headwinds, amid fears that high interest rates and the State Bank of Pakistan’s (SBP) stringent regulations on car financing may limit sales growth in 2022. As a result, the sector’s market capitalisation fell 16 per cent in the last four months (car sector down 18 per cent and trucks 28 pecent), amid concerns on the future earnings.

However, all eyes are now on cost pressures, as commodity prices are expected to soften in 2022, which may support the auto sector’s gross margin, offsetting the impact of lower volumes. In this uncertain outlook on margin and volumes, better way to evaluate auto stocks is on price to book value (P/BV).

Interestingly, the country’s listed auto sector, including cars and trucks is trading at P/BV of 1.6x, almost similar to the P/ BV in 2020 when the Covid-19 pandemic gripped the global economy.

Thus, if we exclude 2020 from our analysis, the sector is trading at its lowest P/BV during 2016/19. Meanwhile, autos have under performed in terms of P/BV, as the sector is trading at P/BV of 1.6x, which is at a discount of 37 per cent versus the historical five-year average of 2.5x.

Pak Suzuki Motor Company (PSMC) is trading near its book value, while Ghandhara Nissan (GHNI) and Honda Cars (HCAR) are at a huge discount of 48 per cent to 62 per cent to their five-year average P/BVs.

Stiff competition due to new entrants, expected slowdown in the demand and resultant impact on the margins seem to be the imminent risks to auto earnings in 2022; however, we believe that such a huge discount to their historical P/BV seems unjustified, especially when gross profit/car is above historical averages.

Despite abrupt cost pressures in such a short span (record hike in steel prices, rupee depreciation and freight costs), car and truck assemblers are enjoying better gross profits on per unit basis than their historical average. This is despite the fact that most of the car assembles have partially passed on the recent cost pressures to the consumers, whereas truck assemblers have already passed these pressures completely.

Farhan Mahmood is the head of Research at Sherman Securities and has more than 15 years of experience in the field of research. Before joining Sherman Securities, he worked at Topline Securities as the head of research. He also worked as senior research analyst in JS Global.

Farhan has been ranked among Pakistan’s Best Analyst 2009 of the 25 analysts, according to a survey conducted by the CFA Association of Pakistan. He has been ranked as second best analyst in Pakistan for two consecutive years (2011 and 2012), according to Asiamoney Brokers Polls.

His major area of expertise is energy sector, banks, cement and strategy. He has often been selected as top analyst in the Bloomberg Analyst rating section.