Pakistan Pulse: (Jun-25-2013) Budget for Autos: Not as bad as it looks (PDF Attached) (June 25, 2013) Recently announced tax reforms in Budget are being marked negative for Pakistan automobile sector by certain corners. There are concerns in market that the increase in GST, WHT, and FED on local cars and rebate on Hybrid Electric Vehicle (HEV) will result in higher local car prices and increased competition. We downplay these concerns as rebate on HEV may not affect local market due to unavailability of low CC HEV while 2-4% increase in car prices due to higher taxes is not significant. However, support to the demand and profitability may emerge from increasing auto financing due to falling interest rates and weak Japanese Yen. We maintain ‘Market weight’ stance on the sector with ‘Hold’ on both PSMC and INDU. Car prices may increase by 2-4% In addition to broad 1% (3% for unregistered buyers) increase in GST, govt has also proposed to increase WHT (ranging 33-200%) and FED (by 100% on above 1800cc cars/SUVs). In the Budget, govt has increase WHT on 1000cc, 1300cc and 1800cc from Rs10500, Rs16875 and Rs22500 to Rs20000, Rs30000 and Rs75000, respectively. Further, it is also proposed to increase FED on above 1800cc cars/SUVs from previous 5% to 10%. Though, the increase looks phenomenal, but our analysis suggests that prices on 800-1800cc cars will increase by 2% for registered and individual buyers (4% for non-registered). HEV: Not a big issue for the industry In an effort to improve energy situation in the country, govt has proposed to provide further relaxation on HEV import. For FY13, there was 25% rebate on the import of new or used HEV while 2% monthly depreciation allowance on customs duty as against 1% for other cars. In Budget FY14, govt has proposed 25%, 50% and 100% rebate on above 1800cc, 1201-1800cc and up to 1200cc, respectively. However, in international market, HEV prices are quite high while there are reports that there is no HEV available in below 1200cc segment. Further, HEV cars require high maintenance in shape of regular change of battery packs. Given that, rebate in duties/taxes on HEV may not affect demand on locally made cars, we believe. Market weight stance maintained Although imposition of higher taxes on locally made cars will increase prices by 2-4% but it may not have major impact on the demand as price increase is nominal and across the board. Further, WHT on car is also adjustable against final tax liability. Support to the demand and profitability is expected to emerge from increasing auto financing due to low interest rates and weak Japanese Yen. Regards Muhammad Tahir Saeed
Posted on: Tue, 25 Jun 2013 06:56:38 +0000