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Morning Shout released by KASB Securities Limited and Economics Research(Pakistan Business News Via Acquire Media NewsEdge) Autos: OGRA at it again According to KASB Securities, • Regulatory risk has once again come to haunt automakers as OGRA has banned the import of CNG cylinders from 12 suppliers, including Faber and EKC which supply CNG kits to PSMC and Indus respectively.• Recall that OGRA banned Faber in Feb-11 on safety concerns; however the decision was later reversed within one month.• Given KASB Securities’ view on early resolution of the issue, KASB Securities see this as more of a sentiment risk than financial risk to automakers’ performance. However, automakers may have to cut production during the interim period, if the process prolongs and their existing supplies are exhausted.• This puts PSMC volumes at greater risk as CNG variants account for >2/3rd of its volumes. Also, this could affect supply of Mehran and Bolan cars under the Punjab Govt taxi scheme that is supposed to start from Sep/Oct onwards.• The effect should be lower for Indus as it has recently introduced CNG variant of its Corolla that has not gained significant chunk of its volumes as yet while Cuore is 10-12% of its volumes.OGRA bans CNG cylinders of 12 suppliers Regulatory risk has once again come to haunt automakers as Oil and Gas Regulatory Authority (OGRA) has again banned the import of CNG cylinders from 12 suppliers, including Faber and EKC which are CNG kit suppliers to PSMC and Indus respectively. Banning of these companies leaves only four approved suppliers on the OGRA list. Recall that OGRA earlier banned Faber in February on safety concerns (for details see KASB Securities’ comment “Autos - Regulatory risk comes to fore” published on Feb 8th) however the decision was later reversed. KASB Securities expects a similar decision this time around too. However, the ban keeps the much-dreaded regulatory risk alive for the local automakers. KASB Securities see this as more of a sentiment than financial risk to automakers’ performance. A chronology of regulatory decisions in past one year To be fair, Govt has offered some benefits to automakers over the last one year too. However, automakers remained exposed to many decisions. (1) Government relaxed age limit on import of used cars and LCVs from 3 years to 5 years. Later, the government also raised cap on maximum duty depreciation allowance from 50% to 60%. (2) OGRA banned Pak Suzuki’s CNG supplier Faber in February 2011. However the decision was later reversed by the regulator. On the positive note, Govt has frozen the AIDP. As per the original plan, some high-tech parts were supposed to be put in localized parts list during FY11-12 that could have significantly raised import duty as none of the assemblers have the capacity to produce engine, transmission, alternative, starter motors etc as volumes are half of originally planned under the AIDP while margins have also contracted. Expect a reversal but interim period will be painful As was the case last time around, KASB Securities expects OGRA to reverse its decision going forward. Hence KASB Securities does not see significant downside risk to KASB Securities’ earnings estimates. Having said that, automakers may have to cut production during the interim period, if the process prolongs and their existing supplies are exhausted. This puts PSMC volumes at risk as CNG variants account for >2/3rd of its volumes (see chart-1 for how the decision affected production in 1H11). Also, this could affect supply of CNG variant Mehran and Bolan cars under the Punjab Govt taxi scheme which is supposed to start Sep/Oct onwards. The effect should be lower for Indus as it has recently introduced CNG variant of its Corolla that has not gained significant chunk of its volumes as yet while Cuore is 10-12% of its volumes. [ Back To TMCnet.com's Homepage ] |