PSMC in vain

To improve profits, Pakistan Suzuki Motor Company, the largest automobile manufacturer in Pakistan, made an all-out effort to increase car sales volume in CY10.
PSMCs efforts materialised, as the company managed to lift cars sales volume by around 52 percent to 78,638 units in CY10, but, the profitability couldn keep pace with the volumetric growth. The profits fell 17 percent year-on-year in CY10, bringing down the net profit margin to 0.5 percent, as against around 1 percent a year earlier.
The main culprit behind poor margins was the rising production cost and higher taxes. The production cost has also increased on account of the launch of Swift, as new models of cars usually have low localisation levels in the initial period.
The yen alone has strengthened by an average 11 percent in CY10 compared to the last year. At the same time, raw material prices, such as iron ore, steel, copper and aluminium, have also increased massively. As PSMCs sales portfolio mainly caters to small car buyers, it is relatively difficult for the assembler to fully pass on the cost impact to the buyers.
Therefore, the growth in sales volume and increase in car prices didn translate into better gross margins, as gross margin remained close to the last years level.
Distribution cost fell drastically to 0.5 percent as percentage of sales, from around 0.8 percent in CY09; reduction came from advertising and sales promotion. While administrative expenses surged on account of depreciation, provision for doubtful receivables and advances to vendors.
On top of that, on the back of the rise in minimum tax rate on turnover from 0.5 percent to 1 percent, PSMCs tax expense increased massively pushing the EPS down to Rs2.57 from around Rs3.10 in CY09.
"Had the ratio of tax to profit remained same, the expense for tax would have been lower by Rs.187. million, and resultantly, net profit after tax would have been Rs.398. million", according to PSMC Chairmans review.
With the relaxed used car import policy in CY11, imports of low-priced used cars would be tough on the companys profitability. PSMCs poor share price performance also speaks for itself, which fell to Rs61/share on Monday, and has lost one third of its value since the start of CY10.