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After turning losses for eight consecutive quarters, Pakistan Suzuki (PSX: PSMC) is back in profits since the past two quarters as volumes have finally started to show strength. The company was in dire straits after struggling to sustain volumes for its new variant Alto as well Wagon-R and Cultus through CY19 and CY20. Economic slowdown together with higher interest rates suppressed demand for the entire industry, though the recovery for peer OEMs has been fairly swifter.

In 1QCY21, the company recorded double the revenue as last year in line with the doubling of volumetric sales. The company’s analyst briefing gives more insight—while nearly all segments under PSMC recorded growth, the CBU import segment showed a decline of 80 percent in year-on-year sales. Margins improved during the quarter as costs did not increase in proportion to revenues even though the company is facing higher freight charges due to shipping and supply-chain challenges.

Currency appreciation may have made CKD kits cheaper. Estimated cost per unit sold has fallen by 4 percent in 1QCY21, though the measure might not be exact as motorcycle sales (up 41%) are not included.

Demand has improved on the back of lower borrowing costs, and may even have offset some of the effects of higher prices that have seen succeeding inclines over the past two years. According to the company’s briefing auto finance constituted 40 percent of total sales during CY20 against 30-35 percent in CY19. It is safe to assume this trend has continued in the outgoing quarter as interest rates have stayed put.

The company has kept overheads at 4-5 percent of revenues which is standard and actually saw a reduction in finance costs to 0.7 percent in 1QCY21 against 6 percent this period last year which shored up the bottom-line. A major contributor to the profit is other income component which was 56 percent of before-tax profits.

With used car imports not picking up due to changes in policy, favorable currency and cheaper financing available for customers, Suzuki is on its way to a solid recovery. One threat remains the supply-chain challenges and the shortage of semi-conductors in the global market which is used in automobile manufacturing. However, it seems Suzuki has remained insulated from that. As long as global supply chain remain disrupted though, higher freight on imports will prevail which may cause margins squeeze.