At a capacity utilization of just over 70 percent, Pakistan Suzuki (PSX: PSMC) has certainly turned a corner in the first half of this year after turning losses for eight consecutive quarters. The poor demand performance for nearly two years was a direct result of the economy in “cool-down” mode with purchasing powers of car buyers diminishing amid increasing cost of borrowing.
This was not the case for other OEMs whose demand began to diminish much after PSMC. Naturally, as a carmaker poised to target middle-income car buyers, the demand for Suzuki cars tends to be very sensitive to changes in income. Couple that with the price effect where automakers almost in unison raised prices across models to keep up with their ballooning costs. All that however is now behind Suzuki as it re-emerges from its past with renewed vigor evidenced by its improving financial standing.
As for the current financial performance, the company sold more than double the vehicles it did during this period last year which translated to an equally positive doubling of revenue. Not including motorcycle sales, the estimated revenue per unit sold grew by 2 percent for Suzuki during 1HCY21. The company’s sales for CBU imported vehicles recorded a decline. Cost per unit sold (estimated) fell by 4 percent despite higher freight and shipping costs due to container shortages, amid the bubbling supply-chain crisis for semi-conductor chips in the global market. This is certainly a feat but improvement in currency certainly played a role here. The margin improvement from negative to 6 percent should be credit to that as well as the company’s higher prices and a favorable sales mix.
Demand has recently improved on the back of reduced cost of car financing which constitute about 40 percent of the company’s sales. This share could grow further over the next quarters if interest rates maintain on that level.
During the period, the company lowered overheads to 4 percent from nearly 6 percent last year which was phenomenal for the bottom-line in conjunction with the reduction in finance costs. In fact, finance costs as a share of revenue fell to less than 1 percent from 7 percent during 1HCY20.
A dominant factor was “other income” that contributed 51 percent to the company’s pre-tax earnings. This is a major component shoring up the bottom-line on other auto OEMs as well which constitutes of prudent investments in risk-free securities and bank deposits. That’s the kind of greasing that Suzuki needed.
Certainly, the company is in recovery mode but not unlike players like Indus Motors, it is also in growth mode indicated by demand being lapped up by prospective car buyers. There are risks—such as government fixing prices amid a rupee depreciation cycle or costs riding up—but if costs of financing stay at their prevailing levels, things are looking up for Suzuki.