Suzuki: Balancing Act

After selling more than double of what it did this period last year, Pakistan Suzuki (PSX: PSMC) has certainly turned a corner in 9MCY21, though it does seem like this triumph may be short-lived. After all, growth in demand is not the only determining factor for a healthy income statement. Right now, it is like this: revenues are up 2.3x and the bottom-line has gone from a loss of Rs2.6 billion to positive earnings of nearly that amount. This has come after a good number of quarters the company spent rather struggling.

Government’s policy to slash sales tax and FED on vehicles, particularly smaller vehicles, gave significant impetus to demand since the measure was announced and resulted in car prices coming down by 3-7 percent. But demand had started to go up on the back of more affordable financing and improving purchasing power even before that.

Even though prices were slashed down, the company’s estimated revenue per unit sold grew by 1 percent in 9MCY21 (this does not include motorcycle sales). Costs did not increase by that much which is commendable given the havoc wreaked by escalating freight and shipping costs in the global market. Favorable sales mix played a role here certainly which resulted in margins improving to 6 percent.

The company has displayed a remarkable command over its overheads –which have come down from 5 percent of revenue to 3.7 percent in 9MCY21 which was further supported by a reduction in finance costs owing to cheaper borrowing cost and lower debt. A dominant factor was “other income” that contributed 42 percent to the company’s pre-tax earnings in the 9M period. This is a major component that has been shoring up earnings for other auto OEMs as well and constitutes of prudent investments in risk-free securities and bank deposits. Suzuki certainly needed that.

Even though, the policy rate was increased recently, demand for Suzuki cars is expected to remain strong—40 percent of the company’s current vehicles are sold on bank financing. However, the concerning bit is the supply-side. In fact, Suzuki stopped taking bookings for Alto and Cultus as the global supply crisis for semi-conductor chips came to a head. (Read more about it: “Autos: Approaching headwinds”, Oct 15, 2021) This will cause production delays, delivery delays and ultimately impact revenue stream for the company, trickling down to a shrinking earning profile.

The recent currency depreciation may lead to the company raising prices of the cars very soon which is frankly a bummer for the car market. Car buyers have hardly been able to truly savour the price decline which has almost never happened before but now they have to contend with a price increase, whilst facing delivery delays. Many customers that had paid in full for their cars, in fact, have to wait for months for delivery due to the production and supply chain challenges. That’s the customer side.

On Suzuki’s side too, while improving financing standing is very visible, the next few months are certainly not going in the direction the company had hoped.