Pakistan Suzuki (PSX: PSMC) is down but not nearly close to being out. In fact, all signs point toward its future prosperity. The company announced its financial results for the first quarter for CY18 showing an increase in revenues of 32 percent, brought forward by an 18 percent increase in sales of locally assembled vehicles. However, margins plunged to single digits, from 12 percent in this period last year. A number of factors have led to the fall in the bottom-line of 31 percent.
The company has seen its costs balloon as it relies on imported completely knocked down (CKD) kits to assemble these vehicles. Average localization may be less than 50 percent, with the highest localization (over 70%) for Mehran which is being phased out. For new cars like Wagon-R, imported content is even higher which points towards company’s reliance on imports and hence, sensitivity to global commodity prices as well as the exchange rate.
Between Dec 4, 2017 and Mar 30, 2018, the Pakistan rupee has depreciated by 9.5 percent against US dollar and by 16.4 percent against Japanese Yen. This translated to the higher cost of production. Meanwhile, rising steel prices globally as well as the regulatory duty imposed on steel in Pakistan has also contributed to greater costs for automakers and parts manufacturers.
The company managed to keep its administrative and distributions costs at 4 percent of revenues same as last year while effective tax rate also remained at 31 percent.
Demand has not caused problems for Suzuki recently and it continues to flourish even now. The passenger car segment is outperforming itself. Wagon-R which has fast become a consumer favourite sold 32 percent more units in the first quarter this year while the new Cultus has also proved to hold on its own—growing by 28 percent in 1QCY18 year on year. Meanwhile, Ravi and Bolan sales were 8 percent and 9 percent respectively. Ravi has competition from FAW carrier and Hyundai Shezore and now may see its market share drop with Daehan Shehzore recently launched by Dewan, which Hyundai-Nishat claims is a replica of the Hyundai’s model.
Though Suzuki faces competition from used cars both of which operate in the small car, affordable segment, the company’s marketability, reach and brand loyalty particularly in the car market has made it a unique player with a growing market share. Despite arrival of new players potentially in the next year or so, Suzuki is set demand-wise as it will continue to occupy the small-car niche—which is where the growth really is.
Exchange rate changes and input prices will continue to affect margins. To offset these, the company has raised prices between 2 and 6 percent across different variants, and in fact, subsequent price hikes may not be completely out of question that could cushion the blow to margins going forward.
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