Pak Suzuki Motors Company Limited (PSMC)

Dear Clients,

Pak Suzuki Motor Company (PSMC) reported its 1Q2021 results at PkR9.45/sh undershooting street consensus and our estimates. The result stood lower than market expectations and our projected profits of PkR22/sh.

– Deviation from our estimates largely emanated from lower than expected gross margins for the period. Our channel checks reveal the spike in the cost of sales is attributable to elevated freight charges on CKD shipments as well as procurement at higher levels of USDPKR parity.

– That said, appreciation of PKR against the USD and JPY depreciation against the USD from Mar’21 is likely to provide some insulation to the margin trajectory going forward.  

– The company posted a 2x Y/Y appreciation in revenues for the quarter to stand at PkR36.1bn stemming from a 106% Y/Y increase in vehicle sales. The company sold 18,249 units as compared to 20,482 units in the same period last year.

– On the cost side, the company reported a 97% Y/Y growth in the cost of sales at PkR33.9bn as production and sales ramped up. We believe there were no one-offs reported during the quarter.

– Resultantly, gross margins were noted at 6.1% for the period with gross profits at PkR2.2bn. Margins for the period were lower by 205bps compared to sequential-quarter margins of 8.2%.

– Administrative expenses stood 15% Y/Y higher likely from the increased workforce. Distribution costs rose in line with sales growth.

– Moreover, other income saw a healthy 11.6x Y/Y rise to PkR619mn for the quarter. This is attributable to two factors. Firstly, the company has likely booked exchange gains on USD and JPY dominated payables. Secondly, the company has earned income on cash balances available on its balance sheet.

– Aggressive deleveraging is notable with the finance cost of the company dropping 76% Y/Y down to PkR250mn. On a Q/Q basis, it stood 6% lower. 

– Overall profits of the company stood at PkR778mn for 1Q2021 translating to EPS of PkR9.45/sh against loss of PkR941mn (LPS of PkR11.4/sh) last year.

– Going forward, we contend for reasonable demand growth as well as a better operating environment to prop up earnings for the year. Low interest rate environment is likely to keep vehicle financing affordable. We await the release of detailed accounts to update our investment case.

Regards,
KASB Research

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