Earnings Report /
Pakistan

Pakistan Suzuki: 2Q21 review – lower gross margins and other income lead to earnings miss

  • PSMC posted an EPS of PKR5.08, lower than our expected EPS of PKR8.74, due to lower-than-expected GMs and other income

  • GMs declined to c.5.8% (vs 6.1% in 1Q), lower than our estimated GM of c.6.2%, amid c.20% qoq decline in volumes

  • Despite the weaker result, we maintain our Buy stance (December 2021 TP of PKR450/sh) amid strong order flows

Intermarket Securities
31 August 2021

PSMC posted a 2QCY21 NPAT of PKR0.4bn (EPS: PKR5.08), down c.45% qoq but up from a net loss of PKR1.5bn (LPS: PKR18.49) last year. This is a weak result vs. our projected EPS of PKR8.74. The variance primarily stems from (i) gross margin of 5.8% vs. our expectation of 6.2%, and (ii) significantly lower other income.

Key result highlights for 2QCY21:

  • Volumes decreased by 22% qoq (up 2.8x yoy) to c.22,000 units, which is largely attributed to the reduced working hours in the month of Ramadan, unusually long Eid holidays and weak sales in June, in anticipation of Budget incentives (price reductions on lower taxes). Net revenue has clocked in at PKR30bn (down c.15% qoq), broadly in line with our estimates. 

  • Gross margins have declined by c.0.3ppt qoq to 5.8%, also lower than our expected GMs of 6.2%, due to the decline in sales volumes and possible procurement of raw materials at higher rates (rise in commodity prices during 2Q) and elevated shipping rates, in our view. We, however, expect GMs to improve in the coming quarters amid normalized sales and robust demand following Budget measures.

  • Finance costs clocked in at PKR42mn, down a sharp c.85% qoq, amid repayment of debt. Other Income is down c.60% qoq, indicating a decline in cash due to debt repayment and working capital management (reduced working hours), in our view.

  • Distribution expenses are down c.20% qoq, which may be due to relatively weaker sales. Admin expenses, on the other hand, remained flat qoq. We await the availability of quarterly accounts for further clarity on this.

With the implementation of Budget incentives (reduction in FED and ACD on cars up to 1,000cc), demand for Economy segment cars is likely to remain robust as seen in July 2021, following price reductions. Gross margins are therefore likely to improve in the coming quarters. However, the recent PKR/USD depreciation, elevated shipping and commodity prices may keep margins in check at current levels. We maintain our Buy stance on PSMC (December 2021 TP of PKR450/sh), on the back of strong order flows, and potential duty reductions in the upcoming Auto policy. Lower for longer interest rates and broad macro improvement are likely to maintain sales growth for PSMC.