Earnings Report /
Pakistan

Pakistan Suzuki: 3QCY21 review – Positive tax adjustments lead to an earnings beat

  • PSMC posted an EPS of PKR12.07, beating our expected EPS of PKR8.91, largely due to positive tax adjustments

  • GMs declined to c.0.5ppt qoq to c.5.3%, in line with expectations, amid sharp qoq PKR depreciation

  • We have a Buy rating on PSMC with a December 2022 TP of PKR300/sh

Intermarket Securities
28 October 2021

Pak Suzuki Motor Co. (PSMC) has posted a 3QCY21 NPAT of PKR1.0bn (EPS: PKR12.07), up a staggering c.2x qoq and better than a net loss of PKR0.5bn (LPS: PKR6.65) last year. This takes the net profits in 9MCY21 to PKR2.2bn (EPS: PKR26.62). The result beats our projected EPS of PKR8.91. The variance primarily stems from (i) higher net revenues, (ii) higher other income and (iii) lower-than-expected taxation.

Key result highlights for 3QCY21:

  • Volumes increased by a sharp 75% qoq (up c.2x yoy) to c.38,000 units, which is largely attributed to the pent-up demand following the incentives announced in the Budget for vehicles up to 1,000cc (resulting in price reductions in July). Net revenues have thus clocked in at PKR50bn (highest in a quarter), up c.70% qoq and higher than our estimate. 

  • Gross margins have declined by c.0.5ppt qoq to 5.3%, in line with our expectations, largely due to the sharp c.7% qoq PKR/USD depreciation and elevated commodity prices, where the sharp volumetric growth cushioned the decline in margins, in our view. We, however, expect any decline in margins to be cushioned by sharp price hikes (as early as November) in the coming quarter to counter the effect of recent PKR depreciation. 

  • Finance costs clocked in at PKR77mn, up a sharp c.80% qoq. Other Income doubled qoq, indicating a rise in cash due to higher customer advances received in the quarter, in our view. We await quarterly accounts for more clarity on the former. 

  • Distribution expenses increased c.35% qoq, which can be attributed to the robust growth in sales. Admin expenses, rose a softer 8% qoq to PKR719mn.

  • PSMC recorded an ETR of 29%, higher than our expected tax costs, likely due to adjustments arising from deferred tax assets, in our view.

This is a decent result from PSMC amid modest decline in gross margins compared with INDU (where GMs fell c.1ppt qoq), on account of robust volumes. However, a rising interest rate environment, along with the recent changes in auto-finance regulations and supply chain constraints (bookings of multiple models of the Cultus and Alto), may result in lower volumes in the coming quarters, in our view. Gross margins are likely to remain in check, given the OEMs fail to increase prices in the coming quarters, as the government has been discouraging price increases in various industries. We have a Buy rating on PSMC with a December 2022 TP of PKR300/sh.