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Pakistan

Pakistan Suzuki: Q1 CY 20 review: Weak margins lead to earnings miss

  • PSMC posted Q1 CY 20 pre-tax loss of PKR1,326mn (LPS: PKR16.11), doubling from a pre-tax loss of PKR529mn in Q1 CY 19

  • Gross margins rose marginally to 3.23% in Q1 compared to 3.09% in Q4, while flattish compared to last year’s 3.25%

  • Reiterate Neutral, TP PKR265

Intermarket Securities
23 April 2020

PSMC posted 1QCY20 pre-tax loss of PKR1,326mn (LPS: PKR16.11), doubling from a pre-tax loss of PKR529mn in 1QCY19 and much higher vs. our projected pre-tax loss of PKR664mn (LPS: PKR8.06). That said, a PKR384mn tax credit diluted overall NLAT to PKR941mn (LPS: PKR11.44). The earnings miss primarily stems from (i) significantly lower-than-expected gross margins at 3.2% vs. expectation of 4.9% and (ii) higher-than-expected finance costs.

Key highlights: 

  • Volumes declined by 38% qoq and 63% yoy in 1QCY20. Reduction in sales may be due to weakened demand following the 4-5% price hikes announced mid-December and a tough macroeconomic environment, in our view.
  • Gross margins rose marginally to 3.23% in 1Q CY 20 compared to 3.09% in 4QCY19, while flattish compared to last year’s 3.25%. This is, however, much lower than our projected GMs of 4.9% due to a significant decline in volumes during the quarter, negating the expected improvements of the recent price hikes. This led to an increase in fixed overheads amid lower inflation and relatively stable PKR. We expect margins to decline due to the lockdown in 2Q.
  • Finance costs came in higher than expected, rising 6% qoq and a staggering 3.2x yoy. This may be due to an increase in short-term borrowings due to declining customer advances and inventory pile-up. Recall that PSMC announced non-production days in the month of January to rationalise inventory.
  • Distribution expenses and admin expenses saw a yoy decline of 57%/8%, while other income increased 7% yoy.
  • PSMC booked a tax reversal of PKR384mn despite the company falling under the minimum tax regime on a turnover basis. PSMC had recorded reversals in the previous three quarters as well. PSMC had been booking turnover tax since 3QCY18 (which has a carry forward period of five years) and it appears that the company is expecting higher profitability going forward, in our view.
  • This is a weak result by PSMC, where we are disappointed by persistently weak margins despite the price hikes and we expect a delay in pickup for cars due to the ongoing lockdown.