JS Securities Limited – JS Research (24-03-2020)

Karachi, March 24, 2020 (PPI-OT): PSMC: LPS of Rs35.49 during CY19

Pak Suzuki Motor Company (PSMC) recently announced its CY19 results, where the company declared a net loss of Rs2.9bn (LPS: Rs35.49), compared to a net profit of Rs1.3bn (EPS: Rs15.77) in the same period last year. The company, unsurprisingly, did not declare any dividend with the CY19 result announcement, compared to a Rs3.16/share pay-out last year. During 4QCY19, the company posted LPS of Rs2.84, compared to LPS of Rs1.15 in 4QCY18.

The drop in earnings was on account of (1) volumes declining by 36% YoY, and (2) massive jump in finance costs (+320% YoY) as the company resorted to bank borrowing for its liquidity requirements. The company managed to reduce its distribution costs by 47% YoY, which helped reduce the pressure on the bottom line. Finally, the loss during the quarter would have been greater, had it not been for tax reversal during the quarter.

On a QoQ basis, the company managed to cut its losses, which was likely on account of price increases in the Suzuki Alto variant which accounted for nearly half of total volumes for the quarter. Resultantly, the company returned to gross profitability with gross margins of 3.1% in 4QCY19, compared to a gross loss in 3QCY19.

Given the current pandemic scenario, where all auto companies have closed down their production units, it appears that volumes might drastically reduce in the next month at least. On the other hand, oil prices are heading towards US$20/bbl and maybe lower. In this backdrop, the latest speech by the government to provide relief to the masses via Rs15/litre cut in oil prices (more to likely follow) and measures such as a further reduction in interest rates (150bps to 11% from 12.50% a week ago) bodes well for the sector’s volumes. However, that obviously assumes that production will commence and it is hard to say when the pandemic scenario alleviates. For the time being, we place PSMC ‘Under Review’ and will update our valuation shortly.

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