Sazgar Engineering Works Limited

Sazgar Engineering Works Limited (PSX: SAZEW) was incorporated in Pakistan as a private limited company in 1991 and was converted into a public limited company in 1994. The principal activity of the company is the manufacturing and sale of automobiles, automotive parts and accessories and household electronic appliances.

Pattern of Shareholding

As of June 30, 2022, SAZEW has a total of 60.445 million shares outstanding which are held by 5814 shareholders. Directors, CEO, their spouse and minor children hold little over 66 percent shares of the company to form the largest shareholder category of SAZEW. This is followed by local general public with an ownership of 24.84 percent shares of the company. Insurance and Takaful companies have a stake of 6.16 percent in the company. Joint stock companies account for 1.37 percent shares of SAZEW. The remaining shares are held by other categories of shareholders each having a stake of less than 1 percent in the company.

Performance Trail (2018-22)

The topline and bottomline of SAZEW shows a mixed pattern in the years under consideration whereby they slid until 2020 and then post an astounding turnaround thereafter. GP and OP margins ride a downhill journey. NP margin slightly improves in 2021 and then tumbles in 2022. The detailed performance review of each of the years is given below.

In 2019, SAZEW’s topline slid by 19 percent year-on-year which reflects the decline across the categories – auto rickshaws, automotive parts and home appliances. During 2019, SAZEW sold 15,845 units of Auto Rickshaws which were 28 percent lesser than the volume sold in 2018. The curtailed momentum of tractor industry sales also affected the sales of tractor wheel rims which shrank by 32 percent to clock in at 73,395 units. Sale of home appliances wax also affected due to reduced purchasing power of the consumers on account of rising inflation.To top it off, due to the closure of Pakistan Steel Mills; the company became dependant on imported steel whereby constant depreciation of Pak Rupee resulted in an unabated increase in the prices of raw materials. Gross profit dipped by 26 percent year-on-year in 2019 while GP margin fell from 11.2 percent in 2018 to 10.3 percent in 2019. Distribution expense remained in check due to lesser freight and octroi charges, however, admin expense rose, depicting an increase in salaries and wages on account of inflation. Other expense reduced by 58 percent year-on-year in 2019 on the back of lower provisioning for WWF, WPPF and doubtful debts. Other income didn’t lend any favor as it contracted by 68 percent year-on-year due to lesser reversals of provisions in 2019. All in all, the operating profit ticked down by 48 percent year-on-year in 2019 while OP margin fell from 6.5 percent in 2018 to 4.2 percent in 2019. Finance cost multiplied by a whopping 396 percent in 2019 due to higher discount rate during the year coupled with long-term loans obtained for the four wheeler project and increased utilization of short-term borrowing facility. The bottomline went down by 56 percent year-on-year to clock in at Rs.82 million in 2019 with an NP margin of 2.5 percent versus 4.7 percent in 2018. EPS stood at Rs.3.04 in 2019 from Rs.8.62 in 2018.

In 2020, SAZEW topline further shrank by 10 percent year-on-year. Owing to the outbreak of COVID-19, automobile sector badly suffered which had its affect on the sales of SAZEW. Not only did the sale of four wheelers and automotive parts decreased during 2020, severe economic headwinds also took its toll on the sales of three wheelers and home appliances. The off-take of three wheelers nosedived to 12,274 units in 2020, reflecting a 22.5 percent year-on-year drop. Due to low capacity utilization and curtailed sales, the cost of sales also inched down by 10 percent year-on-year in 2020, nonetheless, gross profit contracted by 11 percent year-on-year while GP margin almost remained intact. Operating expense rose up not only due to an increase in the salaries and wages but also due to increased advertising and promotion budget as the company launched a new model of Cargo Loader during 2020 with three variants. Other expense inched down due to lesser provisioning of WWF and WPPF due to reduced profitability. Other income posted a staggering growth of 309 percent in 2020 on account of profit on Islamic banking deposits and gain on sales of fixed assets. However, this couldn’t prevent the operating profit from shrinking by 23 percent in 2020. OP margin also fell to 3.6 percent in 2020. Finance cost surged by 164 percent due to increased borrowings during 2020. The net profit lessened by 66 percent year-on-year in 2020 to clock in at Rs.27.64 million with an NP margin of 1 percent. EPS weakened to Rs.0.96 in 2020.

After experiencing the successive years of lackluster demand, 2021 appeared to be the ray of hope for SAZEW as its revenue grew by a stunning 39 percent in 2021. The sales growth came on the back of a robust rise in the demand of three wheelers, four wheelers and tractor wheel rims while the sale of home appliances inched down. The topline growth was also the result of price increase as the company had to pass on the effect of increase in iron prices to the customers. Due to exorbitant raw material prices, GP margin declined to 9.1 percent despite sizeable topline growth. Operating expense grew significantly due to an increase in ocean freight charges as well as salaries expense. Operating profit could only grow by 20 percent year-on-year in 2021 while OP margin dwindled to 3.1 percent. A tremendous support to the bottomline was provided by finance cost as it reduced by 67 percent year-on-year on the back of lower borrowings and downward revision in discount rate. The result was a 174 percent year-on-year rise in the bottomline to clock in at Rs.75.80 million in 2021. NP margin also slightly improved to 1.9 percent in 2021 while EPS stood at Rs.1.25.

2022 blessed SAZEW with the highest ever topline growth of 149 percent which culminated into the record high sales revenue of Rs.10.048 billion. The fat topline was the result of the success of the company’s four wheeler project during 2022 which multiplied by 245.38 times in 2021 to reach Rs.5.46 billion. The sales of three-wheeler also buttressed the topline growth while the home appliances and tractor wheel rims category didn’t perform well. Extraordinarily high prices of iron coupled with Pak Rupee depreciation drove the cost of sales up by 156 percent. While gross profit grew by 82 percent year-on-year in 2022, GP margin considerably shrank to 6.6 percent. Record high inflation, steep rise in freight charges as well high advertising budget pushed the operating expenses up staggeringly. Other expense also posted a sizeable increase of 82 percent on account of higher WPPF. While operating profit posted a 153 percent boost, OP margin stayed almost the same i.e. 3.16 percent in 2022. Finance cost which provided an ultimate breather to the bottomline in 2021, turned ruthless yet again with multiple upward revision in the discount rate during 2022. This suppressed the growth momentum of bottomline which inched up by 55 percent in 2022 to clock in at Rs.117.84 million in 2022. NP margin lessened to 1.2 percent in 2022 while EPS moved up to Rs.1.95.

Recent Performance (9MFY23)

After an overwhelming sales and profits achieved by the company in 2022, the subsequent year appears to be even more encouraging as not only did the topline grow by 78 percent year-on-year in 9MFY23, but it produced even higher growth in the bottomline. Unlike 2022, where the margins weakened, 9MFY23 is characterized by vigorous margins. The topline growth was the result of powerful performance by the four wheeler segment while the other segments posted dreary sales figures. Despite high prices of raw materials, which was further fueled by Pak Rupee depreciation, gross profit magnified by 132 percent in 9MFY23 while GP margin inclined to 10.3 percent from 7.9 percent in 9MFY22. Operating and other expense also grew considerably; other income also acted favorably and grew by 75 percent year-on-year in 9MFY23. Operating profit multiplied by 176 percent in 9MFY23 while OP margin also surged to 7.1 percent from 4.6 percent during the same period last year. Despite an ample growth of 319 percent in finance cost in 9MFY23, net profit blew up by 344 percent in 9MFY23 to reach Rs.523.75 million with an NP margin of 4.2 percent from 1.7 percent in 9MFY22. EPS also surged from Rs.1.95 in 9MFY22 to Rs.8.66 during 9MFY23.

Future Outlook

Despite harsh economic and political backdrop characterized by record high inflation, highest ever discount rate, import restrictions, rise in energy and fuel prices as well depreciation of Pak Rupee, the sales of three wheelers and four wheelers are expected to drive the sales up. However, due to declining purchasing power of consumers, the company may not be able to pass-on the impact of high cost of sales, distribution cost and finance cost to its consumers which might put the bottomline and margins under pressure.