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, 2023, SAZEW has a total of 60.446 million shares outstanding which are held by 5526 shareholders. Directors, CEOs, their spouses, and minor children have the majority shareholding of over 66.71 percent shares of the company. This is followed by the local general public having 27.86 percent shares of the company. Joint stock companies account for 2.06 percent shares of SAZEW while Modarabas & Mutual Funds and Insurance /Takaful companies hold 1.35 percent and 1.14 percent shares respectively. The remaining shares are held by other categories of shareholders.

Performance Trail (2019-23)

The topline and bottomline of SAZEW which were declining until 2020 registered a massive turnaround thereafter. The gross and operating margins of the company witness a downward journey until 2022 followed by a staggering rebound in 2023. Net margin which was dropping until 2020, slightly improved in 2021 only to slide in 2022. In 2023, the net margin also considerably recovered (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, SAZEW’s topline slid by 18.89 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 less 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. The sale of home appliances wax also affected due to the 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 dependent on imported steel whereby constant depreciation of the Pak Rupee resulted in an unabated increase in the prices of raw materials. Gross profit dipped by 25.67 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 expenses were reduced by 57.87 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 47.55 percent year-on-year in 2019 while the OP margin fell from 6.54 percent in 2018 to 4.23 percent in 2019. Finance cost multiplied by a whopping 396 percent in 2019 due to a 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 bottom line went down by 55.92 percent year-on-year to clock in at Rs.81.999 million in 2019 with an NP margin of 2.55 percent versus an NP margin of 4.69 percent in 2018. EPS stood at Rs.3.04 in 2019 from Rs.8.62 in 2018.

In 2020, SAZEW topline further shrank by 10.15 percent year-on-year. Owing to the outbreak of COVID-19, the automobile sector badly suffered which had an effect on the sales of SAZEW. Not only did the sale of four-wheelers and automotive parts decrease during 2020, severe economic headwinds also took their 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. Gross profit contracted by 11.4 percent year-on-year while GP margin slightly dropped to 10.13 percent in 2023. Operating expenses rose up not only due to an increase in salaries and wages but also due to an increased advertising and promotion budget as the company launched a new model of Cargo Loader in 2020 with three variants. Other expenses 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 the sale of fixed assets. However, this couldn’t prevent the operating profit from shrinking by 22.99 percent in 2020. OP margin also fell to 3.63 percent in 2020. Finance costs surged by 164 percent due to increased borrowings during 2020 and higher discount rates for most part of the year. Net profit lessened by 66.3 percent year-on-year in 2020 to clock in at Rs.27.636 million with an NP margin of 0.96 percent. EPS weakened to Rs.0.96 in 2020.

After experiencing successive years of lackluster demand, 2021 brought a silver lining for SAZEW as its revenue grew by a stunning 39.49 percent in 2021. The sales growth came on the back of a robust rise in the demand for 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 increases as the company had to pass on certain effects of increases in iron prices to the customers. Due to exorbitant raw material prices, the GP margin declined to 9.09 percent despite sizeable topline growth. Operating expenses grew significantly due to an increase in ocean freight charges as well as salary expenses. Higher profit-related provisioning inflated operating expenses by 48.72 percent in 2021. Other income also improved by 17.66 percent in 2021 due to higher profits from Islamic bank deposits. Operating profit could only grow by 19.87 percent year-on-year in 2021 while OP margin dwindled to 3.12 percent. Tremendous support to the bottom line was provided by finance cost as it was reduced by 67 percent year-on-year on the back of lower borrowings and a downward revision in the discount rate. The result was a 174.28 percent year-on-year rise in the bottom line to clock in at Rs.75.799 million in 2021. NP margin also slightly improved to 1.88 percent in 2021 while EPS stood at Rs.1.25.

In 2022, SAZEW was blessed with the highest-ever topline growth of 154.72 percent which culminated in a record-high sales revenue of Rs.10.274 billion. The robust 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. During the year, SAZEW introduced a four-wheeler under the brand name “BAIC” which played a pivotal role in achieving robust topline growth in 2022. The sales of three-wheelers also buttressed the topline 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 155.84 percent. While gross profit grew by 143.49 percent year-on-year in 2022, GP margin shrank to 8.69 percent. Record high inflation, steep rise in freight charges as well high advertising budget resulted in 131.42 percent taller operating expenses incurred in 2022. Other expenses also posted a sizeable increase of 82.25 percent on account of higher provisioning for WPPF. While operating profit posted a 152.51 percent boost, OP margin slipped to 3.09 percent in 2022. Finance cost which provided an ultimate breather to the bottom line in 2021, turned ruthless yet again in 2022 with multiple upward revisions in discount rate during 2022. This suppressed the growth momentum of the bottom line which inched up by 55.46 percent in 2022 to clock in at Rs.117.84 million in 2022. NP margin lessened to 1.15 percent in 2022 while EPS moved up to Rs.1.95.

After 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 76.89 percent year-on-year in 2023, its bottom line and margins multiplied staggeringly. The topline growth was the result of vigorous performance by the four-wheeler segment. The sales of four-wheelers multiplied by 83.35 percent year-on-year in 2023 to clock in at 1828 units. Conversely, the sales volume of three-wheelers and tractor wheel rims dropped by 40.18 percent and 47.34 percent respectively to clock in at 15,683 units and 71294 units respectively in 2023. In 2023, the company also commenced the production of SUV vehicles and also introduced hybrid electric vehicles in the local market under the brand name of “HAVAL”. Despite high prices of raw materials, which were further fueled by Pak Rupee depreciation, gross profit magnified by 185.51 percent in 2023 while GP margin inclined to 14.03 percent from 8.69 percent in 2022. Distribution expense grew by 37.28 percent in 2023 due to higher freight and octroi charges, commission, traveling & conveyance charges, and also provision for warranty claims booked during the year. The administrative expense also hiked by 61.87 percent in 2023 due to higher payroll expenses as SAZEW’s workforce grew from 1117 employees in 2022 to 1197 employees in 2023. Other expenses spiked by 496.29 percent in 2023 due to a tremendous rise in profit-related provisioning. Other income acted favorably and grew by 65.68 percent year-on-year in 2023 on the back of higher profit from Islamic banking deposits. Operating profit multiplied by 419.72 percent in 2023 while OP margin also surged to 9.07 percent from 3.09 percent recorded during last year. Finance costs escalated by 211.45 percent in 2023 on account of an unprecedented level of the discount rate. This was despite the fact that the company paid off all its short-term liabilities during the year and considerably reduced its long-term borrowings. SAZEW’s net profit improved by 744.44 percent to clock in at Rs.995.077 million in 2023 with EPS of Rs.16.46 and NP margin of 5.48 percent.

Recent Performance (9MFY24)

During 9MFY24, SAZEW’s net sales grew by 170.44 percent year-on-year. According to the last published 1HFY24 report, all three categories i.e. four-wheeler, three-wheeler, and tractor rims registered significant growth in their sales volumes. Besides, the company was also able to pass on the impact of the cost hike to its consumers, which is evident from the GP margin of 25.82 percent recorded by SAZEW in 9MFY24 versus the GP margin of 11.63 percent attained during the same period last year. Distribution expense multiplied by 149.6 percent in 9MFY24 while administrative expense surged by 79.28 percent during the period.

This may be on account of the elevated advertising budget for the newly launched hybrid electric vehicles, provisioning done for warranty claims, high freight & octroi charges as well se uptick in payroll expense due to expansion in the workforce on the back of the commencement of new production/assembly line. Other expenses mounted by 908.95 percent in 9MFY24 supposedly due to higher profit-related provisioning. Higher other expense was partially offset by 1894.47 percent higher other income which may be on account of higher profit on Islamic deposits. SAZEW posted 736.19 percent healthier operating profit in 9MFY24 with an OP margin of 21.51 percent versus 6.96 percent in 9MFY23. Despite the soaring discount rate, SAZEW was able to cut down its finance cost by 24.13 percent in 9MFY24 as it is constantly streamlining its debt profile. Net profit grew by 749.35 percent year-on-year in 9MFY24 to clock in at Rs.4,448.419 million with EPS of Rs.73.59 versus EPS of Rs.8.66 during the similar period last year. NP margin also remarkably improved from 4.10 percent in 9MFY23 to 12.86 percent in 9MFY24.

Future Outlook

The marvelous profitability and margins posted by the company in the recent quarters speak volumes of the fact that its vehicles are well received by the market. Moreover, an improved agricultural outlook is also a good omen for the company in the segment of tractor wheel rims. Its three-wheeler sales are also flourishing. However, more than 80 percent of the company’s revenue comes from the sales of its four-wheelers. Ever since the introduction of BAIC and HAVAL, the financial performance of the company has reached unparalleled heights. With the declining purchasing power of consumers, how the new environment-friendly four-wheelers introduced by SAZEW penetrate in the local market and ensure sustainable volumes is yet to be seen.