Sazgar Engineering Works Limited

Sazgar Engineering Works Limited (PSX: SAZEW) was set up as a private limited company in 1991. Three years later in 1994, it was converted into a public limited company.

The company manufactures and sells automobiles, automotive parts and household electric applinaces at its manufacturing facility located on Raiwind Road, Lahore whereas another manufacturing facility for four-wheeler is under construction also in Lahore.

The company is also present in the international market; some of its export destinations include Afghanistan, Cambodia, Zimbabwe, South Korea and Japan.

Shareholding pattern

As at June 30, 2020, a vast majority of shares, at over 66 percent were held by its directors, CEO, their spouses and minor children. Of this, nearly 42 percent shares are with Mr. Mian Asad Hameed, the CEO of Sazgar Engineering Works Limited. Some 30 percent shares are with the local general public; the remaining 4 percent shares are with the rest of the shareholder categories.

Historical operational performance

While the topline of the company has been fluctuating over the last decade, profit margins have remained relatively stable after dipping in FY09.

During FY17, the company saw one of the highest growth rates in its topline at nearly 26 percent. Sales for auto rickshaws have grown by 23.3 percent in value terms, while there has also been a rise volumetrically. Sale of automotive parts registered a 47 percent growth. The betterment in the law-and-order situation also stimulated the growth in volumes, particularly demand for transportation in Karachi that resulted in increase in market demand for auto rickshaws.

Cost of production, on the other hand remained around 89 percent of revenue as last year therefore keeping profitability stable, as there were no significant changes in other elements as well. Thus, net margin was recorded close to 4 percent for the year.

Growth rate in revenue at almost 10 percent during FY18 was slightly subdued than the double digit growth rates seen in the last four years consecutively. Sales of auto rickshaws in value terms grew by close to 7 percent while sale of automotive parts witnessed a 25 percent incline. Volumetrically too, sale of auto rickshaws witnessed a 4 percent growth. Production cost was again maintained at near 89 percent, thereby raising profit margins marginally. Rs 12 million was also contributed by other income towards the bottomline, that took net margin to nearly 5 percent.

Sazgar Engineering Works saw one of the highest contractions in revenue during FY19 at nearly 19 percent. Sale of auto rickshaws in value terms reduced by 19 percent while sale of automotive parts also fell by 19 percent. Volumetrically, sale of auto rickshaw was lower by almost 28 percent, to 15,845 units.

The auto sector overall was adversely affected by several factors during FY19 such as currency devaluation that increased input costs, rising rate of borrowing and inflationary pressures. These factors also affected the sale and profitability of the company. Cost of production neared 90 percent of revenue, that reduced gross margins to 10 percent, while net margin fell to 2.5 percent, as finance expense also grew to consume 1 percent of revenue.

Revenue continued to contract during FY20, at a little over 10 percent as economic downturn, high borrowing rate, and inflationary pressures continued to dampen business activity, that was exacerbated by the outbreak of the Covid-19 pandemic towards the third and last quarter of FY20. The latter resulted in a nationwide lock down and a halt in business operations. Sales of auto rickshaws fell by nearly 11 percent while sale of automotive parts reduced by almost 5 percent. Sales volumes for three-wheelers were lower by 22.5 percent.

Cost of production was undeterred at close to 90 percent of revenue, while finance expense grew to claim over 2 percent of revenue- highest seen thus far. Thus, while gross margin hovered around 10 percent, net margin fell to its all time low of less than 1 percent.

Quarterly results and future outlook

Topline was higher by 51 percent during 1HFY21 year on year. More than 50 percent of the revenue was earned during the first quarter of FY21 as business activity began to resume after the lock downs. Production volumes for the company for three wheelers grew to 3,888 units, up from 2,479 units seen during 1QFY21.

Looking at profitability between 1HFY21 and 1HFY20, gross margin was slightly lower in 1HFY21, however, other income of Rs 13 million contributed positively towards the bottomline. In addition, finance expense was also lower due to decline in policy rate by the SBP as a relief measure in response to the Covid-19 pandemic. Thus, net margin was better year on year during 1HFY21 at 2 percent.

While the company hopes for the auto sector to continue its recovery in the future and suitable measure by the government to support business, it does see potential risks and reversal of growth due to the second wave of the Covid-19.