Sazgar Engineering

Sazgar Engineering (PSX: SAZEW) is one of the largest domestic rickshaw manufacturers in Pakistan and has been incorporated since 1991 with plants located in Lahore. Aside from them manufacturing of auto rickshaws, Sazgar also manufacturers and sells tractor wheel rims and home appliances. The current capacity for the plant is to manufacturing 20,000 rickshaws annually. Utilization, in accordance with demand, stands at 79 percent.

In the outgoing year—FY21—Sazgar began commercial trial operation of passenger cars and off-road vehicles under the brand “BAIC”. The company signed a vehicle assembly and technical cooperation agreement with a Chinese manufacturer of passenger cars and commercial vehicles called Great Wall Motors. Sazgar’s first launch in the segment is HAVAL which is operating all over the world and will officially become part of the growing SUV segment in Pakistan.

As a three-wheeler manufacturer, Sazgar did not have any prior experience in other automotive segments, but in Jan-21, the company decided to spread its wings and diversify its product base by venturing into the expanding passenger vehicle segments. Sazgar wanted to utilize the benefits offered by the Auto Development Policy 2016-21 and launch sedans and hatchbacks from the Chinese brand BAIC, which is one of the largest Chinese automotive groups.

Industry dynamics and Sazgar’s operational/ financial performance

Over the past decade, the three-wheeler segment has proliferated with more players entering and expanding their production whilst sharing and dividing the rather subdued market. From selling 9800 units in 2008, Sazgar’s sales grew to 21,000 in FY18 which was a phenomenal year for the automotive industry in general. Since then, Sazgar’s volumes have shrunk in line with the rest of the industry to 12,000 and 15,000 in FY20 and FY21. There is growth but sales are not close to the peak even though the company is operating at 80 percent capacity utilization at the moment.

Though, the total three-wheeler industry size has grown far more with two Chinese players Road Prince and United Auto started to gain ground. Qinqqi dominates the market. The three-wheeler demand grew from some 40,000 units to 72,000 between FY12 and FY18, after which sales fell to 51,000 by FY21. Sazgar’s market share has shrunk from 41 percent to 31 percent between FY12 and FY21.

The company’s financial performance is nothing too exciting to write home about. Recently, the company has been operating at less than 12 percent gross margins and very low profit margins. The primary reason is demand lethargy and the ever-rising cost of production. Though much of the rickshaws are “localized”, a lot of the local parts required imported raw material which essentially makes margins vulnerable to rising commodity prices as well as rupee devaluation. This is why despite increasing prices for rickshaws; the company has had a slowdown in its financial performance.

This reflects in the company’s earnings per share as well which dropped dramatically post its peak in FY18. The company stopped giving out dividends after FY17, not because it was making losses but because it had decided on reinvestment and expanding into new areas of growth. It makes commercial sense.

That is not to say that rickshaws are vanishing. While rickshaw sales have remained dull, with the ever-expanding population and the absence of reliable public transit network in urban and rural areas, rickshaws will continue to create demand for them. They remain an important source of income for many households and with the emergence of ride-sharing apps; the perceived safety of travel for rickshaws has also grown especially in cities. Affordability is a major concern for rickshaw owners who have limited buying power—a lot of rickshaw drivers in cities rent out rickshaws from thaikaydaars because they cannot afford the upfront cost specially in a market where vehicles—from motorcycles to rickshaws to cars—are becoming more expensive. In 2011, Sazgar entered into contract with a leasing company to provide easier financing for potential rickshaw owners which has enabled affordability. If leasing and financing becomes more accessible with better loan tenors and terms for drivers, rickshaw demand can grow faster than what the industry has witnessed thus far.

If rickshaw demand remains slow, Sazgar should explore exporting markets wherever it can be market competitive. The company currently exports to Afghanistan, Ethiopia, Kenya, Senegal, Tanzania and Japan.

In the meanwhile, Sazgar’s plan was to go where government incentives were present. The auto development policy invited new investors to set up shop in the country and avail tax and duty advantages. Sazgar leaped at this opportunity.

Growth outlook

Pakistan is still a nascent fairly small automotive industry with only two-wheelers bringing in the required variety and volumes. Passenger cars, commercial vehicles and the emerging SUV segments are spaces where ample capacity could be created given the right motivation. That motivation came in the form of the auto policy.

However, players like Regal Motors and Master Motors who have brought new Chinese vehicles to the Pakistani market have had nominal success compared to players like Lucky Motors that brought in Kia vehicles into the market. Chinese models have to fight an uphill battle in terms of creating that trust among car buyers and that is going to be a slow process. For a lot of Chinese model buyers, it is going to be a leap of faith.

Even though BAIC is a huge Chinese brand in the world, it’s acceptability in a market as small as Pakistan’s is going to be a struggle for Sazgar. The company will have to beef up its marketing and ensure that it has invested in a well-established dealer network for after-sale services. Without the latter, Sazgar cannot generate the trust required for the market to take a chance on Chinese vehicles that are battling with the so-called “low quality” perception. Though Chinese vehicles are more affordable compared to Japanese models—that too by design—the reliability and authenticity for an asset purchase like a passenger car or SUV is crucial for customers.