Suzuki: Damage control

The first quarter of the calendar year for Pakistan Suzuki (PSX: PSMC) has been a shocker—a loss of Rs12.9 billion—not least because of the shrinking volumes but brought on mainly by the economy slipping into deep chaos with the economic management having to take decisions that are massively causing production halts. Import restrictions in the country and lack of adequate inventory had Suzuki pausing production for days at end, but there were other consequences.

Since August of last year, Suzuki had to halt production for over 52 days—on and off—either only the automobile plant or the both the automobile and motorcycle plants. The motorcycle plant has been shut down for nearly 41 days during March and most of April. Volumes as a result fell. In the outgoing quarter 1QCY23, volumes plummeted 74 percent year on year. But the company still had a positive EBIDTA—that grew by 42 percent. Due to higher prices, revenue per unit sold (estimated for only automobile units) rose 76 percent versus cost per unit sold increase of 65 percent. However, the finance cost did a number—a big one!

At an average localization level of about 57 percent (this is not a weighted average but an average localization of all models locally assembled assigned equal weights); the company still heavily depends on imported content and has to make foreign payments against it. Not only has rupee depreciation caused imports to become costlier, prevailing import restrictions and inability for companies to open L/Cs and make foreign payments in time has triggered an accumulation of pending foreign liabilities. As a result, in the first quarter, the company incurred a finance cost of 59 percent (of revenue) consisting mainly of exchange loss on foreign liabilities.

To prevent this from worsening, the company has decided to change the way it makes payments—it will now be making payments before it receives goods. This will reduce foreign payables and exchange losses as a result but, without easing in import restrictions—which are a happy place for policymakers at the moment given the welcome surplus in the current account—supply constraints will persist which will reduce production and extend delivery delays. It is going to be a long and arduous summer for auto assemblers, with ironically less work to be done.