Sazgar Engineering

Sazgar Engineering (PSX: SAZEW) is one of the biggest rickshaw manufacturers in Pakistan. Incorporated in 1991, the company has its manufacturing plants located in Lahore. Among its product portfolio, the company manufacturers auto rickshaws, as well as tractor wheel rims and home appliances. Most recently, the company made a huge leap by entering the four-wheeler segment by launching a SUV. The current capacity for the plant is to manufacturing 20,000 rickshaws annually while the automobile shop can assemble 24,000 units on an annual basis in a single-shift.

Though Sazgar did not have any experience with automobiles beyond assembling rickshaws, the company decided to utilize the benefits being offered under the Auto Development Policy 2016-21 by entering into vehicle assembly and technical cooperation agreement with brands like BAIC and HAVAL. During FY23, the company introduced the first-ever locally-assembled hybrid electric vehicle.

Sazgar’s operational and financial performance

The three-wheeler segment in Pakistan has thrived over the past few decades and more assemblers entered the market and introduced new three-wheeler options to the market. When the market was expanding, Sazgar’s three-wheeler sales grew from less than 10,000 units to 21,000 units in FY18—this happened over the span of a decade. Sazgar continued to maintain a strong market share during these years—between 30 and 35 percent. Volumes tumbled since FY18 in accordance with shrinking demand and the market pie. Between FY19 and FY22, the company maintained sale units between 12,000 and 16,000. But by FY23, this had tumbled further down to less than 9,400 units. However, its market share has remained on the same level, growing to a phenomenal 49 percent in FY23 despite significant competition Qinqqi and United Auto. Sazgar dominates the three-wheeler market as it stands right now; as other performers saw their sales dwindle faster.

But the good news for the company only just begins. In fact, charting its financial performance has been a delightful experience, with revenues skyrocket in the past two years when the economy has been in doldrums—by any measure. Before that, the company operated to margins below 12 percent and very thin net profit margins. Rising costs of production as much of the local parts and raw materials are imported kept margins from growing amid a subdued purchasing power for rickshaw buyers as the upfront cost of purchase without leasing and financing options available for an average rickshaw driver is steep. Most rickshaw drivers in fact rent rickshaws and pay owners for use as affordability is a major challenge for them.

With those dynamics coming into play, even though Sazgar’s market share grew, its sales did not. So, while Sazgar dominated the rickshaw market, it was essentially dominating a market that was fast losing steam. Demand has plummeted since FY18. This reflects in the company’s earnings per share as well which dropped dramatically post its peak in FY18. The company prudently decided to take matters in its own hands and not rely on existing demand to flourish. It stopped giving out dividends after FY17 and opted for reinvestment and expanding into new areas of growth, such as exports and leaping into new segments altogether.

This worked! The company’s revenues multiplied by 4.5x between FY21 and FY23—just a matter of two years, and its earnings rose even more—up 13x. Net margins improved to 5 percent in FY23 from 2 percent in FY21 and in the outgoing fiscal year, for the first time in 5 years, the company offered dividends to its shareholders. What’s not surprising is that, in FY22, 55 percent of the Sazgar’s revenue came from four-wheelers. This grew to a massive 81 percent in FY23 selling about 1800 units of four-wheelers. This means, about 9,000 units of rickshaws contributed to 19 percent of the company’s revenues which also includes tractor rims, all 37,500 units of it. At this point, its other business operations are barely making any money and a handful of SUV sales are driving the company’s growth and revenue profile.

Outlook

While Sazgar’s vehicles have been well-received, no doubt evidenced by its earnings, such strong dependence on a new and unexplored segment which is being inundated with new options seems like risky business. The market for SUVs is small and significant growth in the segment will take time as car buyers become familiar with the models being launched. At the same time, the steep cost of these vehicles ensures only a very small fraction of the population can make these sales. This is not to say that SUV assemblers need massive volumes—they just need consistent volumes and market performance and an optimistic outlook on market share. Time will tell where Sazgar stands on those metrics.