Pak Suzuki Motor Company Limited was incorporated in August 1983 as a public limited company. Its shares are listed on all stock exchanges of the country. The company is a joint venture between Pakistan Automobile Corporation Limited and Suzuki Motor Corporation (SMC), Japan. PSMC's main operations include manufacturing, assembling, and marketing of cars, vans, pickups and 4x4 vehicles in Pakistan.
At present, the whole range of the Suzuki products currently marketed in Pakistan is being produced at the Bin Qasim plant.
PSMC continues to be in the forefront in the automobile industry of Pakistan. Through effective marketing, wide network of sales, service and spare parts dealers, the company has successfully maintained its market share in the local market in terms of both production and sales. With a total market share of 57%, the company dominates especially in the low-end (1000cc) car segment. This segment is very popular in the middle-class income group of the country due to its affordability. Thus, the company enjoys high demand and consequently high sales volume. Apart from this, it has a meager presence of 11% in the high-end car segment (1300-1600cc).
In the higher end segment, the company has only Liana in its portfolio. Previously it assembled Baleno locally which has been replaced by more advanced model of Liana. The export of Suzuki Ravi to Bangladesh and the sheet metal parts of Suzuki Cultus to Europe has given PSMC a competitive edge over other players. The company's exports in FY06 were touched Rs 35 billion mark. Further diversification in the untapped market will give a boost to the company's overall performance. Above all, the highest deletion level of Pak Suzuki amongst the industry players makes it least susceptible to rupee-yen exchange rate fluctuations.
PSMC has consistently worked on its capacity expansion. The company has undergone three phases of capacity expansion, which were completed in FY05, FY06 and FY07 when the capacity improves to a level of 80,000, 120,000 and 150,000 vehicles respectively. The enhanced capacity has been absorbed and owes much to the rising demand, easy availability of finance and booming GDP growth.
Pak Suzuki posted an after tax income of Rs 0.74bn (EPS: Rs 9.14) in 1Q07. Despite 29.4% increase in sales of cars, the gross margins of the company declined by 12.4% in 1Q07 from 12.8% in 1Q06 mainly due to 1.5% appreciation of Japanese yen against the Pak rupee (J¥ = Rs 0.5171 - average price in 1Q07 as compared to Rs 0.5093 in the same period last year). Sales volume, increased by 29.4% in 1Q07 over 1Q06 and stood at 30,346 units whereas the number of cars assembled was 28,353 in the period under review. Distribution and administrative expenses surged by 118.6% to Rs 402m in 1Q07 from Rs 184m last year due to aggressive advertising and sales promotion by the company to enhance market share. Other income declined due to reduced income on bank's deposits because of decrease in pending orders after capacity enhancement.
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Highlights - PSMC PKR (Rs)m
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Year end: Dec 1Q'07 1Q'06 Chg. (Rs) Chg. (%)
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Net Sales 12,140 9,690 2,451 25.3%
Gross profit 1,510 1,236 275 22.2%
Operating expenses 402 184 218 118.6%
EBIT 1,109 1,052 57 5.4%
Other income 185 229 (44) -19.2%
PBT 1,144 1,139 5 0.4%
PAT 741 730 11 1.5%
EPS (Rs) 9.14 9.01 0.13 1.5%
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AMALGAMATION OF SUZUKI MOTORCYCLES OF PAKISTAN (SMOP) WITH PSMC:
Acquisition of the business of Suzuki Motorcycles of Pakistan (SMOP) by PSMC has been approved in consideration of one share in Pak Suzuki Motors for every twenty-one shares in Suzuki Motorcycles of Pakistan. The PSMC will issue 1.233m shares for the remaining 59% shares as the company already had 41% shareholding in SMOP. As a result of the amalgamation, cost of operations is likely to decrease through streamlined distribution and elimination of duplicated services and operations and reduction in overhead and working expenses.
Pak Suzuki enjoys a fairly strong liquidity position amongst the industry players. With its current ratio lingering around 1.5, an increase in liquidity in 2005 onwards owes much to the very steep rise in the current assets of the company. By virtue of high cash and bank balances and high level of inventory, PSMC has been able to fare well in terms of writing off its liabilities.
Like other players of the industry, the company's major financing comes through acquisition of short-term debt. Expansions are financed either by cash or by equity as evident from the rise in paid-up capital. Long-term debt is near to the ground and comprises of deferred tax liability thus proves its zero contribution towards the company's total financing. This pattern of financing is in line with the industry trend. On the contrary, financial charges for PSMC are on higher side that can be attributed to high compensation paid to the customers for deliveries beyond 60 days. Further increase in the rates of mark-up by the banks badly affected the finances of the company. The aftermath is visible in the deteriorating interest paying ability as indicated by the declining trend of TIE ratio. The State Bank in its recent monetary policy announced higher KIBOR rates that will further raise the cost of borrowing and might affect the interest paying ability of the company. Moreover, the company plans further expansion in the near future. The expansion would be financed through internal cash generation and debt financing in the ratio of 60:40 respectively. Higher debt will result in high interest payments, which would affect the debt management ratios considerably.
Time lag in the delivery to customers has lengthened the operating cycle of Pak Suzuki. As a result, the trade debts have increased over the years under discussion. Due to the ever-increasing demand for the automobile and corresponding rise in expansion capacity, inventory level has risen thus giving rise to higher inventory turnover ratio (in days). Nevertheless, the new expansion in FY07 will soon mobilize and reinforce the sales revenue of the company in future. On the other hand, PSMC is more efficient in converting its assets into sales as shown by total assets turnover ratio. Although the sales/equity trend is below the industry average, the trend can be misleading since the company issued a large amount of shares in subsequent years. All in all, the asset management of the company is commendable.
Net profit margins also posted a healthy trend. During the years under discussion, PAT increased consistently except in FY04. FY04, in general had been unfavourable mainly due to appreciation of yen against the rupee and hike in steel prices which increased the cost of sales for the company consequently affecting the gross profit and net profit as well. As a result, all profitability ratios plunged.
The bottom line of the company continued to augment due to high sales volume, and increase in car prices by the company from February 01, 2005 onwards. Other income also increased from FY05 onwards as due to higher income on bank's deposits because of improvement in mark-up rates.
Other than that the top line also strengthened on the back of appreciation of the rupee against the yen. Financial charges increased enormously especially in FY06 due to increase in compensation paid to customers for deliveries beyond 2 months. The backlog of customer orders posted greater financial risk for the company, which was subsequently resolved through improved assembling capacity in subsequent years.
Despite increase in the number of outstanding shares, PSMC has consistently augmented its net income and thus offers attractive EPS and BV for its investors. Thus the net worth of PSMC is significantly higher in absolute terms. Market price is also higher and depicts strong investors' confidence by offering higher dividends per share. PSMC enjoys a large shareholder base with a shareholder pattern skewed towards associated companies and related parties.
OUTLOOK: In the Budget'08 duty rate on vehicles has been increased while Capital Value Tax (CVT) has been removed. Thus the overall impact will remain the same. Moreover, withholding tax at 5% on purchase of local cars has been imposed.
Import of used cars will now be restricted for cars up to a maximum of 3 years old that was previously 5 years which will benefit the local industry. Tight monetary policy stance by the government will add fuel to the fire.
Whereas, the demand will go down on account of high cost of borrowing, those with the buying power will be bogged down by the 5% withholding tax as the prices of the locally manufactured cars have climbed up.
The new Auto Industry Development Program (AIDP) features reduction in the customs duty (CD) on the CKD unit's localized and non-localized parts from 50%-45% and 35%-30% respectively over the 5 years. For the CBU category, the CD relief is only for the high-end car segment.
Therefore, the company will not be able to reap advantage of this policy, as the major chunk of its product portfolio constitutes low-end car segment. Probably diversification in the high-end segment would enable PSMC to rule out the potential disadvantage and compete with Corolla and Honda.
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AIDP Approved CD Outlook (excl. of CVT)
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Custom Duty Structure 2007-08 2008-09 2009-10 2010-11 2011-12
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CBU (1500 - 1800cc) 65.0% 65.0% 62.5% 60.0% 60.0%
CBU (1800 + cc) 75.0% 75.0% 72.5% 70.0% 70.0%
CKD (localized parts) 50.0% 50.0% 47.5% 45.0% 45.0%
CKD (un-localized parts) 35.0% 35.0% 32.5% 30.0% 30.0%
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Source: PAMA
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CVT - now added to Custom Duty
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Does not exceed 800cc and three wheeler Nil
Exceeds 800cc but does not exceed 1000cc 3.75%
Exceeds 1000cc but does not exceed 1300cc 5.00%
Exceeds 1300cc but does not exceed 1600cc 6.25%
Exceeds 1600cc 7.50%
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Source: PAMA
The company also has another expansion plan to increase its production capacity further by 66.7% to 250k units per annum from its current capacity of 150k units. The plant expansion is expected to complete in Jan'09 with an estimated cost of Rs 15 billion to Rs 16 billion. Moreover, the waiting period for delivery of vehicles is expected to further reduce in the forthcoming months with increase in production after the capacity expansion. However, some inevitable threats loom around the company that would increase the cost of production. Changes in steel prices, interest rates, transportation cost and rupee-yen parity, are some of the uncontrollable factors that might hamper the growth of the company.
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PAK SUZUKI MOTOR LIMITED-KY FINANCIAL DATA
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Income Statement (Rs'000) FY'02 FY'03 FY'04 FY'05 FY'06
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Total Revenue 10,994,067 18,484,220 24,461,966 35,374,556 47,187,945
Cost of Goods Sold 9,614,256 15,840,739 22,045,303 31,801,600 41,627,212
Selling and Distribution Expens 195,397 229,763 267,877 435,452 868,163
Operating Profit (EBIT) 1,184,414 2,413,718 2,148,786 3,137,504 4,692,570
Financial Charges 19,633 37,333 40,060 116,545 220,510
Net Income Before Taxes 1,316,658 2,381,603 2,139,816 3,519,541 5,520,549
Net Income After Taxes 850,097 1,570,191 1,403,572 2,236,880 7,309,124
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Balance Sheet (Rs'000) FY'02 FY'03 FY'04 FY'05 FY'06
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Stores & Spares 16,934 23,677 40,661 54,139 66,730
Stock in Trade 1,919,121 2,258,413 3,765,277 4,968,054 9,232,672
Cash & Bank Balances 5,094,118 5,732,752 6,693,996 9,647,023 8,043,617
Total Current Assets 7,183,211 8,541,540 11,033,551 15,127,089 18,096,001
Total Non Current Assets 8,068,447 9,530,550 13,287,277 18,747,841 22,050,385
Total Assets 885,236 989,010 2,253,726 3,620,752 3,954,384
Total Current Liabilities 5,511,463 5,603,769 7,972,559 10,770,697 11,062,352
Total Non Current Liabilities 0 0 0 151,000 69,000
Total Liabilities 5,511,463 5,603,769 7,972,559 10,921,697 11,131,352
Paid Up Capital 491,312 491,312 491,312 540,444 540,444
Total Equity 2,647,984 4,070,781 5,475,718 7,826,144 10,919,033
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LIQUIDITY RATIO FY'02 FY'03 FY'04 FY'05 FY'06
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Current Ratio 1.30 1.52 1.38 1.40 1.64
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ASSET MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06
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Inventory Turnover (Days) 62.84 43.99 55.41 50.56 70.44
Day Sales Outstanding (Days) 0.44 1.44 2.07 1.18 0.96
Operating Cycle (Days) 63.28 45.43 57.48 51.74 71.40
Total Asset turnover 1.36 1.94 1.84 1.89 2.14
Sales/Equity 4.15 4.54 4.47 4.52 4.32
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DEBT MANAGEMENT FY'02 FY'03 FY'04 FY'05 FY'06
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Debt to Asset (%) 68.31 58.80 60.00 58.26 50.48
Debt/Equity (Times) 2.08 1.38 1.46 1.40 1.02
Times Interest Earned (Times) 60.33 64.65 53.64 26.92 21.28
Long Term Debt to Equity (%) 0.00 0.00 0.00 1.93 0.63
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PROFITABILITY (%) FY'02 FY'03 FY'04 FY'05 FY'06
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Gross Profit Margin 12.55 14.30 9.88 10.10 11.78
Net Profit Margin 7.73 8.49 5.74 6.32 15.49
Return on Asset 16.56 25.38 16.41 19.39 26.04
Return on Common Equity 10.54 16.48 10.56 11.93 33.15
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PER SHARE FY'02 FY'03 FY'04 FY'05 FY'06
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Earning per share 17.30 31.96 28.57 41.39 61.99
Price earning ratio 1.79 3.27 4.50 3.50 5.35
Dividend per share 3.00 3.00 1.00 5.00 6.00
Book value 53.90 82.86 111.45 144.81 202.04
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