PAK SUZUKI MOTOR COMPANY LIMITED

The auto industry in Pakistan has followed a lukewarm growth trajectory despite years of protection from imports. Total passenger car production has remained lower than 200,000 units which is a small number compared to other emerging economies with growing automotive sectors. Car penetration in Pakistan remains really low but the appetite for cars is there. Resold and used imported cars have gained a momentum over the past two years and demographics changes within the country all point toward a sector ripe with opportunities.

The new auto development policy has providing a much needed breeding ground for new players to enter the sphere with the likes of Renault, Kia, Hyundai and even Audi expressing interest. For existing players like Pakistan Suzuki, it is an opportunity to expand its presence. As we have talked about in our earlier brief recordings for Honda Atlas and Indus Motors, the industry is entering a critical new phase-one of greater competition and choice. How the three existing carmakers will carve a smoother path for themselves in coming years remains a crucial question? Let's talk about where Pakistan Suzuki stands today and where it could be going.

Brief history Pak Suzuki Motor Company Limited (PSX: PSMC) was established in1983 as a result of a joint venture agreement between Pakistan Automobile Corporation Limited (representing Government of Pakistan) and Suzuki Motor Corporation (SMC) Japan. The Company started commercial production the year later with the primary objective of manufacturing, assembling and marketing of cars, pickups and vans in Pakistan.

The company was privatised under government's privatisation policy of 1992, and the company went through several phases of expansions with the final phase resulting in the capacity reaching 150,000 in 2007. That year Pakistan Suzuki Motor Company amalgamated with Suzuki Motorcycles Pakistan Limited.

The Company set-up a new plant for motorcycles at Bin Qasim, and all motorcycle operations moved to the new plant by 2011. Over 70 percent of the company's shares are held by Suzuki Motor Corporation, Japan while less than 5 percent of the shares are held by the local public. Meanwhile, around 11 percent of the shares are held by about 50 foreign companies combined but details of said companies were unavailable in the annual report.

Operational and financial performance over the years Pakistan Suzuki has maintained a healthy share in the auto industry and is the only one of the three that enjoys the least competition. Its share in the market has remained between 60 and 70 percent and the company is the only player with smaller engine cars in its fleet that have over the years maintained popularity. Perhaps lack of competition is also the reason why Suzuki has continuously raised prices for its cars. On the other hand, it has such an established dealership network and spare parts market that consumers find it easier and cheaper to maintain a Suzuki car than perhaps those they import.

More recently, the influx of used cars imports such as Toyota Vitz, Passo, Daihatsu Mira and other Daihatsu cars has given Suzuki a run for its money. Suzuki for its part introduced Suzuki WagonR that has fast gained popularity among small family car seekers. The company also introduced a 1400cc sedan Suzuki Ciaz and Vitara (currently imported in CBU form) to the market in competition with the Corollas and Hondas in Pakistan. New products and models are always welcome.

The company's sales units have grown from 79,000 vehicles to 133,000 vehicles between 2010 and 2015 but 2016 saw a sharp drop. The reason for a fall in sales was because during 2015, the company had signed an agreement with the government of Punjab to sell 50,000 units of Bolan and Ravi under the "Apna Rozgar Scheme" in December of 2014. The scheme lasted till March 2016. Expectedly, sales since have dwindled compared to that peak period.

On the revenues front, PSMC has gone from Rs 42.6 billion to Rs 84.5billion between during 2010 and 2015 while they dropped by 10 percent in 2016. The bottom line rose by 200 percent in CY15 due to higher sales, but dropped the outgoing year. Despite some degree of localisation, the company remains an importer of auto parts. Margins grew to 14 percent during CY15 but dropped recently as yen strengthened against dollar and imports therefore became more expensive for carmakers.

Latest: Lower sales, price hikes and parts investment The latest financials for the company for CY16 show a drop in the bottom line by 53 percent and margins were squeezed to 10 percent. The company sold over 133,000 units during CY15, dropping by 18 percent in CY16 cushioned a little by the increase in sales for Cultus, Mehran, Swift and WagonR. Over 30,000 more units of Bolan and Ravi were sold in CY15, during which time the company was functioning at nearly 90 percent of the capacity.

The company announced on the weekend an increase in the retail prices of its cars without offering a reason, though the likely reason is the dropping bottom line. The revisions have been made to Suzuki WagonR, Mehran, Ravi, Bolan and Ciaz. This price hike couldn't come at a worse time, perhaps because used imported cars are capturing more than a quarter of the passenger cars market. We are sure the company has worked out the numbers and has found the price hike reasonable (and necessary) but it is a difficult place to be at given the changing dynamics of the sector, as well as a general demand for car prices to become more competitive.

On the positive front, the company announced it would make an investment in a plant to manufacture glass for automotives. PSMC will invest Rs 344 million for a 40 percent stake in the joint venture with Tecno Auto Glass Limited. The technology for setting up the project will be acquired from Asahi India Solutions Ltd (AIS).

Suzuki's new investments and auto policy: Will they or won't they? Until this week, PSMC was the only automakers of the three that had expressed interest in making heavy investments into the auto industry. (Toyota has announced its own investment plans just yesterday). The amount touted by PSMC is $660 million and the administration said it would make these investments to bring new cars and models into the market if the government gave similar benefits under the auto policy as given to new investors. The famed Alto in a 660cc engine is one of the cars that the company could bring to the market.

There are conflicting news on whether PSMC would get the desired benefits for its new plant from the government. The board of investment (BoI) in a meeting with the media said it would not change the auto policy for any player since the policy was designed to give a leg up to new investors, not seasonable established players. We are unsure how this news has sit with PSMC but the company is awaiting an official response from the government with sources saying the outcome will be positive.

Perhaps, we will find that out soon enough. If the investments do materialise, along with what new entrants are bringing in-Renault with Ghandhara; Hyundai with Nishat and Kia with Lucky- this will be a game-changer for the auto industry as we know it. (Read our story: "Playing your cars right" for some of our projections).

There is no doubt Suzuki will continue to play a leading role in the sector given its current market share and established network of dealerships and parts. It also enjoys the position of being the only automaker, existing and upcoming, which has smaller cars in its fleet. This would ensure the company will have less competition while the competition in the higher segments will be much fiercer.

If the company does not expand, it will become anybody's game. More players together with a surge in used imported cars will provide a healthy boost to the monotony set within the sector, and will clinch PSMC's share in the market. Either way, it is upon Pakistan Suzuki itself to decide where it wants to be in the next decade. Growth and prosperity is well within reach.

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PSMC FINANCIAL RESULTS (YEAR ENDING DEC 2016)

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(Rs mn)                             Jan-Dec     Jan-Dec        YoY

                                       2016        2015

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                                       CY16        CY15

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Sales                              76,516.0    84,548.8       -10%

Cost of Sales                      69,167.5    73,061.3        -5%

Gross Profit                        7,348.6    11,487.4       -36%

Distribution cost                   2,004.3     1,945.8         3%

Administrative cost                 1,539.6     1,230.8        25%

Finance cost                           95.8        30.8       211%

Other operating income              1,039.9     1,058.4        -2%

Profit before taxation              4,415.2     8,685.2       -49%

Taxation                            1,642.6     2,842.5       -42%

Profit after taxation               2,772.6     5,842.7       -53%

Capacity utilisation (motorcars)         73%         89%

Earnings per share (Rs)               33.69       70.99       -53%

GP Margin                                10%         14%

NP Margin                                 4%          7%

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