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Pak Suzuki Motor Company (PSMC): 3Q2018 EPS of Rs1.2, -91% YoY (-76% QoQ); (Below expectations)

• Pak Suzuki (PSMC) reported its 3Q2018 earnings wherein the company posted PAT of Rs95mn (EPS Rs1.2, down 91% YoY). Earnings are below expectations as margin compression as well as taxation were higher than anticipated. Effective tax rate clocked in at 79% due to applicability of turnover tax as opposed to tax on profits.
• Despite 10% YoY decline in volumes during the quarter, net sales of the company rose by 3%YoY due to four price hikes in 2018.
• Company’s cost of sales rose by 7% YoY leading to significant gross margin attrition. Gross profit fell by 34% YoY, dragging gross margin down by 3.5ppts YoY to 6.3%.
• Drop in margins is a result of PKR depreciation (PKR down by 18% from Dec 2017 to Sep 2018) as well as higher raw material costs (average steel prices up by ~5% YoY).
• Administrative expenses also rose by 67%. As per channel checks, the rapid increase in administrative expenses is due to salary and wages increments.
• Moreover, other income also declined by 59%YoY as interest income from investments declined. The decline is a result of reduction in advances from customers that were used to earn interest income, in our view.
• For the 9M2018, earning fell by 55% YoY due to 3.3ppts margin depletion, 48% increase in administrative expenses as well as an effective tax rate of 44% compared to 31% in the same period last year.
• We outline 1) further unfavorable movement in exchange rate & commodity prices, 2) regulatory changes, 3) increased competition from existing and new players and 4) disruptions in operations of principal company, as key risks for the company.