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Pak Suzuki Motor (PSMC): Earnings revised downward, 'Hold' call maintained

• We revise down Pak Suzuki (PSMC) earnings estimate post 3Q2018, incorporating the changes due to considerable deviation of results from our estimates. We decrease our EPS estimate for 2018E to Rs18.2 from earlier Rs29.3 while we also reduce our 2019/20 EPS estimate to Rs22.8/31.6 from previous Rs35.2/40.6.
• Below Expectation 3Q2018 results: To recall, PSMC posted a disappointing result for 3Q2018, wherein its EPS clocked in at Rs1.11, down by 91% YoY (down 76% QoQ). The decline in earnings was a result of 10% YoY lower volumetric sales, 3.5ppts YoY lower gross profit margin, 59% YoY lower interest income, 67% YoY higher Admin expenses and an effective tax of 78% compared to 30% in the same period last year.
• PSMC resorts to short term borrowing: In its most recent financials, PSMC has reported short term borrowing of ~Rs4.0bn compared to no borrowing in the previous quarter while its cash has declined to ~Rs0.9bn in 3Q2018 compared to Rs6.8bn in 2Q2018. The primary reason for this decline in cash as well as need for short term borrowing is the slow down in sales which has also reduced advances from customer, a valuable source of cash, to Rs2.9bn compared to Rs5.5bn in 2Q2018 as well as the CAPEX required for launch of the new Alto.
• Administrative expenses to remain on the higher side: During 3Q2018, admin expenses rose by 67% YoY (25% QoQ). As per channel checks, the increase in admin expenses is primarily due to increases in salary and wages. Given the inflationary pressure expected in economy (CPI inflation up by 7% YoY in Sep 2018), we expect admin expenses to remain elevated.
• GP margins to improve post 1Q2019: We believe that gross profit margins will remain under pressure for next couple of quarters as the company absorbs impact of recent PKR depreciation. However, we expect 2019F GP margin to be higher at around 7.1% compared to ~6.6% in 2018E.
• Launch of Alto on track: Despite slow down in economy, the company still intends to launch all new Alto by the start of 3Q2019, which should give support to PSMC’s revenue post discontinuation of Mehran by 2Q2019. We expect Alto to come in at a price range of Rs1-1.2mn but the final price will depend on future PKR stability. 
• Despite downward earnings revision, we maintain ‘Hold’ call on the stock as we believe recent underperformance of PSMC (down 42% since Jul 2018 vs 1% decline in KSE-100 index) reflects the expected decline in earnings. PSMC is currently trading at 2019E PE of 9.7x.