EUR 8.54 For Business Accounts Only

Pak Suzuki Motor Co. (PSMC): Earnings revised downward, ‘Sell’ maintained

• We revise down Pak Suzuki (PSMC) earnings estimate post 1Q2019 financial result, incorporating the changes due to considerable deviation of results from our estimates amid deterioration in margins. We decrease our EPS estimate of Rs21.5/Rs35.58  for 2019E/2020E to LPS of Rs (15.6)/(6.6).
• Below Expectation 1Q2019 results: To recall, PSMC posted a disappointing result for 1Q2019, wherein its LPS clocked in at Rs11.92 vs. EPS of 10.99 in same period last year. The decline in earnings was a result of decline in GP margin by 5ppts YoY to 3% in 1Q2019.Furthermore,the finance cost was up 5.5x YoY to Rs327mn due to increase in debt borrowings (related to launch of new model Alto) and higher interest rate (+475bps to 10.75% since Jan 2018).
• Margins to remain under pressure: Input cost has been on rise due to significant devaluation of PKR against USD & higher inflationary environment, of which company has nearly passed on 65-70% to end consumer as per our channel checks.Considering the negotiations with IMF on bailout package, PKR is expected to record further devaluation & inflation is also expected to increase which will keep margins of auto sector companies  mainly PSMC in check due to its operations in price sensitive segment.
• New Entrants to intensify the Competition: Competition in small car segment (660CC-1000CC) is expected to  intensify after new entrants (planning to launch variants in small segment first before launching any large sedan variants). PSMCs main target market area is of small cars and  entry of new players will pose a threat for PSMC to maintain its current market share. KIA-Lucky Motors (KLM) is expected to start booking  in June-19  for its new model Picanto (1000 CC) which will be a direct competition to recent successful Wagon-R/Cultus variants of PSMC .
• PSMC launches Alto 660CC: PSMC has recently launched its 660cc Alto with three different variants, Alto 660 is Pakistan’s first locally produced 660cc engine capacity vehicle. Expected price will range between (Rs0.95mn to Rs1.18mn). Its booking has started with advance payment of Rs500,000. Alto can improve the revenue outlook of PSMC if Alto gains as much popularity as its predecessor, Mehran. 
• We maintain ‘Sell’ call on the stock despite recent underperformance of PSMC (down 36% since Jul 2018 vs 16% decline in KSE-100 index) as we believe market is incorporating expected decline in earnings & further rise in competition.