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Pak Suzuki earnings decline in 2004

KARACHI (April 04 2005): Pak Suzuki earnings declined in CY04 mainly on account of adverse yen movement, higher steel prices and increase in depreciation charge due to expansion. Pak Suzuki increased prices of its cars by about Rs 20,000 near the end of the year which shall benefit margins in CY05.

Most of the company's models are booked for 5-6 months; hence there is no threat from the volume side for the current year unless the government reduces the differential between CKD and CBU duties in FY06 budget especially on small engine capacity cars.

Moreover, with premiums on cars like Cultus standing at Rs 100,000, the company has enough room available to increase prices.

Mohsin Ahsan, research analyst at AMS Securities, said that on full-year basis, World Bank's steel price index increased by 54 percent in CY04. However, major increase came between Jun and April when index increased 68 percent. Prices, after that month, stabilised and did not show any major change.

On average, Pakistan rupee depreciated 8.3 percent against yen during CY04. Pak Suzuki finally increased prices of its models in October-November, 04 period and margins therefore shall improve in CY05. During January-March 05 Pakistan rupee depreciated 6.5 percent against yen compared to corresponding last year.

However, on quarter-on-quarter basis there was less than 1 percent depreciation.

Pak Suzuki's volumes grew 32 percent as low interest rate scenario and higher demand led to booking period extending to 5-6 months for a number of its models. Premium on cars is also giving incentive to investors to book cars and sell them at the time of delivery earning a handsome 20 percent return in less than six months.

Volume growth is likely to remain around 15 percent in CY05. Although stock is trading at extremely cheap multiples of 4.8 million as per CY04 earnings, low payout is one of the major factors behind lack of interest of investors in the stock.

The government has reduced differential between import duty on CBU vehicles, up to 1300cc, and CKDs to 15 percent. This differential is unlikely to be further reduced otherwise local assembling would become unviable for this segment. Higher engine capacity cars may see further reduction in duties in the coming budget, which shall have no impact to Suzuki as it is a major player of small engine cars.

Ali Sibtain, research analyst at Elixir Securities, said that Pak Suzuki's top line increased by 32 percent in 2004 due to 30 percent increase in volumes. Increase in volumetric sales included 1) 29 percent increase in sales of Baleno (1300cc) to 4,464 units; 2) 21 percent increase in sales of Cultus (1000cc) to 11,806 units; 3) 58 percent increase in sales of Alto (1000cc) to 9,486 units; and 4) 27 percent increase in sales of Mehran (800cc) to 29,343 units.

Impact of increase in sales, however, was mitigated by lower gross margins, down 500 basis points due to 1) appreciation of yen against Pak rupee in CY04; and 2) increase in steel prices during the year.

As a result, cost of goods sold increased by 40 percent causing profitability to decline by 11 percent to Rs 1,404 million (EPS: Rs 28.57).

“From sector perspective, we expect demand for automobiles to remain robust due to easy availability of car financing by banks / leasing companies (FY04 over Rs 30 billion; up 100 percent from last year) and expect sales of 125,000 units in FY05 (up 28 percent from preceding year).”

Car sales over July-February 2005 have increased by 38 percent compared with same period last year, led by 33 percent growth in the 1300-1600cc car segment (Honda Atlas, Indus Motors); 34 percent growth in the 1000cc car category (Pak Suzuki, Dewan Motors); and 47 percent growth in the 800cc segment (Pak Suzuki, Indus Motors).

On the demand-supply gap, (according to assemblers) capacity increase would result in equilibrium of demand and supply by the end of this fiscal year, helping ease off prevailing premia and long delivery lags.

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