- Gross margins dropped to only 3.2% amid rising cost pressures
Pakistan Suzuki Motors Co. Ltd (PSMC) announced its first quarter result where it posted Net Loss of Rs. 980 million as compared to Net Profit of 908 million in first quarter of last year. Loss per share stood at massive 11.92/share.
Lower Margins, Higher Costs led to Loss
Gross Margins of the company significantly fell to 3.2% as compared to 8.2% in last year. Despite price adjustments, Company was unable to pass on the full impact of rising costs to the customers. Currency devaluation of 30% in last 1 year and higher commodity prices have impacted the margins despite partial pass on of the impact.
Admin Cost increased by 25% to Rs. 626 million as the company incurred increased costs for the launch of Suzuki Alto. Net sales grew by 9% YoY during the quarter on the back of double-digit percentage increase in average price of products, despite drop in volumes by 4% YoY
Finance cost of the company increased massively by 340% to Rs. 326 million as compared to Rs. 73 million in last year. The company has resorted to increased Borrowings from the commercial banks owing to its liquidity constraints. PSMC has previously curtailed Annual dividends to its shareholders in order to preserve the equity in adverse environment.
Balance sheet Deterioration
The Company’s Balance Sheet strength has decreased significantly as ongoing Capital Expenditure for new Alto has dried out cash which has resulted in increased borrowing (More than Rs4 billion) for Working Capital and Fixed Capital requirements. Moreover, the company has aggressive expansion plans to the tune of US$450 million for which the company will require Additional Debt or Equity.
The risks of economic slowdown, increased competition from new entrants, low margins, higher effective tax rate and weakening Balance Sheet is expected to keep the earnings upside restricted. Considering the cyclical nature of the business, analysts have “Sell” call on the stock at current levels.