Despite higher sales revenue, Pak Suzuki Motor Company (PSMC)’s profitability dropped 43% year-on-year for the second quarter of calendar year 2018 as a weaker rupee and steel prices took toll on margins.
The company announced its financial results on Tuesday, reporting a profit of Rs393.5 million for the three-month period. Accordingly, earnings per share (EPS) stood at Rs4.78, down 43% compared with Rs8.32 for the same period of the previous year.
The decline in profit came despite higher sales revenue, which increased 35%. The company sold 7,500 more vehicles in the April-June period, an increase of 26%.
According to a Taurus Securities’ report, the increase in revenue has been attributed to higher sales of Wagon-R, Swift and Ravi and overall increase in prices. The average selling price has increased around 4% on a yearly basis. The paradox of higher sales revenue but reduced profitability, is due to the fact that the cost of sales has increased considerably during the period. The main reason behind the increase in cost is rupee devaluation, which has devalued by 22% against the dollar since December.
Roughly, 50% of the raw material for vehicle assembly is imported in the form of completely knocked down units (CKDs) by Pakistan’s auto sector. All companies including Suzuki have increased prices after each round of rupee devaluation. They are now expected to again increase prices following the fourth round of rupee devaluation that took place last week. Meanwhile, the price of steel, which is a key raw material, has also increased around 18% on a yearly basis.
According to JS Research, the company’s gross margins have declined for the quarter by 314 basis points to 5.7% on a year-on-year basis. Elixir Securities’ analyst Farheen Irfan said the company has apparently been unable to completely pass on the impact of rupee devaluation and increased prices of other raw materials including steel.
“However, it’s difficult to assess what has actually increased the cost and to what extent, during the quarter, as Suzuki, like other auto companies, doesn’t share further breakup of cost data,” Farheen told The Express Tribune.
Suzuki may have also booked its pending super tax of 3% this quarter and hence, the tax component has also gone up despite the lower amount of profit.
