Karachi, June 24, 2021 (PPI-OT): PSMC: Sell with a Target Price of Rs325

Following a discussion with the management of Pak Suzuki Motor Company (PSMC), we have updated our base case estimates for the company.

As per the company, the lower taxes will most likely be applicable only on Suzuki Alto and Bolan, and most likely not on Ravi, since it falls under a separate PCT code and is classified as a commercial vehicle.

Despite the positive impact of the FY22 budget, incorporation of the recent commodity price hikes, higher sea freights, etc. which have been worse than initially feared.

Our Target Price for PSMC revises down to Rs325 (from Rs345 earlier) after incorporating these changes.

Higher costs outweigh budgetary benefits

Following a discussion with the management of Pak Suzuki Motor Company (PSMC), we have updated our base case estimates for the company. While the budget is definitely good news for the company via lower taxes on PSMC’s variants, the company intends to fully pass on the reduced cost impact to customers. This will have a positive impact on demand, given lower prices of certain models. At the same time, this does not allow the company to retain some of the advantage of lower taxes to boost its profitability via higher margins.

Competition remains fierce

As per the company, the lower taxes will most likely be applicable only on Suzuki Alto and Bolan, and most likely not on Ravi, since it falls under a separate PCT code and is classified as a commercial vehicle. The introduction of Swift Hybrid next year is almost certain and is an upside risk to our base case. While the budget is undoubtedly positive for PSMC, the impact will most likely be lower than initially anticipated, even if the limit is expanded to include below 1,000cc cars. Finally, the added attractiveness of the small car segment is definitely undeniable – a fact that would not have escaped the eyes of competitors, where the possibility of new model launches in this category has increased.

Earnings revised down on higher freights

Despite the positive impact of the FY22 budget, incorporation of the recent commodity price hikes, higher sea freights, etc. which have been worse than initially feared, our earnings for the company have been revised downwards by 28% for CY21, whereas CY22-23 earnings are slashed by 4-12%. Our target price for PSMC revises downwards to Rs325 (from Rs345 earlier) after incorporating these changes. Our stance on the stock revises to sell.