Sazgar Engineering Works Limited
Sazgar Engineering Works Limited (PSX: SAZEW) is the leading three-wheeler manufacturer in Pakistan manufacturing auto rickshaws, automotive wheel rims used in tractors and household electric appliances. The company was incorporated in 1991 and only a few years later went public. The company’s market share has been the highest in the three-wheeler segment and has only grown over the years. In terms of capacity utilisation, the company’s production capacity of 20,000 has had higher utilisation over the years growing from 70 percent to 90 percent between FY15 and FY16 and crossing 100 percent during FY17 and FY18 as the company has been run extra shifts. The company exports its rickshaws to Japan, Afghanistan, Sri Lanka, Egypt and Iraq aside from supplying locally. Last year the company announced that it plans on entering the four-wheeler segment with an estimated capacity of 20,000-30,000 passenger cars with an investment of Rs1.76 billion. The company was granted Greenfield status and is working with a Chinese partner to assemble cars and LCVs in Pakistan. As per the latest financial report (March-19), construction and civil work is almost complete at the new facility.
As for shareholding, the pattern is pretty concentrated in the directors, CEO and family category with 66 percent shareholding occupied by them. The CEO of the company holds heavy stakes—about 42 percent of the total shares while other members of the board of directors also hold more than 5 percent voting interest. The general public held 30 percent of the shares of the company as at June-18.
Financial and operational performance
From the start, Sazgar has been the market leader in the three-wheeler segment and with market size growing; Sazgar’s share has also been growing. In fact, market share grew from 25 percent in 2008 to 41 percent in 2011. Though the share has reduced a little, coming down to 31 percent in 2018, the company is still on top. Competition on the other hand, has considerably grown with two Chinese players, Road Prince and United Auto, entering the market.
More than 80 percent of the revenues come from rickshaw sales while wheel rims are a smaller segment. The segment captured 14 percent share in total revenues in FY17. That share has grown or receded in tandem with tractor sales. Tractors sales have historically grown when bolstered by reduce sales tax. This helps tractor parts manufacturers as well. The third segment is the home appliances segment, which has a smaller share and has witnessed some growth in the outgoing year. It is important that Sazgar is diversified in different segments and in different markets. This allows the company to mitigate risks associated with exchange rate and product concentration.
The company’s revenue growth is testament to its slow but steady growth over the past decade. Rickshaws are popular not only in urban centers but also in rural areas where they are used as off-road vehicles much like motorcycles. They are also substantially cheap and are a source of income for many households. Cheaper financing and unique products (Sazgar has a MoU with ORIX Leasing for rickshaw financing at low down payment) allowed rickshaw sales to grow. Though, sufficient competition in the market makes it difficult to raise prices too much. To illustrate, while volumes have grown by 42 percent between 2011 and 2017, revenue per unit sold grew by only 10 percent. Though, the revenue per unit is not accounting for other revenue generating units. The inference however is not wrong. The company has not increased prices much over the past few years and is working on nominal margins of between 10 percent and 11 percent for the past two years.
Costs are dependent on imported content and in times of depreciating rupee and greater commodity prices, the outlook on margins is not great. So far, margins have remained in the same range of 9-11 percent, registering its highest 11.2 percent in FY18.
Outlook
In the latest financials, the company’s revenues show a decline of 18 percent in 9MFY19; this translates to a 53 percent drop in after-tax profits for Sazgar. Tough times for the entire automotive industry have begun; Sazgar is very much in the thick of it. Falling purchasing power specially for low-income groups that actual purchase these vehicles, higher cost of financing, together with rising competition from riding share apps and Chinese rickshaw manufacturers have all led to reduced demand. Overall economic downturn explains the fall in demand.
Meanwhile, higher costs due to inflationary pressures and depreciating rupee have led to a 25 percent decline in gross profits, though gross margins slid only slightly. Ultimately, the rise in finance costs put a dent on expenditure that pushed profits further down.
The fact that Sazgar is entering the car market, it exports to regional markets and it has other products that it could potentially grow into, Sazgar is in a good position for future growth—albeit that depends on how fast the economy resurfaces from its current downtime.
