Sazgar Engineering Works Limited (SAZEW), a prominent player in Pakistan’s automobile assembly sector, is at a critical juncture.
Despite its recent stellar performance, the company’s future profitability and market position are under threat due to impending policy changes and intensifying competition.
Current Performance
Sazgar has reported impressive financial results for FY24, with a projected earnings per share (EPS) of PKR 133.4 and a gross margin of 26%. This success is largely attributed to the benefits derived from the Auto Industry Development and Export Policy (AIDEP) 2021-26, which provided reduced customs duties and sales tax on hybrid vehicle parts.
The company’s HAVAL brand, introduced in November 2022, has been a significant contributor to this growth, with sales expected to reach 8,400 units in FY25.
Haval sales surged to 5,328 units in FY24, and Arif Habib Ltd anticipates a 58% YoY increase in FY25, reaching 8,400 units. However, they have factored in a 5% growth for FY26 and expect stagnation thereafter due to intensifying competition.
Sky-high gross margins: can they sustain the pressure?
Sazgar has reported impressive gross margins of 26% in the first nine months of FY24, significantly surpassing the industry average of 7-10%. The current high margins are largely driven by customs duty and GST benefits from the auto policies, which are set to expire in FY26.
However, the expiration of AIDEP in FY26 poses a significant risk to Sazgar’s profitability. The company’s gross margins are expected to normalize to 12-14% post-FY26, a sharp decline from the current levels.
Additionally, the entry of new competitors such as Toyota, KIA, Changan, Chery, and Honda into the hybrid and electric vehicle market is expected to erode Sazgar’s market share. The introduction of the Toyota Corolla Cross and the upcoming 12th generation Toyota Corolla hybrid sedan are particularly noteworthy threats.
Financial Outlook
Analysts at Arif Habib Limited have initiated a “SELL” recommendation for Sazgar, with a target price of Rs. 935 per share by June 2025, implying a 16.5% downside from the current price of PKR 1,119.9. The company’s earnings growth is projected to decelerate to 10% YoY in FY26, followed by a substantial decline of 56% YoY in FY27. The P/E multiple is expected to rise significantly, making Sazgar appear expensive compared to its peers.
Localization is imminent
It is pertinent to note that the auto policy incentives aim to promote local vehicle production. However, Sazgar has not undertaken any significant CAPEX since obtaining greenfield status in 2021.
Currently, the company’s localization remains at 0% for its four-wheelers. In contrast, Indus Motors has planned to invest $100 million to establish an assembly line for its hybrid Corolla Cross model.
Over the past six years, cumulatively Sazgar has only invested only Rs. 3,630 million in CAPEX, a meager amount compared to other industry players, who have installed new assembly lines in recent years.
To avoid larger duties on imports and mitigate exposure to PKR fluctuation, Sazgar must pursue localization. This will require substantial capital expenditure. Arif Habib Ltd believes the company to undertake extraordinary capex in FY27, FY28, and FY29.
Strategic Imperatives
To mitigate these challenges, Sazgar must focus on localization and expand its dealership network. Currently, the company has zero localization for its four-wheelers and operates with only 16 dealerships, far behind industry leaders like Toyota Indus Motors and Honda Pakistan. Significant capital expenditure in localization and after-sales service infrastructure is crucial for Sazgar’s sustainability, stated the report.
Conclusion
While Sazgar Engineering Works Limited has enjoyed a period of remarkable growth, the road ahead is fraught with challenges. The expiration of favorable policies and the entry of formidable competitors necessitate strategic shifts in localization and customer service.
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