The company's manufacturing facilities are located in Raiwind, Lahore and have production capacity of 20,000 units of auto rickshaws with a capacity utilisation that climbed from 70 percent to 90 percent between FY15 and FY16. During FY17, the company ran on overcapacity by working extra shifts. The company's wheel rims are used by tractor assemblers and demand in agriculture drives this segment's growth.
Sazgar's market share reached 41 percent in FY11 but since has come down to 35 percent (FY17) as more players have entered the manufacturing sphere. The company also exports its rickshaws to Japan, Afghanistan, Sri Lanka, Egypt among other countries.
Shareholding and investments Nearly 67 percent of the company's shares are held by the Directors, CEO and family, of which 42 percent of the shares held by the CEO, 12 percent by an Executive Director and 6 percent by the Chairperson of the company. The general public held 26.61 percent of the shares of the company.
Sazgar's stock price climbed from Rs 30 in Jan-16 to Rs 107 in Nov-16 after it announced that it will be undergoing an expansion at its current location in Raiwind. The stock price rose to Rs 273 in Jul-17 as the company's earnings rose and it continued to amass investor interest.
With demand projections in mind, the company announced that it would expand its capacity of production from 20,000 to 30,000 investing Rs 330 million in its production facility. The financing will come from 20 percent debt with rest internally arranged equity. The company bought 27 acres of land for this expansion. In another announcement, the company told that it will be venturing a green field investment under the Auto Development Policy 2016 to enter the assembly business for cars and LCVs.
Financial and operational performance Sazgar has had a solid run-its production has gone from just 9800 rickshaws to over 21,000 units between FY08 and FY17, currently running at overcapacity. The expansion has come just in time. The company currently holds around 31 percent of share in the three-wheeler market, which has become a lot wider given two Chinese players Road Prince and United Auto started manufacturing in this space. The market share for Sazgar used to be a lot higher in 2011 at 41 percent even when production was significantly less. Rickshaw sales have driven more than 85 percent of the company's revenues historically-in FY16; the share was 89 percent, dropping to 86 percent in FY17 as the other major segment picked up.
Wheel rims manufacturing is a smaller segment that captured 14 percent of revenue during FY17 against 12 percent in FY16. Production for these rims rose by 45 percent during FY17 as tractors sales picked up. Government support in tractor sales has propelled sales for these wheel rims though production now largely depended on costlier imported steel after Steel Mills stopped production. The third segment is the home appliances segment that saw a decline in its share in revenue remaining below one percent during FY16 and FY17.
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 of goods primarily consists of raw materials consumed-86 percent in FY17 and 89 percent during FY16. These costs are also higher due to imported content as cost components. Improving margins will be an uphill battle as there is a very small gap between costs per unit against sales per unit. Once the company gains economies of scale, it may be able to accomplish efficiency and cut down on costs that are in its control.
Finance costs are likely going up in the coming quarters as debt capital is raised for expansion. The company still works on very small net margins (4%) due to high level of indirect expenses such as salaries, wages and freight.
The three-wheeler industry and Sazgar's demand outlook In latest financial results for the quarter ending Sep-17, the company saw a 28 percent growth in its bottom-line bolstered by a 6 percent growth in rickshaw sales. Tractor sales have been increasing due to a turnaround in the agriculture sector; given a favourable budget, and lower taxes that has helped bring wheel rims sales.
Rickshaw demand has been phenomenal for the past two years and Sazgar's expansion comes just in time. The lack of proper public transportation has propelled sales for two and three wheel motor vehicles as urbanization and youth population goes up. Despite the arrival of car sharing apps like Uber and Careem, which have carved a growing and receptive urban market for themselves, rickshaws remain a prominent mode of transportation for consumers compared to passenger buses.
In fact, now ride sharing apps are introducing rickshaw options for consumers because the travelling costs for these variants are much lower if priced right. There are indeed thousands whose incomes depend on driving rickshaws in cities as well as rural communities where infrastructure for mobility exists. Earlier in 2011, Sazgar entered into a contract with a leasing company to provide easier financing for potential rickshaw owners, which has retained the affordability of these commercial vehicles. Meanwhile, following the Sindh High Court's order to restrict the illegal use of motorcycle rickshaws, auto rickshaw sales have also increased across the province.
It is true that mass transit networks in Lahore and Islamabad have offered some respite to commuters while similar projects in Karachi, Multan and other cities are in the works. Whereas the middle class segments have greatly embraced the sharing economy with the likes of Careem and Uber that offer reasonable rates (at least for now!) for comfortable and safe travelling. In such a scenario, one would think three-wheeler market would drop as most of the rickshaws do not have running meters and charge on negotiation with individual customers, which often becomes inconvenient and costly.
However, let's not underestimate the growing population of commuters belonging to different segments of the income pool with different needs. Since rickshaws have been here for long, they are still trusted; and perhaps there will be room for different modes of transportation without much displacement of demand for rickshaws.
Sazgar currently faces competition from the three Chinese players; two of which (Road Prince and United Auto) have grown substantially in sales in just the past year. The additional 10,000 production enhancement will bode well given the direction demand is taking. Meanwhile, Sazgar is also exporting its vehicles that speak for its superior quality. It is hoped that with more people living in cities than ever before and the overall expanding population, rickshaws will remain the most reliable form of transportation; and a source of income for many as well.
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Sazgar Engineering Works Limited
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Rs (mn) 1QFY18 1QFY17 chg
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Sales 921.96 791.66 16%
Cost of goods sold 820.71 708.57 16%
Gross profit 101.24 83.09 22%
Distribution & marketing cost 25.09 19.72 27%
Administrative expenses 18.16 15.53 17%
Other operating expenses 3.94 3.36 17%
Other operating income 0.50 0.47 6%
Finance cost 1.70 0.34 406%
Profit Before tax 52.86 44.61 18%
Taxation 15.25 15.14 1%
Profit After tax 37.61 29.48 28%
Gross margin 10.98% 10.50%
Net margin 4% 4%
EPS (Rs) 2.09 1.64 27%
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Source: PSX notice
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Sazgar: Pattern of Shareholding (as at June 2017) Shares %
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Directors, Chief Executive, Their Spouse and Minor Children >of 11,993,781 66.73
Mian Asad Hameed- CEO 7,562,967 42.00
Mian Muhammad Ali Hameed- Director 2,104,336 12.00
Mrs. Saira Asad Hameed- Chairperson 1,143,975 6.00
General Public 4,782,055 26.61
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Source: Company Accounts
Copyright Business Recorder, 2017