DEWAN FAROOQUE MOTORS

The company enjoys the distinction of being a car assembler located in the rural area of Sindh

SHABBIR H. KAZMI, Special Correspondent
July 17 - 23, 2006

The automobile industry has benefited from the rising disposable incomes and relatively easy modes of car financing. Expectation of continued strong GDP growth above 6% per annum augurs well for the automobile industry. Pakistan trails below the region in terms of car penetration. Reportedly, the ratio is around one car per 125 persons. Therefore, the full potential of the industry is yet to be tapped and continued economic growth will mean an improvement in this ratio. The products catering to the low end of the market remain in great demand. Fuel economy and low maintenance cost make some of the models most favorites.

Despite increase in imported cars and a slight increase in car financing rate, local car sales continued their merry growth during financial year ended 30th June 2006. According to latest available figures released by Pakistan Automotive Manufacturers Association (PAMA), car sales were recorded at 155,500 units during the year compared to the sale of 127,300 units during 2004-05, showing growth of about 22%. Car production was also up at 160,600 compared to 127,300 units during 2004-05 depicting a growth of 27%. Interest rates, although slightly higher than before, are still low enough to encourage car financing being offered by different institutions. Introduction of new models and overall economic growth have resulted in higher auto demand.

Dewan Farooque Motors (DFM) is a unit of Dewan Group, having interest in diversified business activities. The Company has technical and collaboration agreement with two Korean companies, namely Hyundai Motor Company and KIA Motors Corporation. While Pakistan market is dominated by Japanese brands DFM remained the only assembler of non-Japanese vehicles from some time. However, now brands of some other origins have also rolling out of local assembling units.

It also enjoys the distinction of being a car assembler located in the rural area of Sindh. Indus Motor, Pak Suzuki and Nissan have their plants virtually located in Karachi, the city having two ports. Therefore, their transportation cost for shifting components to assembling plants is low. Similarly, bulk of the cars is sold in Karachi and DFM has to transport the CBUs from its plant located in interior to Karachi, adding more to the freight cost.

Cars with engine capacities of 1300cc and above now constitute 43% of total car sales as against 42%. In contrast, the 800cc category's slice in the pie shrank from 31% to 28%. The share of 1000cc cars improved marginally from 27% to 29%. According to the available data from various sources DFM seems to be focusing on the production and marketing of two vehicles, one a car and another a light commercial vehicle Shehzore. During the recently concluded financial it produced 9,234 Shehzore and 7,031 Santro. In financial year 2004-05 it had produced 8,012 Shehzore and 7,000 Santro.

DEWAN FAROOQUE MOTORS

(Rs in million)

Net Sales

6,456

5,863

Gross Profit

775

710

Gross Profit margin

12.0%

12.1%

Operating Expenses

372

309

Operating Profit

403

401

Financial Charges

189

100

Net Profit

131

185

EPS

1.7

2.39

Units Sold

11,757

10,885

The company announced its nine month operating result, showing a 39% drop in earnings despite sales increasing by 16%. The company assembling Korean brands faces very tough competition from those assembling Japanese brands. However, it enjoys significant share in its presence in the light commercial vehicle (LCV) segment. Its product, Shehzore, enjoys a lion's share of 50% in the LCV segment, whereas the Santro has a market share of 17% in the 800-1000cc car segment.

SPECIFIC INCENTIVES FOR AUTOSECTOR IN BUGDET 2006-07:

  • A tariff based system is being introduced with effect from 1st July, 2006 to replace the existing deletion programme in the auto sector.
  • Duty on multi-axle trucks rationalized.
  • Duty on purpose built taxis rationalized.

The existing scheme for import of old/used vehicles under TR, Gift & Baggage schemes revised to Introduce a capping on aging of the vehicles.

Unit sales increased 8% for DFM, well below that of peers who have seen +30%. DFM's top selling product is the Shehzore pick-up with an ex-factory price of around Rs 650,000. It remains highly competitive in comparison with other light commercial vehicles. However other products are underperforming. Gross profits have remained constant despite appreciation of the Korean Won. However, higher selling and administrative expenses do not allow the company to improve its operating profit. The bottom-line fell because of significantly higher financial charges- the company has undertaken new loans for operating purposes, which have resulted in higher financial charges.

The outlook for the Company remains bright. Even though the leasing rates have started to edge up due to rising interest rates, the demand-supply gap has also started narrowing owing to import and capacity expansions. Allowing import of secondhand cars was a good move but the policy must facilitate the local assemblers to enhance installed capacity, production and efficiency to bring down car prices. All the car assemblers have posted impressive sales and the trend must continue.