Suzuki Pakistan is all set to be delisted as Danka finally sells his veto shares. Who gained and who lost?

A big local shareholder was in a Mexican Standoff with Suzuki Pakistan's Japanese owners. Who flinched first?

Our story starts in a land far far away. In a boardroom more than 7000 kilometers away from Karachi, it was decided that Suzuki Pakistan would delist from the Pakistan Stock Exchange (PSX) and no longer remain a public company. 

The decision was a harsh one. But it simply came down to the dollars and cents. For the past four years, Suzuki Pakistan had been making significant losses. The losses weren’t necessarily indicative of any failing on the part of Suzuki. The automotive industry in Pakistan had seen a nosedive off the back of rising interest rates and auto-loans going  bad in big numbers.

For the executives over the Suzuki HQ in Japan, there are over 200 countries that they need to look into. At the time, Suzuki Motor Company Japan held 73.1% shares in Suzuki Pakistan. But to delist they had to acquire at least 90% of the company and could only then take themselves off the PSX. 

This meant a buyback. And that is where things get dicey. From the moment that the announcement came, Suzuki Pakistan’s stock shot upwards. The stock had been hovering at around Rs 136 and rose all the way to Rs 900. In response, Suzuki Japan said it would set the minimum share price at Rs 406. But the final price for a buyback was to be determined by the PSX, which went on to set it at Rs 609.

This was a pretty sweet deal. For anyone that had Suzuki stock before the announcement was made could sell it off at a near 500% increase. Ideally, this would have been a nice simple buyback where minority shareholders would get a neat sum and walk away. But in the middle of this buyback something happened. One of the minority shareholders, Nadeem Nisar, announced in the middle of the buyback that he had now acquired more than 10% of the stock. This meant Suzuki Japan could not do anything without his cooperation and would either have to strike a deal or go for a fresh buyback attempt. Over the months the Mexican Standoff between Suzuki Japan and Nadeem Nisar went on and on. Now, it seems Mr Nisar has sold his holdings to the company. This move signifies that Pak Suzuki will now meet the minimum 90% threshold required for the buyback to be successful. What this also implies is that Nisar may have successfully influenced the company, given the mounting pressures on Pak Suzuki to conclude the buyback before the specified deadline of April 21.

But what went on behind the scenes of this buyback, and how did it affect shareholders aside from Nadeem Nisar? 

The chain of events

The saga started in October 2023 when Suzuki Motor Corporation, the parent company of Pak Suzuki, resolved to buy back their shares from the local bourse. The reasons given for this move were that they felt the company was facing losses and wanted to give an exit to investors who had invested their hard earned earnings into the company. The whole episode has been covered extensively in the past by Profit.

This announcement was greeted with a rally in the stock price as it soared to Rs 900. The market felt the company was worth much more due to their dominance in the small car category. The company boasted a 55% market share in the category.

Also read: Impasse persists in stalemate over Suzuki’s delisting

In order to carry out the buyback, the company felt that a price of Rs 406 was justified as it was 4 times the price that was prevailing in the market when the buyback was announced. Market participants disagreed with this notion as they felt the price should be much higher. In this moment of chaos, the Pakistan Stock Exchange had the final say and they stated that the final price for the buyback was going to be Rs 609. Many would have felt that a price 6 times to what the share price was in October was ample.

Also read: Pak Suzuki: things are not all they seem to be

Seeing that the matters would be decided and agreed upon without their input, minority shareholders, led by Nadeem Nisar, started to accumulate a position in the stock and passed the threshold of 10% shareholding. As per the applicable law, for a buyback to be successful, Pak Suzuki would need to hold 90% of its shareholding. 

This meant that as long as the minority shareholders stayed together as a block, the buyback would fail and Pak Suzuki would have to offer a better price in order to exit the market. As the minority shareholders came together, they saw that they had a collective holding of 15.39% which means Pak Suzuki has to at least buy 5.39% of shares from these minority shareholders.

As a deadlock had been created, a media war began where Pak Suzuki decided to stick to their guns while minority shareholders decided to go after the company. At one end was Pak Suzuki which was looking to steamroll through the formal delisting and buyback process while on the other, were the minority shareholders looking to put any pressure in order to make the management bow down to their demands.

The minority shareholders alleged that the Japanese company had siphoned off billions from its Pakistani subsidiary which would rationalize the lower buyback price that was going to be quoted. By using price mechanisms like transfer pricing, discounts, commissions, technical fee and royalties, much of the revenue generated by Pak Suzuki was already being transferred to Japan. Due to this, Pak Suzuki was valued much lower than what it should have been. The basic fact was that the minority shareholders were not going to bow down either.

With the validity of the buyback offer expiring on April 21, it seemed like unless some compromise is reached, the buyback would fail as the price quoted by the stock exchange cannot be revised according to its own laws and a new buyback would have to be carried out in order to allow the shares to be delisted.

This, however, is all old news. So what’s the latest development? It appears that Pak Suzuki’s persistence has paid off, but not without a considerable amount of drama surrounding its financial results and a data breach.

Financial results and creative accounting

On the 8th of April 2024, Pak Suzuki released its annual report and by the looks of it, the company has suffered a huge loss. The company suffered its worst year yet as it made a net loss of Rs 10 billion or a loss per share of Rs 122. This is the worst performance the company has seen since it was listed on the stock exchange. The previous worst results were losses of Rs 6 billion or per share loss of Rs 77 that the company had suffered in 2022.

It comes as no surprise that the company was not able to turn around its bottom line, considering the previous year’s trend of cars becoming less affordable and the challenges faced by automobile manufacturers due to currency devaluation and plant closures resulting from weak demand.

But when a closer analysis is carried out, it can be seen that the recent quarter results are against the run of play. In short, the results should have been better.

After the end of last financial year in 2022, the company recorded a finance cost of Rs 11 billion which was contributed to markup on late delivery, demurrage charges and exchange losses. 

Imports being banned, late delivery of vehicles, increasing interest rates and currency depreciation meant that these costs faced by the company increased to Rs 11 billion. For context, financial charges were less than Rs 1 billion during 2021. In 2022, rupee had depreciated by 27.2% against the dollar hitting a high of 226.5 per dollar at the end of 2022. 

In the first quarter of 2023, the rupee further depreciated by 25.4% against the dollar and hit a high of Rs 284 per dollar. This led to a further exchange loss of Rs 13 billion that was suffered by the company. This translated into a quarter end loss of Rs 13 billion. At this juncture, it seemed things were going to persist and the company was heading towards a similar fate due to factors outside its control.

However, the trend changed and results at the end of June pointed towards a better quarter. As the rupee started to stabilize, it was thought that the worst of its losses had been booked and Pak Suzuki would be able to earn better profits going forward. 

At the end of June, gross profits were around Rs 2 billion and the company actually made an exchange gain of Rs 3.5 billion which led to profit after taxation to be around Rs 4.5 billion. There were signs that things were going to get better in the next few quarters.

And these expectations were seen to be real when the company was able to boost its gross profits to Rs 4.2 billion in the third quarter ending in September, leading to profits of Rs 3.8 billion. Due to amazing two previous quarters, the company was able to claw back some of the losses it had made till March 2023 and the loss per share for the 9 months ended stood at 71 which had been 157 at their highest point. With things on the up, it could be expected that the December end results and the results for the year would rebound and results of 2022 would be beaten.

Alas, this did not happen.

Even though the company was able to improve its gross profits from Rs 4.2 billion in the third quarter to Rs 8.9 billion in the last quarter of 2023, the company still ended up in the red with a loss of Rs 10 billion. But why was it that a company which was seeing better results ended up making a bigger loss than it had made last year with stellar quarterly results?

In order to understand this, a fine comb approach needs to be taken. Specifically, over some of the expenses which have jumped where they had not even been recorded in the past. In 2023, two major expenses that had been recognised by the company were provision for doubtful advances and provision for onerous contracts which amounted to Rs 1.9 billion. 

The provisions were recorded because a planned new car model had to be discontinued due to low demand. This led the management to provide for the irrecoverability of advance payments made to suppliers for raw materials. Additionally, provision for onerous contracts was booked to account for potential losses claimed by the suppliers due to Pak Suzuki’s inability to fulfill the contract.

Both these expenses should be taking place in a normal course of business. What raises a few eyebrows is the fact that no such expenses have been recorded by the company in the last 10 years atleast and suddenly an amount of Rs 2 billion is set aside from the profits for these two expenses. It boggles the mind that an expense was not recorded for such a long time and then suddenly a quarter of the gross profits are wiped off and expensed in one go. These provisions are by discretion of the management and are approved by the auditors once they are rationalized by the company to the auditors.

After considering the provisions being set aside, the company still saw a profit before tax of Rs 4 billion for the quarter ended December 2023. This shows that much of the gross profits was seen in the form of profit before tax and earned by the company.

The next item which has increased in terms of the expenses is the taxation expense. Till 2022, the company was paying out taxes worth Rs 3 billion even when it had not earned a profit. This is due to the tax code developed where taxation is charged on the turnover or sales of the company in case the profits are below a certain threshold.

Taxation accounting is a dark art where the company determines their taxation amount and then pays it off. When additional wrinkles of turnover tax, supertax, custom and duties are added, it is difficult for a company to track how much tax it owes and how much tax it needs to give. 

Due to this, there is some estimation used by the company on a yearly basis. In some years, it will end up paying a higher tax and in some it will pay a lower one. For years where it pays a higher tax than it was supposed to, the company will recognize a tax asset as it has paid an amount higher than expected and will yield benefit from it in the future. This is referred to as deferred tax assets.

Something similar had happened at Pak Suzuki. Over the course of 12 years, the company had slowly accumulated a deferred tax asset which had grown to Rs 7.3 billion. 

The deferred tax assets are created based on the expectation that the company would be able to generate sufficient profitability in the future to utilize these accumulated tax benefits. 

However, in 2023, the company felt that all the tax assets it had accumulated amounting to Rs 7.3 billion were not sustainable based on their profitability expectations and were written off. To give some context to this figure, the total assets of the company stand at Rs 21 billion at the end of 2023. If these tax assets had still existed, these assets would have been worth Rs 28 billion. 

The company wiped away a quarter of its assets with a stroke of a pen. As these assets were taken away, the profits of the company were also decreased and an expense of Rs 7.3 billion was recorded.

The reason given for transferring the assets and writing them off was that there was a reduction in sales volume caused by high inflation, interest rate and exchange rates. As the company needs to pay off its tax liabilities in turnover tax, these assets were deemed redundant.

All these provisions are created based on the discretion of the management and their expectation and the auditors have the task of scrutinizing these assumptions of the management when they audit the accounts.

In its audit report, AF Ferguson discussed the fact that the writing off of the deferred tax asset was a key audit matter indicating that it indeed required special attention during the audit process. 

The report states that, “The Company has carried out an assessment to determine the recoverability of deductible temporary differences as at December 31, 2023 by estimating future taxable profits of the Company and the expected tax rate applicable to those profits. The determination of the future taxable profits is most sensitive to certain key assumptions such as sales volume, contribution margins, fixed overheads, inflation and exchange rates etc which have been considered in that determination. As a result of this exercise, the deferred tax asset amounting to Rs 7,345 million carried forwarded as at January 1, 2023 has been completely charged off to profit or loss for the year.”

The auditors also state that, “The management is of the view that this is owing to significant reduction in sales volume on account of high inflation, interest rate and exchange rate parity. Due to this in the foreseeable future the Company’s tax liability shall be based on turnover tax and the Company shall be unable to utilize the deductible temporary differences. As estimating future taxable profits require significant management judgment, we considered this to be a key audit matter.”

The auditors determined the importance of this issue and then carried out a thorough audit of this matter by making sure that the assumptions were correct and that the tax rates being applied were according to the tax legislation applicable on the company.

Accountants have their hands tied to an extent as the management is allowed to make judgments, estimates and assumptions that have an impact on the assets, liabilities, income and expenses being recorded in the financial statements. A management can make these estimates and assumptions based on past experience and factors that allow it to use their discretion. 

Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed as an ongoing basis. These provisions can also be reversed in the future if the management feels that the underlying factors have changed. Just like the tax assets were created in the past and then written off, these assets can be recognized again in the future with the approval of the accountants.

In case these provisions had not been written off, the company would have made a loss of less than Rs 1 billion which would have translated to a per share loss of Rs 12. This considers only the turnover tax that the company would have had to pay and adds back the writing off of deferred tax assets and the provisions being made for onerous contracts and doubtful advances.

While we are not insinuating that Pak Suzuki has violated any legal regulations or engaged in creative accounting, the company’s current circumstances, the delisting process, and the need to persuade a group of minority shareholders create fertile ground for conjecture regarding the reasoning behind the provisions recorded that led to a record net loss, especially considering the novelty of these measures.

As one tax expert explained to Profit, there is nothing in the accounting standards that stops management from making an estimate as far as they have the proper justification ( which may be appropriately provided in the FS). An auditor just needs to go over the estimates for their rationality and it shouldn’t be a problem. Estimates can change year to year. So on the face of it these don’t seem a problem since Suzuki is already delisting. What might be a problem, however, is that they charged it off because they don’t believe they will be profitable in the future (deferred tax is recognized only where future profits are available to set it off later) But as per note 1.5 of the company’s financial statement it says the company will be profitable in the next year.

The winners and the losers

So here is the situation. Suzuki announced a buyback for delisting. Their share price surged to Rs 900 as the market was bullish on Pak Suzuki. The company proposed a buyback price of Rs 406 as per its own valuer’s report. PSX had the final call and proposed Rs 609 per share. Seeing that the matters would be decided and agreed upon without their input, minority shareholders, led by Nadeem Nisar, started to accumulate a position in the stock and passed the threshold of 10% shareholding.

The deadlock continued with the last date of completing the buyback, 21st April, fast approaching. In the meantime, The company wiped away a quarter of its assets with a stroke of a pen reducing its value and making the situation tricky for minority shareholders. 

In the wake of this, the battle was very finely balanced. On the one hand there was Nadeem Nisar. He was unwilling to sell at Rs 604 because the average price at which he got to the 10% was likely higher than this. Otherwise why would he simply not sell? But Suzuki had a card up their sleeve too. They could simply call off the buyback and the price of the share would come crashing down to the Rs 136 level it was at before the announcement. Anyone that had bought shares in the frenzy, in particular the group of investors led by Nadeem Nisar, could have their investment tank in a matter of minutes. So what middle ground would they reach? 

The exact details of what is likely an off-market deal are difficult to understand but it seems Nadeem Nisar has struck a deal right in the nick of the 21st April deadline and sold off his holding. Did he sell it at over the average price at which he acquired the stock or did he sell it at less and simply try to cut his losses? That is not clear yet. But in any case, minority shareholders will be chuffed by the outcome. 

If the buyback had been called off a lot of people would have lost their money. But even if Nadeem Nisar sold it at a higher price, at most some shareholders might be a bit annoyed. In any case, other than the people that would have bought stocks at over Rs 604 due to the frenzy, everybody will have walked away happy.

As things stand   

The recent developments at Pak Suzuki in the last few weeks seem to be a sequence of unfortunate circumstances. It remains unclear whether these events were orchestrated or unfolded naturally. However, it is evident that the situation affected the minority shareholders, ultimately prompting them to capitulate. According to market sources, Nadeem Nisar, who held a 10% stake in Pak Suzuki and led the group of minority shareholders, has reportedly sold his holdings to the company. This move signifies that Pak Suzuki will now meet the minimum 90% threshold required for the buyback to be successful. What this also implies is that Nisar may have successfully influenced the company, given the mounting pressures on Pak Suzuki to conclude the buyback before the specified deadline of April 21. This situation may have left other minority shareholders with limited leverage compared to Nisar. While specifics of the transaction remain undisclosed, it seems to mark the end of Suzuki’s buyback saga. 

Zain Naeem
Zain Naeem
Zain is a business journalist at Profit, and can be reached at [email protected]


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