PCAL on a roll

These are good times for one of Pakistan’s leading manufacturers of electric wires and cables. Pakistan Cable Limited (PSX: PCAL), which is trying to associate its brand name with safety and reliability, last week announced its financials for the year ended June 30, 2017, with record profits.

The 64-years old firm manufactures copper rods, wires, cables and conductors, aluminum extrusion profiles and PVC compounds. PCAL finds major customers in the construction and power sectors. Investors have been optimistic of the firm’s prospects. PCAL stock price has been up more than 50 percent in the year-to-date period. The BoD returned the favour last week, announcing Rs2/share final cash dividend, which is in addition to the already-paid Rs8.5 interim cash dividend.

Prior to FY17, PCAL has been on a steady growth trajectory since the decade turned. Between FY10 and FY16, it almost doubled its top line to Rs6.8 billion. Net profits have also consistently increased, reaching Rs264 million in FY16.

The FY16 produced gross margin (15.8%), net margin (3.9%), return on equity (14.2%), and return on assets (5.2%) that were the highest in the seven-year period. Now stellar results in FY17 take over the title of recent highs.

The prices of PCAL products – such as copper rods, cables, and aluminum extrusions – are largely determined by global prices of copper and aluminum, which are mostly tracked through the influential London Metal Exchange (LME). Recall that despite growing volumes, PCAL top line went down 2 percent year-on-year in FY16 on account of falling copper prices, with average monthly prices dipping to $4,463 per ton in January 2016.

Luckily for PCAL, Copper prices started an upward turn in November 2016, thanks to capacity cuts among major copper refiners and an up tick in global GDP forecasts. For remaining half of FY17, prices traded in the range of $5,500-$6,000 per ton.

This provided the much-needed boost to PCAL, whose growing sales volumes received the price recovery gladly.

Last Thursday, the LME 3-months copper contract was on offer for $6,444.5 per ton. This suggests that PCAL 1QFY18 top line may also do well as prices have strengthened lately.

PCAL product portfolio of wires and cables seem well-placed to meet the demands from residential and commercial construction sectors and electricity transmission and distribution utilities. Product demand also originates from other power-intensive industries like ports and shipping, oil and gas, and automotives. However, the company also faces significant risks.

For instance, the top line remains exposed to global copper price fluctuations. PCAL is operating in a very competitive industry, which has excess capacity. The price-sensitive demand makes inventory-management a great challenge. Then, subpar and counterfeit cables distort the organised market. Moreover, cheaper imports of Chinese power cables for CPEC projects undercut local producers. There is also a foreign exchange risk: PCAL buys most of its raw materials in dollars but has sales in rupees.

Going forward, PCAL management, in the face of those challenges, will do well to focus on two main areas. One, they must drive hard even more operational efficiencies, so that the firm is better able to deal with external shocks.

Two, the government should be lobbied effectively to give the local manufacturers a level-playing field vis-à-vis imports. An effective crackdown on counterfeit wires and cables is also in order.