Electrical goods: PAK ELEKTRON LIMITED - Analysis of Financial Statements Financial Year 2003-3Q- Financial Year 2010
Pak Elektron Limited (PEL) is the pioneer manufacturer of electrical goods in Pakistan. PEL was established in 1956, in technical collaboration with M/s AEG of Germany. In October 1978, the company was bought by the Saigol Group, which runs under the name of "Kohinoor Industries Limited". Pak Elektron Limited was incorporated on March 03, 1956 as a public limited company and it is listed on all the three stock exchanges of Pakistan.
The principal activity of the company is manufacturing and sale of electrical capital goods and domestic appliances. The company comprises two divisions:
* Appliances Division (air conditioners, refrigerators and deep freezers, microwave ovens, colour televisions and washing machines)
* Power Division (energy meters, transformers, switch-gears, kiosks, compact stations, shunt capacitor banks etc.)
PEL's refrigerators and air conditioners are in great demand. At present, PEL crystal has 30% market share. PEL deep freezers are also the preferred choice of prominent companies. In addition, PEL is one of the major electrical equipment suppliers to Water and Power Development Authority (WAPDA) and Karachi Electrical Supply Company (KESC), the largest power utilities in Pakistan. Over the years, PEL electrical equipment has been used in numerous power projects of national importance in Pakistan.
Since its inception, the company has always been contributing towards the advancement and development of the engineering sector in Pakistan by introducing a range of quality electrical equipments and home appliances and by producing hundreds of engineers, skilled workers and technicians through its apprenticeship schemes and training programmes.
Recently, PEL has been awarded for the second time with '4th CSR National Excellence Award 2009' for best efforts within the multi-dimensional scope of CSR and a special award for 'Best Information Material on CSR'
Recent performance (3Q10)
Sales during the period at Rs 16.719 billion registered an increase of 24% over corresponding period and net profit also grew to Rs 350 million from Rs 194 million, showing an increase of 80%. The gross profit margin was 18.8% in 9M10 as compared to 19.7% in the same period last year. This slight decline in margin was covered with the control on expenditures, which led to improvement in net profit margin by 2% as compared to 1.4% in the same period last year. EPS was recorded at Rs 2.87 as compared to 1.34 in the same period last year.
The power division has performed well due to healthy growth in sales and orders in-hand. In appliances division, sales growth contribution mainly came from refrigerator and new addition of distribution business of LG. Selling prices were raised during the period, which helped maintain the margins. Sale of air conditioners also went down because of imposition of duty, which increased the prices along with the economic distress being faced by the economy.
Profitability
The company has been achieving higher profits during the past years (FY03-FY09). The company registered a 355% growth in net sales during the period 2003-09. However, analysis of the past trend indicates that in recent years growth has been increasing but at a much slower rate.
During FY09, the company could not maintain the growth momentum in profits and registered 42% lower profit as compared to that earned in FY08. PEL posted profit after taxation (PAT) of Rs 260 million in FY09 as compared to Rs 452 million in FY08. This was despite a 15% increase in net sales revenue earned by the company in FY09.
Sales for Appliances Division grew by 10% from Rs 2.642 billion to Rs 2.898 in FY09. One of the factors attributed to this increase is the visible increase in the disposable income of farmers. As published in the Economic Survey of Pakistan, farmers' disposable incomes have grown from Rs 288 billion in 2003 to Rs 900 billion in 2009.
The cost of sales of PEL increased by around 15% in FY09, owing to higher costs of production.
Also administrative expenses and marketing and selling expenses were higher by 18% and 32% during FY09 as compared to FY08. Along with this, the operating income from financial and non-financial assets took a remarkable stride and ended up by 104% higher in FY09. However, operating expenses shot up by 150% in FY09 leading to lower PAT. Although the EBIT for 2009 was slightly higher - Rs 1.757 billion as against Rs 1.61 billion in 2008 - the dramatic rise in financial expenses of 38% in 2009 scrapped much of the bottom line with a PAT of Rs 260 million as compared to Rs 452 million in 2008.
Liquidity
PEL's current ratio became more than 1 (times) in FY05 and has increased since then except for a slight decline in FY06. Liquidity declined in FY06 because the company's current liabilities (mainly due to higher trade payables and short term borrowings) were rising far more than its current assets, reflecting a decline in its ability to pay off its short-term obligations. But in FY09 the liquidity position of the company improved mainly due to reduction in current liabilities and increase in assets. The current ratio in FY09 is at 1.32.
PEL's quick ratio has followed almost a similar trend as its current ratio. After a drop in the quick ratio in FY06 due to a 54% increase in current liabilities as compared to just 24% increase in quick assets that fiscal year. However the quick ratio recovered in FY07 and in FY08 and stands at 0.81 for FY09, a mere .06 lower than 2008.
Asset management
Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO for PEL rose till FY04, after which it declined in FY06 and later in FY07 by 22 days. The decline was due to a higher increase in net sales than the increase in average inventory kept by the company. However, in FY08, it took the company a longer time (around 26 more days) to convert inventory into sales. This is because the sales growth was slower in FY08 as compared to the increase in PEL's inventory. Sale of air conditioners reduced during FY08 due to shorter summer season and load shedding across the country combined with slowdown in economic indicators along with a dry up in liquidity throughout the country. Therefore, the end of FY08 left the company with a lot of inventory. This however came to benefit PEL in 2009 as demand in appliances rose across the board as disposable income rose. In 2009, ITO is at 82 days as opposed to being 103 days in 2008.
The trend line indicates a decline in DSO during FY04 after which it has been on a rise except for a decline in FY07 because the sales growth was higher in FY07 as compared to the increase trade debts (accounts receivables). In FY08, the average collection period increased because the sales growth slowed down while trade debts increased substantially. Thus, it took the company 30 more days to convert its sales into cash. In comparison though, DSO for 2009 has once again dropped, as the company has become more efficient in collecting outstanding sales to 94 days, which was previously at 120 days.
High ITO and DSO ratios caused the operating cycle of the company to become longer. This lengthening of the operating cycle is unfavorable because it means that the quality of both the main current assets: inventory and trade debts deteriorate. In FY09, PEL has successfully slashed the 2008 operating cycle from 223 days to 175 days in 2009.
Debt management
The debt to asset (D/A) ratio of the company depicts that PEL has a greater percentage of funds provided thorough debt rather than equity and in FY09 the D/A ratio slightly decreased from being 0.66 in 2008 to 0.64 in 2009. The D/A ratio of the company has remained almost stable over the years except in FY06. In contrast, the ROA of the company has continuously dropped since 2007 and stands at 1.37%.
The debt to equity (D/E) ratio has shown a decrease form being 1.92 in 2008 to 1.81 in 2009. Depicting that the company is gradually trying to decrease the amount of its growth through debt.
The Times interest earned (TIE) ratio for PEL had been on a rise till FY05 showing the company's increasing ability to cover its interest expenses. However TIE declined in FY06 and continues to drop owing mainly to significantly lower interest expense compared to an increase in EBIT. In FY09, the TIE ratio decreased showing that the high interest rates are having an impact on PEL's ability to meet annual interest costs through its operating profit (EBIT). Should economic activity pick up pace in the future, it is likely that the TIE ratio will once again take rise.
Market value
Earning per share (EPS) of the company declined to Rs 1.94 per share. As PEL's EPS had risen in FY07 owing to higher profits, the Price to earning (P/E) ratio of the company increased during FY08. PEL's P/E ratio continued to rise in FY08 because of high expectation from it after a favourable profitability performance in FY07 and FY06. However, the current situation of the country, with lacklustre economic performance, slow growth rates, high interest rates and inflation, the P/E ratio has fallen for 2009 to 14.67 from 17.34 in 2008.
Future outlook
Pakistan is facing many challenges right now, a systematic rise in terrorist attacks, depreciating Pak rupee, rise in interest rates, inflation, economic instability, high cost of production and low investor confidence are all factors that are continuously stressing the economic activity of the country. However, with all the odds against companies like PEL to operate efficiently, the future outlook of PEL is not as bleak as it may look.
The recent devastating floods in the country have impacted the whole society and economy. At the same time, it has brought opportunities for areas such as rebuilding infrastructure of power distribution system and demand for more appliances/products when the first phase of rehabilitation is over in 4 to 6 months' time.
The power division of the company is diversifying its business by establishing an Engineering Procurement and Construction (EPC) division, which has already recognised itself as a major player in the construction of the 132 KV grid station on EPC basis. Recently, PEL has also been awarded its first 220KV sub-station construction contract. By moving forward into new business avenues and expanded vigorously, the company aims at improving bottom line figures and sustain its growth in a competitive and lackluster market.
The transformer facility is now online and will yield benefits in the future.
In the Power Transformer division, PEL has become a leading player to produce 132KV power transformers. Currently, they are also in the process of acquiring the technology to produce 220KV power transformers since educational orders of 250 MVA and 220 KV power transformers is expected to come from WAPDA.
As mentioned earlier, the appliances division has since significant growth on the back of greater disposable income and high demand for home appliances. Where five to seven years ago the refrigerator market was at 200,000, now it stands at 1 million units, a trend prevalent in microwaves and washing machines.
Deep freezer business is showing positive signs as well since the segment has most profits coming from B2B projects where businesses are ordering tailor made appliances on repeat orders. B2C segment is also going to flourish as the company plans to increase the dealer network and offer new affordable products.
With all the positive steps that they company has taken to combat this volatile business environment, the acquisition of LG's domestic appliances and air conditioners distribution rights has also paid off with respect to market diversification.
============================================================================================
PAK ELEKTRON LIMITED - KEY FINANCIAL RATIOS
============================================================================================
PROFITABILITY RATIOS 2003 2004 2005 2006 2007 2008 2009
============================================================================================
Profit Margin 4.40% 5.62% 4.20% 4.70% 4.93% 3.58% 1.78%
Gross profit margin 25.76% 21.71% 21.94% 21.77% 21.42% 22.43% 22.83%
Return on Assets 2.64% 4.11% 3.56% 4.37% 5.04% 2.76% 1.37%
Return on Equity 7.05% 11.66% 10.21% 14.05% 14.32% 8.05% 3.83%
--------------------------------------------------------------------------------------------
LIQUIDITY RATIOS 2003 2004 2005 2006 2007 2008 2009
--------------------------------------------------------------------------------------------
Quick Ratio 0.56 0.52 0.69 0.61 0.83 0.87 0.81
Current Ratio 0.90 0.93 1.16 1.04 1.33 1.42 1.32
--------------------------------------------------------------------------------------------
ASSET MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008 2009
--------------------------------------------------------------------------------------------
Inventory Turnover(Days) 94.91 99.20 106.95 100.81 78.38 103.95 82.12
Day Sales Outstanding (Days) 84.06 71.61 98.32 100.04 89.83 119.73 93.75
Operating cycle (Days) 178.96 170.80 205.27 200.85 168.21 223.67 175.87
Total Asset Turnover 0.60 0.73 0.85 0.93 1.02 0.77 0.77
Sales/Equity 1.60 2.07 2.43 2.99 2.91 2.25 2.15
--------------------------------------------------------------------------------------------
DEBT MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008 2009
--------------------------------------------------------------------------------------------
Debt to Asset 0.63 0.65 0.65 0.69 0.65 0.66 0.64
Debt to Equity Ratio 1.67 1.84 1.87 2.21 1.84 1.92 1.81
Long Term Debt to Equity (%) 0.44 0.47 0.34 0.29 0.57 0.74 0.84
Times Interest Earned 1.53 1.74 1.86 1.73 1.74 1.63 1.28
--------------------------------------------------------------------------------------------
MARKET RATIOS 2003 2004 2005 2006 2007 2008 2009
--------------------------------------------------------------------------------------------
Earnings per share 5.96 11.70 4.27 5.79 6.65 4.14 1.94
Price/Earnings Ratio 12.91 4.57 14.87 5.13 10.90 17.34 14.67
Dividend per share 2.50 4.00 4.00 2.50 0.00 0.00 0.00
Market prices(Year End) 76.93 53.45 63.50 29.70 72.46 71.81 28.47
============================================================================================
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Comments
Comments are closed for this article.