Pakistan Cables Limited (PSX: PCAL) was established in 1953 as a private limited company but soon in 1955, it was converted into a public limited company. It was established through a joint venture with British Insulated Callender’s Cable (BICC), UK. Pakistan Cables manufactures copper rods, wires, cables, and conductors, aluminium extrusion profiles and PVC compounds. Some of its clients include The Aga Khan University Hospital, Abbott, Marriott, Novartis, GSK, Unilever and Nestle, among many others.
About 29 percent of the shares are held under the category of shareholders owing more than 5 percent or more voting rights. This is followed by the directors, CEO, their spouses, and minor children that hold a little over 22 percent of the shares. About 21 percent is held by the general public, and 17 percent by the associated companies, undertakings, and related parties. The latter includes International Industries Limited. The remaining 11 percent is distributed with the rest of the categories.
Pakistan Cables has mostly witnessed positive growth in topline with the exception of FY16 and recently in FY20, while profit margins have been on a declining trend since FY17.
During FY16, the country witnessed GDP growth of 4.7 percent- not seen in the last eight years. Despite this growth in economy, Pakistan Cables saw a near 2 percent decline in its revenue. This was due to a fall in selling price owing to the sharp fall in copper prices, although volumetrically there was growth in sales. Copper prices were at $5,700/ MT at the start of FY16, and slumped to below $4,500/ MT by the start of second half of FY16. This was a result of weak Chinese demand, expectation for a global supply surplus and a strong dollar. Since there was a decline in cost of production, as a percentage of revenue, gross margins improved year on year. The effect of this trickled down to the bottomline as net margin improved to almost 4 percent (FY15: 2.7 percent).
GDP growth went even higher to reach a 5.7 percent in FY17. This was supported by low interest rates, increased FDI, reduced oil prices and low inflation. The effect of positive economic indicators was reflected in the company’s performance that grew its topline by 18 percent- the highest seen in the last five years. With this the company crossed the Rs8 billion mark in sales. This was again due to a volumetric gain; both the segments of wire and cable business performed well. The higher revenue came with a marginal increase in cost pf production as a percentage of revenue that reduced gross margin by roughly the same extent. However, net margin grew due to support coming from other income; this was sourced from two elements- reversal of impairment loss on investment in associate and reversal of provision for Sindh Sales Tax.
Revenue growth was roughly the same during FY18 at 18 percent. With an 18 percent incline, the company crossed the Rs9 billion mark. However, this higher revenue did not translate into higher margins as the Rs9.6 billion revenue came with a high cost of production. The latter increased to 88 percent of the revenue. This was due to currency devaluation that led to a high cost of inputs, and increase in copper prices, which could not be passed on to the customers entirely. Moreover, finance costs also increased notably due to more borrowings as a result of higher working capital requirements. Thus, net margin halved year on year, to 3 percent. During the year, the company also added a new product, ACCC conductor to its product portfolio, which had the advantages like energy loss reduction, low sag, and high current capacity.
Topline growth was marginal at a little over 1 percent in FY19. During the year, the company started developing a new factory premises in Nooriabad. This was attributed to the general slow down in the economy. Since the company’s industry is linked with the construction industry, the slow down in the economy had an impact on the residential and industrial activity. Although the currency devaluation increased the value of the company’s product, however, this could not be taken advantage of since the inflationary pressures and high interest rates also had an impact on disposable income and input costs. The high interest rates also increased the finance cost of the company thereby further contracting net margin to a little over 1 percent.
Recent results and future outlook
The company saw negative growth in topline at a little over 6 percent in FY20 for the second time in the past decade. This was partly attributed to the lock down in the country following the outbreak of Covid-19, as well as adverse economic conditions prevalent in the economy prior to the event of pandemic, such as high interest rates, emphasis on documentation of economy, inflationary pressures, etc. The quarterly breakdown reveals that a large part of the revenue was lost in the last quarter of FY20. Since fixed costs still had to be incurred, cost of production increased to make up more than 90 percent of the revenue. Finance costs were also at an exorbitant level due to “exchange loss on borrowings in US dollars and high interest rates”. Thus, the company incurred a loss for the first time in a decade, of Rs92 million.
While profit margins will remain under pressure for some time in the future, some respite is expected due to the government’s announcement of packages for the construction industry. Apart from the exchange rate risk, the company also faces risk of exemption of duties and sales tax on imported cable (growing imports), which is not available if procured through local manufacturers.