Pak Elektron Limited (PSX: PAEL) was established as a public limited company in 1956 under the Companies Act, 1913 (now, Companies Act, 2017). It has two business divisions namely power division and appliance division. Under the power division, the company manufactures transformers, switchgears, energy meters, etc. The appliance division manufactures, assembles and distributes refrigerators, deep freezers, air conditioners, microwave ovens, washing machines, water dispensers among other home appliances.
The parent group Pak Elektron also has a subsidiary group- PEL Marketing (Private) Limited, which was established in 2011. It sells electrical capital goods and domestic appliances.
The shareholding pattern has not been revealed in the recently released annual report; hence the shareholding pattern for last available year has been mentioned. As at December 31, 2018, the directors, CEO, their spouses and minor children owned 29 percent of the shares in the company. Of this 25 percent is with Mr. M. Naseem Saigol, Director/Chairman- Non-Executive. Nearly 46 percent is distributed with the general public followed by 6 percent held by the insurance companies. The remaining is distributed with the rest of the categories as illustrated in the table.
Historical operational performance
In CY14, the topline of Pak Elektron grew by 17 percent while profit margins also improved considerably year on year. A major contribution to the growth of revenue was made by the domestic appliances. A significant 41 percent growth was seen coming from the sale of appliances. The power division, although experienced a relatively lower rate of growth in sales due to slow decision-making on part of the discos, yet it managed to register a 16 percent growth in sales. This was achieved by catering to private companies, as well as exploring export markets, especially Afghanistan.
On the costs side, due to research and development conducted in the preceding years, there was an improvement in production processes and cost optimization. Therefore, higher sales did not lead to higher costs for the year. Thus, profit margins grew across the board.
The problem of power shortage continued to hamper growth of the manufacturing sector, despite government’s attempts to improves power supply and distribution. However, due to the nature of company’s products such as refrigerators and deep freezers, the company fared well.
The general increase in temperatures and the need to store edibles translated into higher demand for Pak Elektron’s products such as refrigerators and air conditioners. Demand was seen generating in rural areas of the country. This trend provides rationale for the 26 percent rise in revenue year on year during CY15. Since costs only increased marginally, in line with the higher sales volumes, margins continued to grow for the year; operating margin was recorded at its highest.
In CY16, the company’s refrigerator line of product performed the best in terms of sales as it registered a growth of 26 percent, whereas the overall appliance segment witnessed a phenomenal 28 percent growth. During CY16, the company launched air conditioner “inverter series” as well as energy efficient “Invert-o-Cool” refrigerator, which allowed for greater market penetration. The overall net revenue grew by 2 percent, but it was accompanied by higher costs as well, which reduced margins slightly. The debt repayments on the other hand helped to reduce finance costs which provided some support to the bottomline; the latter was the highest recorded since CY12, both in terms of margin as well as in absolute terms.
In CY17, Pak Elektron regained its momentum, with net revenue growing by its highest rate so far- close to 28 percent. The appliance division witnessed 42 percent growth in revenue. The “invert-o-series” in air conditioning and deep freezers were well received in the market. Sales from the power division remained more or less flat as there was low demand from the government sector. However, the energy meter segment saw a volumetric increase of 38 percent but prices were low here. This was due to timely response to orders placed.
The high revenue brought with itself high costs, resulting in costs consuming nearly 85 percent of the revenue, thereby squeezing margins. Distribution costs also saw a rise, resulting from advertisement and promotions.
The year CY18 was noted by the general elections and the resultant uncertainty with regards to policy. The high inflation crippled the purchasing power of the consumer leading to lower spending on appliances. Power division was also affected by the uncertainty that prevailed in the economy due to which orders placed by the power distribution companies remained slow; thus, the net revenue of the company declined by 10 percent, year on year. Costs also increased significantly during CY18 as the weakened Pakistan rupee by around 25 percent and the consequent higher cost of manufacturing led to costs consuming 88 percent of the revenue, reducing profit margins.
Recent annual result and future outlook
The effect of high inflation, weakened currency and declining disposable income continued through CY19, causing net revenue to register a negative growth rate of almost 5 percent. Moreover, distribution costs were also notably higher largely driven by warranty period services. In addition, margins were further driven down due to higher finance costs as the last year’s lower revenue led to liquidity problems which in turn led to borrowing, thus higher finance expense for the period.
With changing trends and greater urbanization, the company foresees a higher demand for their products. In expectation of the latter, Pak Elektron has been continuously spending on plant and machinery to improve productivity and capacity. However, the recent development of the ongoing pandemic and the resultant lock down has changed the course for a lot of the businesses and brought uncertainty which may require time to return to normalcy.