Pak Elektron Limited (PSX: PAEL) was incorporated in Pakistan as a public limited company in 1956. The company is engaged in the manufacturing and sale of domestic appliances and electrical capital goods. The company organizes itself in two divisions – power and appliances. The company was acquired by Saigol Group of Companies in 1978. The company has formed several alliances over the years with renowned international companies including Hitachi, Fujitsu, and General Electric.
Pattern of Shareholding
As of June 30, 2023, PAEL has a total of 856.012 million shares outstanding which are held by 10799 shareholders. General public has the majority stake of 48.096 percent in the company followed by its directors, CEO, their spouse and minor children holding 30.55 percent shares. Insurance companies account for 6.61 percent of PAEL’s shares while foreign companies hold 6.015 percent shares. Around 3.04 percent of the company’s shares are held by joint stock companies and 2.54 percent by Banks, DFIs, and NBFIs.Modarabas & Mutual Funds hold 1.422 percent of PAEL’ shares. The remaining ownership is distributed among other categories of shareholders.
Financial Performance (2019-23)
Barring 2019 and 2023, PAEL’s topline rode an upward trajectory over the period under consideration. Conversely, its bottomline took a plunge twice i.e. in 2019 and 2022. PAEL’s margins have been fluctuating over the period under consideration (see the graph of profitability ratios), however, attained their optimum level in 2023. The detailed performance review of the period under consideration is given below.
In 2019, PAEL’s topline slid by 4.78 percent year-on-year. Revenue from home appliances division registered a mild growth of 1.87 percent in 2019 as the company started the commercial operations of its washing machine production line during the year. Power division revenues slumped by 16 percent year-on-year which was the consequence of slow orders from WAPDA and DISCOS. Cost of sales also tumbled by 8.20 percent year-on-year in 2019, resulting in 20.91 percent year-on-year improvement in its gross profit during the year. GP margin also climbed up from 11.73 percent in 2018 to 14.89 percent in 2019. Distribution expense registered 30.23 percent year-on-year spike in 2019 primarily due to warranty period services as well as freight & forwarding charges. Administrative expenses also surged by 13.45 percent year-on-year in 2019 due to higher payroll expenses despite 10.68 percent shrinkage in its workforce which stood at 4321 employees in 2019. Other income also posted a noticeable 94.93 percent year-on-year rise in 2019 particularly due to gain on sale and lease back activities undertaken during the year. Operating profit rose by 19.32 percent year-on-year in 2019 with OP margin improving from 6.26 percent in 2018 to 7.85 percent in 2019. Finance cost grew by a massive 57.7 percent year-on-year in 2019 due to discount rate hike. This culminated into 66.34 percent year-on-year plunge in PAEL’s net profit in 2019 which stood at Rs.177.84 million. EPS also plummeted from Rs.0.98 in 2018 to Rs.0.27 in 2019. NP margin dropped from 2.25 percent in 2018 to 0.8 percent in 2019.
In 2020, PAEL’s topline posted a vigorous 28.86 percent year-on-year rise. During the year, the company witnessed three important milestones. Firstly, its wholly owned subsidiary, PEL Marketing Private Limited (PMPL) was amalgamated into PAEL. Secondly, the company’s power transformer manufacturing facility started its commercial operations. Finally, the company entered into collaboration with Panasonic Marketing Middle East & Africa (PMMAF). All these developments produced a profound impact on its sales and profitability. The outbreak of COVID-19 during 2020 had a devastating impact on the disposable income of company’s consumers. This was evident in a considerable decline in refrigerator, deep freezer, and LED TV sales during the year. Power infrastructure-related projects also remained lackluster during 2020 due to operational lockdown imposed on account of COVID-19. The topline growth came on the heels of a tremendous growth in the sale of water dispensers, energy meters, switch gears, power and distribution transformers, washing machine, AC and microwave oven. Cost of sales grew by 17.75 percent year-on-year due to high inflation, Pak Rupee depreciation, and hike in the prices of POL products. However, higher sales and the company’s ability to pass on the impact of cost hike to its consumers yielded 92.31 percent growth in its gross profit in 2020 with GP margin moving up to 22.23 percent. Distribution expense registered a massive 146 percent spike in 2020 on account of higher salaries & benefits, advertising & sales promotion, freight & forwarding as well as warranty period services. 2020 marked 30 percent year-on-year increase in the number of employees which clocked in at 5616 during the year, resulting in a considerable rise in payroll expense which provided impetus to 148.47 percent year-on-year escalation in administrative expenses during the year. Operating profit improved by 45.75 percent year-on-year in 2020 with OP margin climbing up to 8.88 percent. Finance cost surged by 42.76 percent year-on-year in 2020 despite monetary easing backdrop for the most part of the year. This was due to increased long-term borrowings obtained during the year which is also evident in a significant growth in PAEL’s gearing ratio in 2020 (see the graph of gearing ratio). This greatly diluted the bottomline growth which was recorded at 25.87 percent in 2020. PAEL’s net profit stood at Rs.223.849 million in 2020 with EPS of Rs.0.36. NP margin stayed intact at 0.80 percent in 2020.
The promising recovery post COVID is evident in 48.92 percent year-on-year increase in PAEL’s net sales in 2021. With robust economic recovery, industrial sector revival, and rapid urbanization, PAEL’s power division posted 62 percent year-on-year growth in its revenues. Home appliances division’s revenues also magnified by 37.39 percent in 2021 on the heels of tremendous rise in disposable income principally, agricultural income and foreign remittances. Cost of sales mounted by 51 percent year-on-year in 2021 which was the consequence of hiking inflation, supply chain disruptions, high global commodity prices, gas shortages and electricity tariff hike. While gross profit progressed by 41.65 percent year-on-year in 2021, GP margin ticked down to 21.14 percent. Distribution expense surged by 18.46 percent year-on-year in 2021 on account of increased freight & forwarding charges, advertising & sales promotion as well as salaries & benefits. Administrative expenses also grew by 18.41 percent year-on-year in 2021, primarily on the back of higher payroll expense, as the number of employees grew by 2.9 percent year-on-year to clock in at 5745 in 2021. High profit-related provisioning undertaken during the year resulted in 301.53 percent spike in other expenses. Operating profit registered 71.37 percent year-on-year enhancement in 2021 with OP margin rising up to 10.22 percent. Finance cost slid by 1.12 percent in 2021 due to discount rate cuts and reduced borrowings, which is also evident in a slump in its gearing ratio. Net profit enlarged by 610.78 percent in 2021 to clock in at Rs.1591.076 million with EPS of Rs.2.89 and NP margin of 3.71 percent – the highest among all the years under consideration.
PAEL’s topline grew by 22.15 percent year-on-year in 2022. This was on the heels of 52.24 percent rise in power division revenues. Home appliances division posted a marginal decline of 0.74 percent in 2022 which signifies product cost hike and sluggish economic backdrop which squeezed the purchasing power of consumers. Cost of sales spiraled by 24.44 percent year-on-year in 2022 on account of high inflation, global commodity super cycle, Pak Rupee depreciation and hike in energy tariff. Gross profit inched up by 13.61 percent year-on-year in 2022, however, GP margin slipped down to 19.66 percent. 7.28 percent year-on-year growth in distribution expense in 2022 was the result of elevated freight & forwarding charges on account of high petroleum prices. While the workforce shrank by 14 percent to clock in at 4921 employees, payroll expense continued to mount in line with inflation, resulting in 15.37 percent year-on-year spike in administrative expense in 2022. During the year, PAEL’s export sales immensely boosted, yielding significant foreign exchange gain. This pushed up the company’s other income by 102.75 percent in 2022. As against previous three years, PAEL booked impairment reversal on ECL worth Rs.241.88 million in 2022. As a consequence, operating profit built up by 24.14 percent year-on-year in 2022 with OP margin climbing up to 10.38 percent. Finance cost soared by 42.15 percent year-on-year in 2022 due to excessive monetary tightening as well as enormous rise in working capital-related borrowings. The company also issued 358.33 million ordinary shares during the year which compressed its gearing ratio. Higher finance cost coupled with the imposition of additional taxes during the year constricted PAEL’s bottomline by 32.91 percent year-on-year in 2022. Net profit stood at Rs.1067.47 million in 2022 with EPS of Rs.1.33 and NP margin of 2.04 percent.
PAEL net sales dwindled by 26.15 percent year-on-year in 2023. Drastic drop in the purchasing power of consumers due to hiking inflation took its toll on the performance of home appliances division whose revenues fell by 34.82 percent in 2023. Furthermore, sluggish industrial activity also kept the power division sales under stress resulting in 18.2 percent decline in its revenues. Geographical breakup of sales shows decline in both local and export sales during the year. On supply front, import restrictions also contributed to lower production and sales during the year. Cost of sales plunged by 34.46 percent year-on-year in 2023, translating into 7.79 percent uptick in gross profit. Due to limited supply in the market, the company was able to pass on the onus of high raw material cost and Pak Rupee depreciation to its consumers. This resulted in an extraordinary GP margin of 28.7 percent in 2023. Due to lower sales volume, distribution expenses shrank by 38.2 percent in 2023. PAEL also undertook lesser advertising & promotion drives during the year. Salaries expenses also dwindled during the year. Conversely, administrative expenses increased by 4.23 percent in 2023. This was on account of higher Ujrah payments, utility charges as well as repair & maintenance charges. Conversely, payroll expenses fell during the year as the company streamlined its workforce to 4238 employees in 2023. PAEL was able to improve its operating profit by 27.83 percent in 2023 with OP margin jumping up to 17.97 percent. Finance cost mounted by 18.1 percent year-on-year on account of an unprecedented level of discount rate. This was despite the fact that the company significantly reduced its borrowings during the period through efficient working capital management. Lesser debts and higher retained earnings resulted in a significant decline in gearing ratio in 2023 (see the graph of gearing ratio).Net profit strengthened by 24.13 percent to clock in at Rs.1325.089 million in 2023 with EPS of Rs.1.5 and NP margin of 3.43 percent.
Recent Performance (1HCY24)
PAEL’s net sales mounted by 45.19 percent in 1HCY24. This was the result of a staggering 91.91 percent growth in the revenues of home appliances division. The ease of import restrictions enabled the company to enhance its supply chain and production to its optimum level. Furthermore, recovery in economic activity, controlled inflation, exchange rate stability and the need of energy-efficient appliances in the face of high energy tariff also fostered the sales of home appliances during the period. Power division sales also increased by 22.54 percent in 1HCY24. Cost of sales hiked by 43.74 percent during 1HCY24, however with upward price revision and increased sales volume, PAEL recorded 49.32 percent stronger gross profit in 1HCY24 with GP margin clocking in at 26.77 percent versus GP margin of 26 percent posted during the same period last year. Greater sales volume and increased promotion budget also resulted in 45.19 percent spikes in distribution expense in 1HCY24. Administrative expense escalated by 20.79 percent in 1HCY24 may be on account of higher payroll expenses due to increase in capacity utilization. 145.87 percent surge in other expenses during 1HCY24 appears to be the effect of higher profit-related provisioning on account of improved profitability. PAEL’s operating profit rose by 57.72 percent in 1HCY24 with OP margin clocking in at 15.56 percent versus OP margin of 14.32 percent recorded during the same period last year. Finance cost inched up by 6.41 percent during 1HCY24 which was due to increased short-term borrowings. Net profit enhanced by 167.8 percent to clock in at Rs.1415.563 million in 1HCY24 with EPS of Rs.1.63 versus EPS of Rs.0.59 recorded during the same period last year. NP margin improved from 2.55 percent in 1HCY23 to 4.71 percent in 1HCY24.
Future Outlook
Recovery in macroeconomic fundamentals including ease in import restrictions, improvement in exchange rate as well as downtick in inflation and discount rate, etc has greatly buttressed consumer and investor confidence. The increase in urbanization, the evolution of the nuclear family setup, and the need for energy-efficient appliances will also aid the sale of the appliance division in the near term. In power division, the company is also executing a tamper-proof metering system for well-ordered billing. This would in turn resolve the issue of pilferage, infrastructure losses, and bill recovery.
The company has recently approved the incorporation of a wholly owned subsidiary in the UAE which will strengthen its geographical footprint and enhance its sales and profitability.
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