Electrical: PAK ELEKTRON LIMITED - Analysis of Financial Statements December 2003 June 2007
Pak Elektron Limited (PAEL or PEL) is the pioneer manufacturer of electrical goods in Pakistan. The company was listed on all three stock exchanges of the country. 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).
Like the air conditioner, PAEL's refrigerators are also in great demand. Presently, PAEL Crystal has 30% market share. PAEL deep freezers are also the preferred choice of companies like Unilever.
In addition PAEL is one of the major electrical equipment supplier to Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC), the largest power generation utilities in Pakistan.
Over the years, PAEL electrical equipment used in numerous power projects of national importance in Pakistan.
PAEL was established in 1956 in technical collaboration with M/s AEG of Germany. In October 1978, the company was acquired by Saigol Group of Companies, which is run under the name of "Kohinoor Industries Limited".
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, home appliances and by producing hundreds of engineers, skilled workers and technicians through its apprenticeship schemes and training programmes.
In spite of stiff competition from emerging local and multinational brands, company's appliances and electrical equipments remained in the spotlight due to constant innovation. PAEL is synonymous with quality. Strategic partnership with multinationals of repute have enabled the PAEL Group to incorporate new technologies into existing product ranges, thus giving the Pakistani market access to innovative, affordable and quality products.
RECENT RESULTS (9 MONTHS):
Pak Elektron Limited (PAEL) posted profit after tax of Rs 453m (EPS: Rs 5.94) in nine months 2007 as compared to Rs 345m (EPS: Rs 4.52) in the corresponding period last year, reflecting a growth of 31.4% due to double digits growth in top-line and significant increase in other income.
The sales volume showed an upward trend and demand for the companies products grew across all categories. Sales revenue of the company grew 23.2% to Rs 7.37 billion in the nine months 2007 from Rs 5.98 billion last year.
Despite increase in sales, gross margins of the company remained flat due to increase in major input cost. The company faced tough time in controlling the cost of major raw materials especially in the power division due to rising cost of plastic, steel and copper.
Other operating income rose significantly by 114.5% to Rs 127m in nine months 2007 as against Rs 59m last year mainly due to gain on the change in fair value of investment. The company has 1.2m shares in Union Bank, which has now been acquired by Standard Chartered Bank therefore increasing the worth of the said investment. Other income contributed Rs 1.66 in nine months 2007 to the bottom line as compared to Re 0.77 in the parallel period last year.
Financial charges of the company increased due to rise in short term borrowings. Share of loss from associate companies reduced by 64.1% to Rs 5.8m in nine months 2007 from 16.2m during the corresponding period of last year. This has helped in boosting the companies' bottom line.
Following its policy to modernize and bring operational efficiencies, major capital expenditure was incurred during the current financial year which has ensured both higher output as well as more consistent quality of product.
Financial performance (Jun'03 - Jun'06): The company has achieved more than 25% growth for the fifth consecutive year. The consistent growth in sales observed across the product categories.
During FY06, company has shown progress by maintaining sustained growth momentum in sales and profit. Gross sales of Rs 11.042 billion from Rs 8.075 billion in the last year with Rs 6.077 billion and 3.983 billion in FY 2004 and 2003 respectively have shown consistent growth.
Growth in sales and profit after tax in FY06 have been 37% and 55% respectively. The robust sales growth was mitigated by high COGS as a result of slight decline in gross profit margin. But the overall profit margin was slightly higher than the preceding year 2006 due to higher net profit on account of low taxation. Also ROE and ROA showed slight increase in FY06 for the above mentioned reasons.
All the current ratios being less than one indicate that the company has higher portion of current liabilities over the years.
The current ratio increased in 2003 onwards but decreased slightly from 0.69 to 0.61 in 2006. This shows that company's current liabilities (mainly due to higher trade payables and short term borrowings) are rising far more than its current assets, reflecting a decline in company's ability to pay off its short-term obligations.
Quick ratio, a better measure of liquidity followed a slightly different trend than current ratios, first it declined slightly in 2004 then rising again in 2005, while suffering a slight fall in 2006. The drop can be attributed to the 54% increase in current liabilities as compared to 24% increase in quick assets in that year.
Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO has been rising until 2004, after which it declined in FY06 by 6 days. The decline is to be explained by the proportionate increase in net sales being higher than the increase in average inventory kept by the company. This shows an efficiency of PAEL to quickly convert its inventory into sales.
(DSO) days sales outstanding shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. The trend line indicates decline in this ratio in 2004, after which it was on a constant rise due to the proportionate increase in net sales being lower than that in trade debts (which have been doubling every year after 2004). Indicating that the company is facing higher risk of debt evasion and it needs to reformulate its credit policy.
The operating cycle of PAEL hence showed a decline in FY04 and FY06 due to fall in DSO and ITO in the respective years. Also both TATO and sales/equity show a rising trend on the account of robust sales growth in last 4-5 years. Sales/equity showing a sharp rise than TATO because of a big increase in total assets than in equity base.
As far as debt management is concerned, both D/A and D/E ratios show that the company has greater reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.63 to 0.69) ratio has remained almost stable over the years whereas D/E ratio has increased significantly (1.67 to 2.21) owing to the proportionate increase in short term liabilities, (as further evident by the long term debt to equity ratio) being greater than the modest increase in the equity base.
The TIE ratio for PAEL has been on a rise till 2005 showing PAEL's increasing ability to cover its interest expenses. However this ability declined in 2006 owing mainly to significantly higher interest expense compared to an increase in EBIT. Looking at this, we can infer that the high interest rates are having adverse impact on PAEL's operations.
The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). PAEL's EPS has been erratic driven mainly by any changes in company's number of shares and its net income.
Consequently, the P/E ratio also followed an erratic trend driven by the increases in EPS and market price of its share.
Initially PAEL's book value per share was very high however 2004 onwards, the company's Book Value per share nose-dived on the account of nearly 5 times increase in the number of shares compared to only a modest increase in total equity.
FUTURE OUTLOOK Power division: The outlook for the power division looks bright with increased focus of the government on power projects, resulting into higher demand for PAEL's products by WAPDA and its distribution companies coupled with private sector clients. PAEL would also likely to benefit from this according to its market share. Also increasing demand for switchgears, transformers etc especially during the last quarter of the current fiscal year and increased order booking of these goods would help boost sales.
PAEL has already made considerable investment in the expansion and modernization of its manufacturing plant. In order to utilize its experience in this business for half a century and to target the upcoming opportunities, the company has diversified into production of power transformers and turnkey construction of grid stations. This should result, in sound development of PAEL's business in the coming years.
APPLIANCES DIVISION: With continued product improvement and deepening sales network through augmentation of consumer marketing the company hopes not only to maintain its present share but aims to enhance it by reinforcement through launch of additional products. With improved marketing and sales strategy focused on reducing market credit, bringing uniformity in pricing structure and widening of dealers network, margins in this area are expected to improve. Simultaneously, progress on bringing cost efficiencies through innovative production processes, use of latest designs and testing equipments together with continuous training of personnel is continuing. PAEL has planned to capture a great share of the market in microwave ovens, colour televisions and washing machines categories in the coming year.
Kohinoor group is one of the major contenders in PSO privatization having formed consortium with BP and MerchantBridge. Success in the said deal would likely to add to the group's worth and stock price in general. Hence the economic future for PAEL seems brighter with many key indicators moving in a favourable direction. It is hoped that national economy will continue to grow and rising prosperity will bring expanding opportunities for the Engineering Industry and for PAEL.
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Pak Elektron Limited (PAEL) - Financials
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Balance Sheet 2003 2004 2005 2006
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Property, plant and equipment 3,029,908 3,598,805 2,716,401 3,144,904
Intangible assets 249,880 602,465
Long-term investment 96,701 96,701 60,711 11,227
Long-term deposits 6,034 13,073 25,541 38,811
Total non-current assets 3,132,643 3,708,579 3,052,533 3,797,407
Stores, spares and loose tools 28,765 49,157 52,713 58,543
Stock-in-trade 817,285 1,309,131 1,963,765 2,576,026
Trade receivables 749,316 980,491 1,853,889 2,614,396
Total current assets 1,595,366 2,338,779 3,870,367 5,248,965
Total assets 4,728,009 6,047,358 6,922,900 9,046,372
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Share capital and reserves
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Share capital 189501.00 236876.00 1136194.00 1215873.00
Reserves 125100.00 77725.00 1167070.00 1467619.00
Retained earnings 204226.00 485946.00 - -
Total equity 2,003,904 2,376,893 2,791,865 3,147,663
Total non-current liabilities 880,008 1,114,892 936,500 911,821
Trade and other payables - - 836,697 1,599,580
Short-term running finances 1,132,927 1,897,577 2,879,827 3,795,340
Provision for taxation - - 8,685 -
Proposed dividend - 23,688 - -
Total current liabilities 2467215 3256102 4290531 6048257
Total liablilities 3347223 4370994 5227031 6960078
Total equity and liabilities 5351127 6747887 8018896 10107741
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Income Statement 2003 2004 2005 2006
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Net Sales 3,209,236 4,929,496 6,787,882 9,408,018
Cost of Goods Sold 2,382,619 3,859,115 5,298,489 7,360,351
Gross Profit 826,617 1,070,381 1,489,393 2,047,667
Selling, General and Admin. Expen 299,542 443,013 688,024 852,894
EBIT 533,182 659,103 837,758 1,282,218
Interest Expense 349,388 379,001 450,888 742,130
Net Income Before Taxation 183,794 280,102 380,875 516,751
Net Income After Taxation 141,207 277,224 285,174 442,142
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PROFITABILITY RATIOS 2003 2004 2005 2006
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Profit Margin 4.40% 5.62% 4.20% 4.70%
Gross profit margin 25.76% 21.71% 21.94% 21.77%
Return on Assets 2.64% 4.11% 3.56% 4.37%
Return on Equity 7.05% 11.66% 10.21% 14.05%
LIQUIDITY RATIOS 2003 2004 2005 2006
Quick Ratio 0.56 0.52 0.69 0.61
Current Ratio 0.90 0.93 1.16 1.04
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ASSET MANAGEMENT RATIOS 2003 2004 2005 2006
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Inventory Turnover(Days) 94.91 99.20 106.95 100.81
Day Sales Outstanding (Days) 84.06 71.61 98.32 100.04
Operating cycle (Days) 178.96 170.80 205.27 200.85
Total Asset Turnover 0.60 0.73 0.85 0.93
Sales/Equity 1.60 2.07 2.43 2.99
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DEBT MANAGEMENT RATIOS 2003 2004 2005 2006
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Debt to Asset 0.63 0.65 0.65 0.69
Debt to Equity Ratio 1.67 1.84 1.87 2.21
Long Term Debt to Equity(%) 0.44 0.47 0.34 0.29
Times Interest Earned 1.53 1.74 1.86 1.73
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MARKET RATIOS 2003 2004 2005 2006
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Earning per share 5.96 11.70 4.27 5.79
Price/Earnings Ratio 12.91 4.57 14.87 5.13
Dividend per share 2.50 4.00 4.00 2.50
Book value per share 105.75 100.34 24.57 25.89
No of Shares issued (in thousand 18950.10 23687.60 113619.40 121587.30
Market prices(Year End) 76.93 53.45 63.50 29.70
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
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].
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