Emco Industries Limited

Emco Industries Limited (PSX: EMCO) was incorporated in Pakistan as a joint stock company in as a joint stock company in 1954. Initially, the company was known as Electric Equipment Manufacturing Company (Private) Limited. It was converted into a public limited company in 1983 and changed its name to EMCO Industries Limited in the same year. The principal activity of the company is the manufacturing and sale of high/low tension electrical porcelain insulators and switch gears.

Pattern of Shareholding

As of June 30, 2022, EMCO has a total of 35 million shares outstanding which are held by 767 shareholders. The local general public represents the largest group, holding 42.26 percent of shares, while the company’s leadership, including Directors, the CEO and their family members, owns 40.6 percent. Associated companies and joint stock companies account for 15.81 percent and 1.06 percent of shares, respectively, with the remaining ownership distributed among various other stakeholders.

Historical Performance (2018-22)

EMCO’s financial performance from 2018 to 2023 reflects a consistent growth in topline. However, this upward trajectory in revenue was interrupted by the challenges of 2020, where both gross and net margins experienced a sharp decline, while operating margin continued to grow. The subsequent year, 2021, witnessed a recovery, with all margins rebounding, followed by 2022 where margins experienced a plunge. Notably, in 2023, EMCO displayed improved gross and operating margins, demonstrating effective cost management and operational efficiency. Despite this, the net margin experienced a minor decline, suggesting that while the company successfully optimized its operational expenses, it may have encountered factors impacting its net profitability (see graph of profitability ratios to observe the cyclical movement in margins). A comprehensive analysis to understand the underlying reasons for these financial trends is given below.

In 2019, EMCO achieved a remarkable 21 percent year-on-year increase in its revenue, despite facing challenges. The company’s insulator production decreased by 6.3 percent to 4,556 tons due to a slight drop in demand, leading to a 91 percent capacity utilization rate, down from 97 percent in 2018. Export sales also declined due to fluctuating insulator demand. EMCO adjusted prices in response to rising gas and electricity costs, higher raw material prices, Pak Rupee depreciation, and increased borrowing expenses, resulting in a 122 percent year-on-year increase in gross profit and a gross profit margin of 25.1 percent, up from 13.7 percent in 2018. Administrative and selling expense grew by 15 percent and 10 percent respectively on account of higher payroll expense, travelling expense, freight and handling as well as rigorous sales promotion undertaken during the year. Operating profit soared by 496 percent year-on-year, with an operating profit margin of 15.9 percent, compared to 3.2 percent in 2018. Finance costs grew by 32 percent due to increased borrowings and adjustments under IFRS-9. This led to a remarkable 302 percent year-on-year growth in net profit, reaching Rs. 144.54 million, with a net profit margin of 10.4 percent, up from 3.1 percent in 2018. EPS also increased from Rs. 1.03 to Rs. 4.13 in 2019.

EMCO’s net revenue posted 15 percent year-on-year improvement in 2020 which was primarily attributable to price hike. While the demand was growing during the year due to persistent enhancement in the energy transmission and distribution network, lockdown imposed on account of COVID-19 resulted in a curtailed capacity utilization of 84 percent in 2020. The company produced 4198 tons of insulators in 2020, down by 7.9 percent year-on-year. Conversely, export sales posted remarkable escalation in 2020. Cost of sales grew by 17 percent year-on-year in 2020 as low capacity utilization resulted in a reduced absorption of fixed costs. Gross profit increased by 9 percent year-on-year in 2020, however, GP margin shrank to 23.8 percent. Administrative and distribution expense recorded a 13 percent and 11 percent year-on-year growth respectively in 2020. Conversely, other expense massively plummeted by 81 percent year-on-year in 2020 as EMCO didn’t book any impairment loss on disposal group in 2020. This buttressed the operating results of the company in 2020. Operating profit picked up by 18 percent year-on-year in 2020, manifested as an OP margin of 16.3 percent in 2020. Finance cost blew up by 19 percent year-on-year in 2020 as discount rate was high for most part of the year. This resulted in 18 percent year-on-year decline in bottomline. Net profit clocked in at Rs.117.90 million in 2020 with NP margin sinking to 7.4 percent. EPS climbed down to Rs.3.37 in 2020.

With a strong focus on the improvement of energy infrastructure in the country to overcome slippages in the system and to counter circular debt, EMCO sales witnessed a robust 30 percent year-on-year rise in 2021. The company produced 4794 tons of insulators in 2021, up by 14 percent year-on-year. This translated into a capacity utilization of 96 percent in 2021. Unfortunately, export sales couldn’t witness any growth in 2021. Cost of sales grew by 27 percent year-on-year in 2021 majorly attributable to high RLNG prices. However, buoyant sales volume and improved prices resulted in a 39 percent year-on-year uptick in gross profit with GP margin mounting to 25.4 percent in 2021. 11 percent higher administrative expense incurred in 2021 was the consequence of increased employee count from 455 in 2020 to 462 in 2021 which drove the payroll expense up. Marketing expense mounted by 5 percent year-on-year in 2021 due to higher freight charges as well as intense sales promotion drives executed during the year. Higher provisioning booked for WWF, WPPF, ECL and obsolescence of stock resulted in a massive 394 percent year-on-year spike in other expense. Other income also registered a staggering 515 percent rise in 2021 on the back of fair value gain on investment properties. Operating profit picked up by 41 percent year-on-year in 2021 with OP margin jumping up to 17.7 percent. Monetary easing resulted in a 10 percent lower finance cost in 2021. This sparked 71 percent year-on-year growth in bottomline which clocked in at Rs.201.93 million in 2021 with an NP margin of 9.7 percent and an EPS of Rs.5.77.

With 24 percent year-on-year ascend in its topline; EMCO continued to thrive in 2022 despite myriad challenges surrounding the economy which include political and economic turmoil, Pak Rupee depreciation, unprecedented level of inflation and discount rate along with steep hike in energy cost. EMCO produced 5288 tons of insulators in 2022 resulting in a capacity utilization of 106 percent in 2022. Investment in energy infrastructure remained one of the core concerns for the government resulting in increased demand for EMCO products. Moreover, the addition of new products in the substation equipment portfolio of the company also buttressed the sales. Cost of sales grew by 27 percent year-on-year in 2022 due to elevated prices of RLNG and electricity. The company partly mitigated the cost hike by its timely investment in solar based renewable energy project in 2022. Gross profit grew by 16 percent year-on-year in 2022 while GP margin inched down to 23.6 percent. Administrative expense grew by 18 percent year-on-year in 2022 on account of higher payroll expense. Marketing expense registered a hike of 62 percent which was on account of higher freight and travelling charges due to increasingly high petroleum prices and also because of increased sales volume in 2022. Furthermore, concentrated advertisement and promotion drive during the year also drove up the marketing expense in 2022. Late delivery charges pushed the other expense up by 43 percent year-on-year in 2022. This translated into a marginal 4 percent year-on-year growth in operating profit with OP margin falling down to 14.7 percent in 2022. Finance cost hiked by 18 percent year-on-year due to increased borrowings for capital expenditure as well as considerably high discount rate. Net profit grew by 7 percent year-on-year in 2022 to clock in at Rs.216.902 million with an NP margin of 8.4 percent and an EPS of Rs.6.20.

Recent Performance (FY23)

In 2023, EMCO’s net sales grew by 37 percent year-on-year. The detailed financial statements are still awaited to comment on the sales volume of the company in 2023, however, as per the 9MFY23 report, the production and sales volumes slid on account of installation of new plant and machinery as part of its BMR project which halted the operations. Moreover, import restrictions resulted in supply chain disruptions leading to curtailed production and sales volume. The topline growth came on the back of upward price revision coupled with robust sales of switchgear products recently launched by the company. Effective cost control measures by the company as well as installation of solar based power plant kept the cost in check which grew by 31 percent year-on-year in 2023. This resulted in a 58 percent year-on-year improvement in gross profit with GP margin attaining its optimum level of 27.2 percent in 2023. Operating expense grew by 29 percent year-on-year in 2023 which was due to inflation as well as higher freight charges on account of elevated prices of POL products. Operating profit grew by 75 percent year-on-year in 2023 resulting in an OP margin of 18.8 percent – the highest among all the years under consideration. 140 percent higher finance cost was the result of higher discount rate as well as increased borrowings to execute BMR projects. This along with increased taxation charges diluted the bottomline growth to 35 percent year-on-year in 2023. Net profit stood at Rs.292.92 million in 2023 with an EPS of Rs.8.37 and an NP margin of 8.3 percent.

Future Outlook

With encouraging sales of high value switchgear products and upward revision in the prices of other products to account for high inflation, Pak Rupee depreciation, high gas and power charges and high cost of borrowings, the topline is expected to continue its growth trajectory. The company is undertaking measures to contain its cost for e.g. installation of solar based power plant. However, with the reduction in government spending on energy infrastructure on account of fiscal and current account slippages, the demand is expected to remain depressed in the near-term. Inclination towards export sales appears to be the silver lining amid uncertain business landscape.