Emco Industries Limited (PSX: EMCO) started off in 1951 with a very small facility within the premises of its parent company The Imperial Electric Company (Pvt) Limited. It was not until three years later, in 1954 that an upgraded full-fledged facility was established in Lahore under the name Electrical Equipment Manufacturing Co. Ltd. (EMCO). It was converted into a public limited company in 1983 and its name was changed to what it is now, EMCO Industries Limited. The company manufactures and sells high/low tension electrical porcelain insulators and switchgear.
Shareholding pattern
About 40 percent of the company’s shares are held by the directors, CEO, their spouses and minor children, of which two major shareholders holding 6.8 percent and 6 percent are held by Mr. Pervaiz Shafiq Siddiqi and Mr. Suhail Mannan, respectively; both are on-executive directors of EMCO. Another 43 percent are distributed with the local general public followed by 15.8 percent in associated companies. The remaining 1 percent is with the rest of the shareholders.
Historical operational performance
After remaining relatively stable for around five years, sales revenue gradually bottomed out until FY17, and has been rising since. Profit margins, on the other hand, have been fluctuating.
During FY16, sales revenue increased by 35 percent- the highest seen thus far. There was also an increase in production from 3,200 tons to 4237 tons in FY16 owing to a better supply situation of gas and electricity. Moreover, due to the government’s effort to eliminate load shedding and further investments in the energy sector, the company sees higher demand for its products currently as well as in the future.
In FY14 and FY15, the company saw a shutdown of its tile plant division which meant the costs associated with it were also eliminated, except for certain unavoidable elements such as depreciation. Despite the latter, cost of production decreased to 82 percent, compared to nearly 87 percent in FY15. This increased gross margin and net margin; the latter was recorded at 2.6 percent. FY16 was also the first year to post a positive net profit figure after a period of consecutive losses for seven years.
While export sales increased in FY17 by 50 percent, local sales declined by 10 percent. Given that local sales made a large part of the total revenue, a loss of 10 percent in local sales translated to an almost 5 percent decline in overall sales for the year. Despite lower sales, production had increased from 4237 tons to 4817 tons. With a further fall in cost of production as a percentage of revenue at 77.7 percent, gross margin improved.
Distribution and other expenses made a larger part of revenue in FY17; the former was due to late delivery charges/liquidity damages, while other expenses increased due to provision for doubtful debts. However, it was not sufficient to adversely affect operating margin that continued to increase, while net margin that increased marginally was recorded at close to 3 percent.
In FY18, EMCO saw its topline rising by 14 percent. While export sales doubled year on year, local sales also rose incredibly to nearly Rs 1.3 billion from Rs 1 billion in FY17. However, this was accompanied by a marked increase in cost of production as a percentage of revenue that grew to more than 86 percent. This was largely due to a rise in power and gas expense. The province of Punjab was provided gas through a combination of indigenous natural gas and imported LNG in the form of RLNG; this substantially increased the average price of gas. As a result, gross margin fell considerably to 13.7 percent while other expenses and finance cost further worsened profitability that eventually led to a pretax loss of Rs 25 million. Other expenses increased due to one-time factors such as impairment loss and doubtful debts associated with the Tiles division.
Topline continued to expand as it grew by close to 21 percent during FY19. Export sales contracted, more than halving year on year, while local sales continued to make a larger share in the total revenue. Production in tons was slightly lower to 4556 tons compared to last year’s 4817 tons. This was due to variation in demand. The company requires continuous supply of gas for heating its kilns; with a shift in tariff of previously combination of natural gas and RLNG to now only RLNG, which is pegged to crude oil and USD, cost of gas increased. Considering this, and the currency devaluation the company made an upward revision of prices that plausibly helped to increase revenue. This also resulted in higher gross margins and the highest net profit recorded at Rs 145 million.
While the topline grew by 15 percent during FY20 brought about by an increase in both, local and export sales, production was adversely affected due to the outbreak of coronavirus that meant the plant was shut down; production declined from 4556 tons in FY19 to 4198 tons in FY20. Although the plant was shut for two weeks, it did not commence production for another week “due to heating up of kilns to the desired temperatures”. There was a slight rise in cost of production that reduced gross margin marginally to 24 percent, whereas net margin that had been supported by high other income for the last three years, returned to its previous levels; this, along with a higher finance cost brought net margin down to 7.4 percent.
Quarterly results and future outlook
During 1QFY21, sales increased by 12.4 percent year on year. The company continues to see rising demand for its products each year. With a fall in cost of production to 73 percent of revenue, gross margins improved. Moreover, a lower finance expense on account of lower borrowing rate allowed net margin to improve year on year to almost 13 percent.
While demand exists, profitability is adversely affected by power expense in addition to finance expense; moreover, currency devaluation and the recent development of rising cases of Covid-19 also pose a risk to the company in the future.
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