Pakistan Cables Limited

Pakistan Cables Limited (PSX: PCAL) was set up as a private limited company in 1953, through a joint venture with British Insulated Callener’s Cable (BICC), UK. Subsequently, in 1955, it was converted into a public limited company.

The company manufactures copper rods, wires, cables and conductors, aluminium extrusion profiles and PVC compounds. Some of the company’s clients include The Aga Khan University Hospital, Abbott, Marriott, Novartis, GSK, Unilever, and Nestle.

Shareholding pattern

As at June 30, 2020, over 22 percent shares of the company are held by the directors, CEO, their spouses and minor children, followed by close to 29 percent shares held under the category of “shareholders holding 5 percent or more voting rights”. The general public owns nearly 21 percent shares, while 17 percent are held in associated companies, undertakings and related parties that solely includes International Industries Limited. The remaining about 11 percent share is owned by the rest of the shareholder categories.

Historical operational performance

Since FY09, Pakistan Cables Limited has seen a contracting topline only twice, in FY16 and more recently in FY20. However, profit margins have been on a gradual decline after FY17.

During FY17, the company saw an 18 percent increase in its topline, crossing Rs 8 billion. This increase in revenue was brought about by a volumetric gain in all segments of wire and cable business. This increase in demand was generated through investments in infrastructure, new projects and growth, particularly in the residential construction market. On the other hand, cost of production remained largely stable at around 84 percent of revenue, keeping gross margin also flat at over 15 percent. However, net margin was supported by a higher than usual other income coming from reversal of impairment loss on investment in associate and reversal of provision for Sindh Sales Tax. Thus, net margin was at its all-time high of 5.9 percent; bottomline was also recorded at its highest, at Rs 478 million.

Revenue again grew by 18 percent in FY18, achieving yet another milestone of crossing Rs 9 billion in value terms. However, this did not translate into higher profitability as cost of production inclined to over 88 percent of revenue. This was attributed to the currency devaluation that elevated cost of inputs and copper prices, the burden of which could not entirely be passed on to the consumers. Combined with this was other income reverting to its somewhat original level, along with the rise in finance expense, led net margin to fall to 3 percent for the year. Finance expense increased due to higher borrowing which in turn was a result of higher working capital requirements.

Revenue growth slowed down drastically in FY19, with topline witnessing only a marginal increase of 1.5 percent, given the change in government, a general slowdown in residential and industrial activity. Although the currency devaluation increased the value of the company’s product, it could not be taken advantage of due to the general inflationary pressures, and high interest rates that shrunk disposable incomes. Gross margin stood at 11.8 percent. Moreover, the high interest rates and high advertising expenses increased distribution and finance expenses, that reduced profitability reflected in net margin that dropped to 1.3 percent for the year. A positive development during the year was that the company began developing a new factory premises in Nooriabad.

After growing for three consecutive years, revenue fell in FY20 by over 6 percent. This was attributed to the disruption created in operations due to the outbreak of the Covid-19 pandemic that led to a nationwide lockdown. A large part of the revenue was lost in the last quarter of FY20 which is when the lockdown was in place. Since fixed costs were unavoidable, cost of production as a share in revenue climbed to the highest of over 90 percent. As a result, gross margin also fell to its lowest of 9.5 percent. With finance expense continuing to rise since interest rates remained high for a major part of the year, the effect of lower gross margin also reflected in the net margin that fell to a negative 1 percent; the company incurred a loss for the first time in more than a decade, of Rs 92 million.

Quarterly results and future outlook

As business activities resumed gradually resumed after the lockdown eased, revenue was lower by over 18 percent during the first quarter of FY21. With cost of production also making a larger share in revenue, nearly 93 percent, profitability was lower in 1QFY21 year on year.

Topline recovered gradually in the second quarter as revenue was higher by 13.7 percent year on year. With a marginal reduction in costs, reversal of impaired trade debts and considerably higher other income, net margin for 2QFY21 was 3.5 percent, compared to nearly 2 percent in 2QFY20.

The third quarter saw significant improvement in topline year on year; it registered a 70 percent increase. This growth momentum continued from the second quarter as business activities returned to somewhat normal levels. The company also saw considerable support coming from other income that led to higher profitability for the period, compared to the loss seen in the same period last year.

With the company moving its factory to Nooriabad premises, it expects lower overheads in the future, however, copper prices reached a 10-year high during the third quarter which could result in higher finance expense in the future due to higher working capital requirements. On the back of the government’s incentives such as the construction package and TERF along with better foreign reserves, demand is expected to remain high, however, the risk of Covid-19 and associated lockdown continues to pose a risk