Emco Industries Limited

Emco Industries Limited (PSX: EMCO) was established as a joint stock company by the name Electric Equipment Manufacturing Company (Private) Limited in 1954 under the repealed Companies Act, 1913 (now Companies Act, 2017). Later in 1983, it was converted into a public limited company and its name was also changed to what it is today. The company manufactures and sells high/low tension electrical porcelain insulators and switchgear.

Shareholding pattern

As at June 30, 2021, over 40 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, over 6 percent shares are held by each of the following: Mr. Suhail Mannan, Mr. Jawaid Shafiq Siddiqi, Mr. Pervaiz Shafiq Siddiqi and Mr. Ahsan Suhail Mannan. The local general public owns 42 percent shares, followed by almost 16 percent held in associated companies, undertaking and related parties. A major shareholder in this category is ICC (PVT) Limited. The remaining 1.5 percent shares are with the rest of the shareholder categories.

Historical operational performance

Emco Industries has seen fluctuating revenue over the years, while profit margins have also been fluctuating.

Topline in FY18 registered a growth of 14 percent. Local sales grew from Rs 1 billion to Rs 1.3 billion while export sales doubled year on year. Owing to the efforts by the government to improve energy transmission and distribution network, the demand for insulators in the market is also expanding. But the growth in topline did not translate into higher profitability as cost of production increased to consume over 86 percent of revenue. This was largely attributed to the rising cost of energy that was sourced from indigenous natural gas and imported LNG in the form of RLNG. Thus, gross margin fell to 13.7 percent from 22.3 percent seen in FY17. Pre-tax losses stood at Rs 25 million compared to a profit of Rs 67 million in the previous year. However, net margin was marginally better at 3 percent due to a positive tax figure.

The company continued its growth momentum in FY19 as revenue increased by almost 21 percent to reach close to Rs 1.4 billion in value terms. Contrary to FY18, export sales halved year on year, while local sales continued to make a larger contribution to the total revenue. Owing to demand fluctuation, production decreased at 4,556 tons in the current period compared to 4,817 tons seen in FY18. With higher revenue that was attributed to increase in prices, gross margin also increased to an all-time high of 25 percent. This also reflected in the net margin that was also at its highest of 10.46 percent.

In FY20, topline growth stood at 15.3 percent as both export sales and local sales witnessed growth. But production was adversely impacted due to the outbreak of Covid-19 that led to plant shutdown. It decreased from 4,556 tons in FY19 to 4,198 tons in FY20. Moreover, cost of production increased slightly to over 76 percent reducing gross margin to nearly 24 percent. However, the decrease in net margin was more pronounced as it fell from 10.4 percent to 7.4 percent due to other income nearly disappearing, and finance expense rising to consume over 6 percent for the year.

Revenue in FY21 grew by over 27 percent to cross Rs 2 billion in value terms. Gross local sales posted a growth of 30.3 percent, while gross export sales reduced by 19 percent. This can be attributed to Covid-19 and supply chain related issues. Production volumes were higher in the current period at 4,794 tons as production in the previous year was affected due to the outbreak of Covid-19. With production cost continuing to consume around 76 percent of revenue, gross margin was also stable at almost 24 percent. However, net margin was slightly better at 9.9 percent as a result of a reduction in finance expense as a share in revenue and some support from other income.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 18 percent year on year on the back of enhanced production by achieving in addition to rising prices in response to rising costs. Production also increased to 1,271 tons versus 1,205 tons in the same period last year. Despite attempting to reduce costs and utilizing solar energy to reduce energy costs, total cost of production was higher year on year reducing gross margin to 24.7 percent versus 27.2 percent. Moreover, in spite of support from other income, net margin was also lower at 11 percent compared to 12.9 percent in 1QFY21.

In the second quarter revenue was higher by almost 51 percent year on year. Sales volumes for 1HFY22 were higher at 2,811 tons compared to 2,364 tons in 1HFY21. Production cost, on the other hand, jumped to 81.7 percent of revenue in 2QFY22, compared to 74 percent in 2QFY21. Thus, net margin was also lower in 2QFY22 at 6.2 percent compared to 8.3 percent in the same period last year.

In 3QFY22, revenue was higher by 14.4 percent year on year with production higher at 4,035 tons recorded in 9MFY22, compared to 3,577 tons in 9MFY21. Sales volumes were also higher by 16 percent in 9MFY22 year on year. While gross margin was better in 3QFY22 at almost 25 percent (3QFY21: 22 percent), net margin was marginally lower at 8.5 percent versus 9 percent in 3QCY21, due to rise in finance and tax expense. Since the company has been facing capacity constraints that have resulted in liquidated damages on late supplies, it has arranged financing for BMR project to improve capacity. Since demand continues to exist and is expected to remain stable, the company may see higher profitability in the future when it has higher capacity.