Pak Elektron Limited

Pak Elektron Limited (PSX: PAEL) was established “through a technical collaboration with AEG” in 1956 under the Companies Act, 1913 (now Companies Act, 2017). In 1978, the Saigol Group acquired PAEL and it was later made public. The company produces and sells electrical capital goods and domestic appliances. Its two main operating divisions are the power division and the appliances division.

As of December 31, 2021, over 29 percent of shares are held by the directors, CEO, their spouses, and minor children. Over 47 percent of shares are with the general public, followed by 9 percent in insurance companies. The remaining 14 percent of shares are with the rest of the shareholder categories.

PAEL - historical performance

Pak Elektron has largely seen a growing topline except for CY13, CY18, and CY19. Profit margins, on the other hand, have been fluctuating, particularly in the last six years.

In CY18, the topline contracted by over 10 percent to fall to Rs 23.5 billion compared to Rs 26 billion seen in the previous year. This was attributed to the flat performance witnessed in the appliances division while the revenue from the power division fell by 20 percent. This, in turn, can be attributed to the inflationary pressure in the economy that had an adverse impact on disposable incomes, thus reducing spending on appliances. Combined with this was the increase in the cost of production to over 88 percent, up from last year’s almost 85 percent that squeezed gross margins. In addition, the general elections of 2018 affected the demand the electric power distribution companies for electric equipment. Lastly, currency devaluation and the rise in interest rates also raised finance expenses, thus reducing the net margin to 2.25 percent, down from last year’s 5.3 percent.

Revenue contracted in CY19 by nearly 5 percent to reach Rs 22.3 billion. Volumes in the appliance division saw a marginal improvement of Rs 511 million; the increase in revenue from this division was also marginal. On the other hand, sales from the power division were reduced by 16 percent. However, the company invested in setting up a power transformer facility in anticipation of future growth. Cost of production improved to 85 percent of revenue, allowing gross margin to improve to almost 15 percent. Despite this, the net margin fell to below 1 percent for the year as distribution expense consumed a larger share of revenue due to freight and forwarding and warranty period services, while finance expense escalated due to greater short-term borrowings.

In CY20, the company’s wholly-owned subsidiary, PEL Marketing Private Limited was amalgamated into Pak Elektron Limited with effect from April 30, 2020. CY20 results show results after the amalgamation and are therefore not comparable to CY19 results. Nevertheless, the topline in CY20 grew by nearly 29 percent to reach close to Rs 29 billion. During that period, another power transformer manufacturing facility commenced commercial production. On the other hand, the appliance division saw a 9.7 percent reduction in volumes due to the effect of the Covid-19 pandemic. The power division, however, saw revenue growth of 31 percent as it resumed soon after the lockdowns were eased. The overall higher revenue was reflected in the gross margin which peaked at over 22 percent. But this did not trickle down to the net margin which remained flat at less than 1 percent due to inflationary pressures, high-interest rates, currency depreciation, and increases in the prices of petroleum products.

In CY21, the company posted the highest growth in revenue at nearly 49 percent to reach close to Rs43 billion. The power division saw an increase in revenue by 62 percent while the appliance division also saw an increase in revenue, by over 37 percent. This was attributed to normalcy in economic activities a year after the first outbreak of the Covid-19 pandemic. As a result, the electricity consumption also increased. However, this was combined with a marginal incline in costs that reduced the gross margin to 21 percent. But the net margin improved year on year to 3.7 percent as operating expenses and finance expenses consumed a relatively smaller share of the revenue. The bottomline stood at a five-year of Rs1.6 billion.

PAEL in 9MCY22 and beyond

PAEL’s earnings grew by around nine percent in 9MCY22. The increase in the bottom line during the nine-month period was primarily because of the rise in topline by 28 percent, as the average product price increase stood at around 26 percent year-on-year during the nine months. For the appliances and power divisions, the price increase stood at 22 and 31 percent year-on-year, respectively. PAEL incurred finance costs that increased by 41 percent year-on-year as total debt levels for the company jumped substantially as per the recently held analyst briefing for the 3QCY22.

PAEL operates in two main divisions: Home Appliances and Power division contributing to 51 and 49 percent share in total revenues currently. As per the recent analyst briefing, the management of the company highlighted that the Power division of the company is witnessing strong growth, and is expected that the revenue mix in 2023 will tilt towards the Power division. It also highlighted that the company has its sales order booked for the next 6 months for the power division. On the other hand, the home appliance division has been hit due to import quotas or restrictions by SBP. The company expects a decline in the appliances division of around 20 percent, which will be in line with the industry average as the management does not anticipate a fall in its market share.

As part of its strategic planning, the company also plans to de-merge its consumer and power divisions with PAEL being the holding company.