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 its name was changed 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, 2024, EMCO has a total of 35 million shares outstanding which are held by 749 shareholders. The local general public has a majority stake of 54.31 percent in the company followed by its leadership, including Directors, the CEO, and their family members holding 29.65 percent shares. Associated companies, undertakings, and related parties account for 15 shares of EMCO. The remaining ownership is distributed among other categories of shareholders…
Historical Performance (2019-24)
EMCO’s financial performance from 2019 to 2024 reflects consistent growth in the top line. Conversely, its bottom line dipped in 2020 and 2024. The company’s margins posted staggering growth in 2019. In 2020, gross and net margins experienced a sharp decline, while operating margins continued to grow. The subsequent year witnessed recovery in all margins followed by 2022 where margins again experienced a plunge. Notably, in 2023, EMCO displayed improved gross and operating margins while net margin stayed intact at last year’s level. EMCO’s margins tapered in 2024 (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 20.73 percent year-on-year increase in its revenue, despite facing challenges on the economic and political front. The company’s insulator production decreased by 6.3 percent to 4,556 tons due to a slight drop in demand, leading to 91 percent capacity utilization recorded in 2019, down from capacity utilization of 97 percent achieved 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. This resulted in a 122 percent year-on-year increase in gross profit and a GP margin of 25.1 percent, up from a GP margin of 13.7 percent recorded in 2018. Administrative and selling expenses grew by 15.26 percent and 10.44 percent respectively in 2019 on account of higher payroll expenses, traveling expenses, freight and handling as well as rigorous sales promotion undertaken during the year. Operating profit soared by 495.75 percent year-on-year in 2019, with an OP margin of 15.9 percent, compared to an OP margin of 3.2 percent posted by the company in 2018. Finance costs grew by 32 percent in 2019 due to increased borrowings and adjustments under IFRS-9. EMCO registered a remarkable 302 percent year-on-year growth in its net profit which reached Rs. 144.54 million in 2019. This translated into an NP margin of 10.4 percent in 2019, up from an NP margin of 3.1 percent posted in 2018. EPS also increased from Rs. 1.03 in 2018 to Rs. 4.13 in 2019.
EMCO’s net revenue posted a 15.31 percent year-on-year improvement in 2020 which was primarily attributable to a price hike. While the demand was growing during the year due to persistent enhancement in the energy transmission and distribution network, the lockdown imposed on account of COVID-19 resulted in 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. Export sales posted a remarkable escalation in 2020. Cost of sales grew by 17.34 percent year-on-year in 2020 as low capacity utilization resulted in reduced absorption of fixed costs. Gross profit increased by 9.22 percent year-on-year in 2020, however, GP margin shrank to 23.8 percent. Administrative and distribution expenses recorded 13.47 percent and 11.25 percent year-on-year growth respectively in 2020. Conversely, other expenses massively plummeted by 81.35 percent year-on-year in 2020 as EMCO didn’t book any impairment loss on the disposal group in 2020. This buttressed the operating results of the company in 2020. Operating profit picked up by 18.11 percent year-on-year with an OP margin of 16.3 percent in 2020. Finance costs blew up by 19.1 percent year-on-year in 2020 as the discount rate was high for most part of the year. This resulted in an 18.43 percent year-on-year decline in the bottom line. Net profit clocked in at Rs.117.90 million in 2020 with NP margin sinking to 7.4 percent. EPS ticked 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 capacity utilization of 96 percent in 2021. Unfortunately, export sales couldn’t witness any growth in 2021. Cost of sales grew by 27.21 percent year-on-year in 2021 majorly attributable to high RLNG prices. However, buoyant sales volume and improved prices resulted in a 38.94 percent year-on-year uptick in gross profit with GP margin mounting to 25.4 percent in 2021. 10.97 percent higher administrative expense incurred in 2021 was the consequence of an increased employee count from 455 in 2020 to 462 in 2021 which drove the payroll expense up. Marketing expenses mounted by 4.64 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 394.46 percent year-on-year spike in other expenses. Other income also registered a staggering 515.25 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 10.12 percent lower finance cost in 2021. This sparked 71.27 percent year-on-year growth in the bottom line which clocked in at Rs.201.93 million in 2021 with a margin of 9.7 percent and EPS of Rs.5.77.
With a 24.5 percent year-on-year ascend in its topline; EMCO continued to thrive in 2022 despite myriad challenges including 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 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. The cost of sales grew by 27.42 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 projects in 2022. Gross profit grew by 15.9 percent year-on-year in 2022 while GP margin inched down to 23.6 percent. Administrative expenses grew by 17.58 percent year-on-year in 2022 on account of higher payroll expenses. Marketing expenses registered a hike of 61.7 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 drives during the year also drove up the marketing expense in 2022. Late delivery charges pushed other expenses up by 42.92 percent year-on-year in 2022. This translated into marginal 3.79 percent year-on-year growth in operating profit with OP margin falling down to 14.7 percent in 2022. Finance costs hiked by 18 percent year-on-year in 2022 due to increased borrowings for capital expenditure as well as the considerably high discount rate. Net profit grew by 7.42 percent year-on-year in 2022 to clock in at Rs.216.902 million with an NP margin of 8.4 percent and EPS of Rs.6.20.
In 2023, EMCO’s net sales grew by 37 percent year-on-year. During the year, the company enhanced its capacity from 5000 insulators in tons to 6500 insulators in tons. The enhanced capacity was specifically dedicated to the export market. Import restrictions resulted in supply chain disruptions leading to curtailed production and sales volume. Production volume stood at 5032 tons of insulators in 2023, down 4.8 percent year-on-year. This resulted in a capacity utilization of 77.42 percent. The topline growth came on the back of upward price revision coupled with robust sales of high-voltage switchgear products recently launched by the company. Effective cost control measures by the company as well as the installation of a solar-based power plant kept the cost in check which grew by 30.69 percent year-on-year in 2023. This resulted in a 57.78 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 29.38 percent year-on-year in 2023 which was due to higher freight charges on account of elevated prices of POL products. Inflationary pressure also drove up payroll expenses in 2023 despite a plunge in the workforce from 448 employees in 2022 to 429 employees in 2023. Operating profit grew by 75.22 percent year-on-year in 2023 resulting in an OP margin of 18.8 percent – the highest during the period under consideration. 140.10 percent higher finance cost was the result of higher discount rates as well as increased borrowings to execute BMR projects. EMCO’s gearing ratio mounted from 23.81 percent in 2022 to 35.75 percent in 2023. This along with increased taxation charges diluted the bottom line growth to 35 percent year-on-year in 2023. Net profit stood at Rs.292.92 million in 2023 with EPS of Rs.8.37 and NP margin of 8.3 percent.
In 2024, EMCO’s net sales registered 18.25 percent year-on-year growth. This was mainly on the back of price increases as well as encouraging market response to its high-voltage switchgear products. The company has been focusing on diversification of its product lines as well as geographical markets to offset low demand in the home market. There was a 34.4 percent decline in EMCO’s production volume during the year which clocked in at 3300 tons of insulators. This resulted in capacity utilization of 50.77 percent in 2024. Lower capacity utilization was due to the installation of new machinery and equipment which impeded the routine operations of the company. However, this was in line with the company’s long-term vision to undertake BMR in order to cater to the growing demand for switchgear products. Lower production was also the result of cash-flow constraints as the company was struggling to sell off its finished goods inventory and realign its sales mix in favor of high-margin switchgear products. Heightened cost pressure slightly reduced the GP margin to 26.8 percent in 2024 despite gross profit portraying a 16.52 percent year-on-year rise in absolute terms. Operating expenses mounted by 34.71 percent in 2024 due to higher freight charges on account of growing export sales, a spike in fuel prices, implementation of axle load regulation, and one-time fee charges by SECP for an increase in authorized capital. Operating profit picked up by 12.31 percent in 2024 with OP margin ticking down to 17.9 percent. Finance cost escalated by 58.36 percent in 2024 due to higher discount rates as well as increased long-term borrowings to finance BMR projects and increased short-term borrowings to meet working capital requirements. EMCO recorded a net profit of Rs.218.998 million in 2024, down 25.24 percent year-on-year. This translated into EPS of Rs.6.26 and NP margin of 5.2 percent – the lowest since 2019.
Future Outlook
With encouraging sales of high-value switchgear products, increased focus towards export sales as well as upward revision in the prices of its products to account for cost pressure, EMCO’s topline may continue its journey upwards. The company is also undertaking measures to contain its cost e.g. installation of the solar-based power plant and localization of raw materials.
The expected rehabilitation of the energy infrastructure and the development of new energy infrastructure in Pakistan will likely increase the demand for the company’s products in the home market. On the export front, the ongoing tension between the US and China has paved the way for EMCO to penetrate the US market.
On the downside, the transshipments experienced due to a spike in global logistics prices resulted in liquidated damages of Rs.59.17 million for the year ended June 2024. The major impact of these damages is yet to be realized.
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