EMCO Industries Limited

EMCO's has been present in Pakistan for more than eighty years with its original parent company, The Imperial Electric Company (Pvt.) Ltd., being established in 1931. Electrical Equipment Manufacturing Co. Ltd. (EMCO) was the pioneer in production of all types of insulators including those required for extra high tension lines.
The company set up a manufacturing plant in collaboration with Japanese and French assistance in 1954. After the merger of Associated Engineers (Pvt.) Ltd. with EMCOs parent company, further expansion took place with a new plant being set up in 1968 under the guidance of NGK Insulators, Japan with which a fifteen-year technical collaboration agreement was also signed. `
In 1983, this company became publicly listed and was rechristened as EMCO Industries Limited. In addition to electric porcelain, the company is also involved in the production of chemical porcelain such as acid proof lining bricks, raschig rings, saddles and special refractory. This line is now fully developed to cater to the requirements of beverage factories, milk plants, chemical, edible oil, fertilizer industries, for acid proof wares. EMCO, in 1995, signed a licensing agreement with M/S. SIEMENS, Germany to manufacture surge arresters from 66kv to 420kv.
In 1983 EMCO decided to expand their manufacturing activities and utilize their long experience in ceramics by adding a plant for the manufacturing of decorative wall tiles with an annual capacity of 700,000 square meters. This plant was commissioned in 1985 and used machinery from German and Italian manufacturers according to the company.
The company set up another plant for floor tiles having an annual capacity of 1,000,000 square meters, which was commissioned in 1991 in collaboration with SACMI, Italy. EMCO increased the capacity of its wall tile plant from 700,000 to 1,500,000 square meters per annum in 1996 after increase in demand. The overall capacity of the plant is now 2,500,000 square meters and ceramic production is over 30000 tons according to the company's website.
Historical performance
After suffering consecutive losses for the past nine years, EMCO managed to turn a green bottom-line in FY16. The reasons for the poor performance of the company could be attributed to the constant increase in prices of electricity and gas as well as severe load shedding that made operations costlier and affected exports as well as local production.
In FY14, the company decided to undertake operational restructuring, which involved temporary suspension of manufacturing at its tile division given the crippling gas shortage it faced during the period. EMCO chose to focus on improving production at its more profitable segment - the porcelain insulator division. As a result, full year depreciation of the tile division was charged to the profit making insulator segment in FY15 as well as FY16.
During FY15, only the insulator plant was operational and the production of the insulator plant increased by 116 percent and sales by 85 percent during the period. The total orders in hand for insulators were 2600 tons and another 2000 tons were in the pipeline. FY15 showed a higher loss for the company as compared to FY14, but the director's report attributed this to charging depreciation of Rs 53 million on the tile division as well as creating a provision of more than Rs 22 million against doubtful receivables.
EMCO also arranged beneficial structural financing arrangements with banks against confirmed orders from Discos and NTDC. The management injected Rs 89 million during FY15 to plug the liquidity crunch, which the company was facing due to a string of losses in the past decade.
Similarly, in FY16 even though the supply of gas improved, the company focused on enhancing production in insulator segment, which had the desirable results this time around. There was an increase in production of 31 percent in the insulator division resulting in a positive impact on the gross profit. The company was also able to repay borrowings of over Rs 100 million during the year. Therefore, after nine years the company made an after tax profit of Rs 27.2 million despite the tile plant is closed and all its costs being charged to the insulator division.
Recent snapshot
FY17 saw EMCO increase production of its insulator division by almost 14 percent. According to its annual report for the period, EMCO's current orders in hand stood at more than 1240 tons, whiles the company expected more than 3500 tons to be completed in the current financial year. EMCO's direct export sales increased by 185 percent, while indirect exports also more than doubled. However, exports hold an insignificant share at this point in the company's overall revenue mix.
Keeping in view the rising cost of gas because of imported R-LNG, which is more expensive than system-based gas, EMCO has decided to divest its tile division assets. This move is beneficial in the long term as it will allow the company to focus on its core insulator division. Also, the depreciation charges of the tile division will not drag down financial performance of the insulator division as a result of the divestment.
Stock performance
EMCO remained in tandem with the benchmark KSE-100 index till October 2017.The Company had garnered interest after turning around its consecutive loss making streak for the past several years. However, generally negative market sentiment led EMCO to under-perform the KSE-100 index by a wide margin in recent months.
Future outlook
The pickup in demand of insulators as a result of the government's focus to improve the power sector infrastructure has been a boon for EMCO. Direct export sales have decreased considerably in the past year to meet the local demands of Disco's and NTDC as well as increased competition in the international market.
The company has made a good decision when it comes to divesting its tile division given the increase in cost of gas. As the proportion of R-LNG in the overall mix rises, this cost would go up even further.
A red flag mentioned in the auditor's report for FY17 has been the qualified opinion on the tile division's outstanding receivables, which the company hopes to still recover.
EMCO is currently operating at almost full production capacity but hopes to invest in BMR activities to further enhance production. It also plans to introduce new products in light of the developing power sector in the country.

=======================================================================

EMCO Industries Ltd FY12-16

=======================================================================

Rs (Mn)                    FY12    FY13    FY14    FY15    FY16    FY17

=======================================================================

Net sales                  1856    1596     932     783    1058    1006

Exports                      61      46      51      44      74     118

Employees Costs             285     313     213     222     254     275

Profit/(Loss) before tax    -14     -39    -106    -125      38      68

Profit/(Loss) after tax     -21     -35    -104     -98      27      29

Earning per share         -0.61   -0.99   -2.96   -2.80    0.78    0.83

Capital Expenditure          37      23      13      18      35      21

Shareholder's Equity         33      17     -50     -28      21      72

=======================================================================

Source: Company accounts

=============================================================================

EMCO: Shareholding pattern

=============================================================================

Shareholder                                          Shares held   Percentage

=============================================================================

Directors, CEO and children                           15,526,033        44.36

of which

Suhail Mannan (CDC)                                    3,892,237        11.12

Tariq Rehman (CDC)                                     2,377,013         6.79

Javaid Shafiq Siddiqi (CDC)                            2,109,524         6.03

Usman Haq (CDC)                                        1,829,810         5.23

Associated Companies                                   4,954,736        14.16

of which

Associated Engineers Pvt. Ltd.                         2,011,325         5.75

ICC Pvt. Ltd                                           2,692,285         7.69

NIT & ICP, Financial Institution,

 Insurance Companies and Modarabas and Mutual Funds      244,125         0.70

Joint Stock Companies                                  1,371,936         3.92

Shares held by the general public (Local)             12,897,683        36.85

Shares held by the general public (Foreign)                3,065         0.01

Total                                                 35,000,000          100

=============================================================================