Economic and political uncertainties during much of 2018 ensured that one of Pakistan’s leading appliance makers couldn’t replicate its blockbuster year of 2017. As per a PSX notice, Pak Elektron Limited (PSX: PAEL) saw its top-line shrink by 8 percent year-on-year. That the bottom-line more than halved last year owes to proportionally higher manufacturing costs and rising financial costs.
About two-thirds of the revenues of this firm – which markets its products under the PEL brand – are derived from sales of consumer “appliances”. The appliances division undertakes the manufacturing and sale of refrigerators, deep freezers, microwave ovens, air conditioners and other home appliances.
Based on a recent directors’ review, it appears that the appliance division managed to show some volumetric growth, mainly from products like deep freezers, microwave ovens and water dispensers. However, rising price-competition in this space perhaps restrained the top line from fully reaping the fruit of that volumetric growth
The remaining third of PEL’s top-line is derived mostly from “power” division, which deals in manufacturing and sale of electrical equipment such as transformers, switch gears and energy meters besides. The power division, it also bids for EPC contracts, construction of grid stations and rural electrification works, mainly for the likes of Wapda and Discos in segments like electrical transmission and distribution.
The power division was particularly affected by the political uncertainty and the economic slowdown that started in CY18. One, in a break from past election cycles, there were low rural electrification works prior to the July 2018 elections. And second, there was a slow contract-award process as a new government took over in August 2018 and took some time before it gained its footing.
It looks like the deadly combo of power-sector woes and economic slump that had affected PEL for many years until 2014 is rearing its head again. If electricity ends up becoming more expensive and the circular debt affects power production this summer, it will hurt PEL’s market. PEL, along with other competitors, is trying to convince customers through their energy-saving refrigerator and air-conditioner products.
Be that as it may, an economic slowdown – which is already underway, as indicated by sobering trends in LSM, PSDP spending and a retarding GDP – will affect retail spending on discretionary goods like home appliances. Higher inflation will further suppress the purchasing power of folks whose real per capita incomes are stagnating.
To counter external slowdown, there is not much that PEL can do internally to cushion its profit margins. Thanks to major PKR depreciation in 2018 that raised the cost of imported machine components, PEL’s cost of sales was 75 percent of net sales in CY18, up from 71 percent in CY17. Already, PEL is keeping its distribution and administration costs in check. Further cost-cutting may not matter much for bottom-line.
With the power business dependent on government projects, the home-appliance business is going to become increasingly competitive as the economy bites and consumers get stingy. That concern is weighing on PEL’s stock at the bourse. In the last 52 weeks, PEL’s stock has lost more than half of its value, besides under-performing the benchmark index. At Rs22 as of April 5, the scrip is way down from its peak (Rs124: May 2017). From what it looks, PEL and its stock have a steep climb ahead.
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