Pak Elektron Limited (PAEL or PEL) is the pioneer manufacturer of electrical goods in Pakistan. It was established in 1956, in technical collaboration with M/s AEG of Germany. In October 1978, the company was bought by Saigol Group of Companies, which runs under the name of "Kohinoor Industries Limited". It is listed on all the three stock exchanges of Pakistan.
Its principal activities are manufacture and sale of electrical capital goods and domestic appliances. The company comprises two divisions: -- Appliances Division (air-conditioners, refrigerators and deep freezers, microwave ovens, colour televisions and washing machines)
-- Power Division (energy meters, transformers, switchgears, kiosks, compact stations, shunt capacitor banks etc) PAEL's refrigerators and air conditioners are in great demand. Presently, the PAEL Crystal has 30% market share. PAEL deep freezers are also the preferred choice of the companies like Unilever. In addition, PAEL is one of the major electrical equipment suppliers to Water and Power Development Authority (WAPDA) and Karachi Electrical Supply Corporation (KESC), the largest power utilities in Pakistan.
Over the years, PAEL electrical equipments have been used in numerous power projects of national importance in Pakistan. Since its inception, the company has always been contributing towards advancement and development of the engineering sector in Pakistan by introducing a range of quality electrical equipments and home appliances and producing hundreds of engineers, skilled workers and technicians through its apprenticeship schemes and training programmes.
In spite of stiff competition from emerging local and multinational brands, PAEL Group's appliances and electrical equipments have remained in the spotlight due to constant innovation. PAEL is synonymous with quality. Strategic partnership with multinationals of repute have enabled the PAEL to incorporate new technologies into existing product ranges, thus giving the Pakistani market access to innovative, affordable and quality products.
PROFITABILITYThe company had achieved higher profits during the past years (FY03-FY07). The company registered a 96% growth in its profits in the period 2003-04. Subsequently, there was a slow down in the growth in profits in later years, but the company showed a rising trend in its profits.
However, during FY08, the company could not maintain its profit growth momentum and registered 22% lower profit as compared to FY07. PAEL posted profit after taxation (PAT) of Rs 452 million in FY08 as compared to Rs 582 million in FY07. This was despite a 7% increase in net sales revenue earned by the company in FY08.
Sales for Appliances Division grew by 32% from Rs 5.092 billion to 6.772 in FY08. Sales in term of value and volume increased. Along with the existing products of the appliances division, the sale of diesel generators and water dispensers helped the company in generating revenue.
The company's sales have grown over the years but generally at a decreasing rate. During FY07, the sales had grown by 26% but during FY08 there was only a 7% growth in sales of the company. The local sales increased slightly by 3.5% while the export sales declined by 35% during FY08. It was the 98.5% increase in contract revenue that boosted the overall sales revenue of the PAEL.
The cost of sales increased by around 5.7% in FY08, owing to higher costs incurred during production. The cost of goods manufactured increased by 8.2% during FY08 due to higher direct material, direct labour and factory overhead costs. Factory overhead costs increased mainly due to higher salaries, wages, electricity, gas and water charges and depreciation costs.
Prevailing inflationary pressure in the economy and rising commodity prices increased the fixed costs of the company but the company managed to cope by passing the burden to the customers. Also, administrative, marketing and selling expenses were higher during FY08 as compared to FY07.
Along with this the operating income from financial and non-financial assets was 82% lower than FY07 and this decrease further depressed the profitability in FY08. The company earned lower operating profit (EBIT) and higher financial charges (mainly due to increased long term financing) resulted in lower profit before taxation (PBT) for FY08.
The gross profit margin increased in FY08 due to 12% increase in gross profit, as compared to a 7% rise in net sales in FY08. However, the rising trend in the profit margin since FY06 could not be maintained in FY08. The basic earning power of the company had increased in FY06 and FY07 but because of low growth in sales and low profit margin on sales in FY08, it did not earn as high a return on its assets (ROA) as it had in the previous two fiscal years. Likewise the return on equity (ROE) also fell in FY08.
LIQUIDITY
PAEL's current ratio became more than 1 (times) in FY05 and has increased since then except for a slight decline in FY06. Liquidity declined in FY06 because the company's current liabilities (mainly due to higher trade payables and short term borrowings) were rising far more than its current assets, reflecting a decline in its ability to pay off its short-term obligations. But in FY07, the liquidity position of the company improved mainly due to reduction in current liabilities.
In FY08, the liquidity position of the company improved further. Although the current liabilities of the company increased by 23.6% in FY08, the increase in current assets was higher (CA increased by 36.8% in FY08). This increase in current assets was largely due to a considerable rise in inventory and loans and advances to employees, suppliers and contractors. However, cash and bank balances, the most liquid of the current assets decreased by 19%.
Inventory is the least liquid current asset of a company and stock in trade constitutes 38% of PAEL's current assets. Therefore the quick ratio is a better measure of short-term liquidity for a company like PEL which manufactures and sells slow-moving items. PEL's quick ratio has followed almost similar trend as its current ratio. After a drop in quick ratio in FY06 due to a 54% increase in current liabilities as compared to just 24% increase in quick assets in that fiscal year. However the quick ratio recovered in FY07 and 08.
ASSET MANAGEMENT
Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO rose till FY04, after which it declined in FY06 and later in FY07 by 22 days. The decline was due to a higher increase in net sales than increase in average inventory kept by the company. However, in FY08, it took the company a longer time (around 26 more days) to convert inventory into sales.
This is because the sales growth was slower in FY08 as compared to the increase in PAEL's inventory. Sale of air conditioners reduced during FY08 due to shorter summer season and load shedding across the country. Therefore, the company was left with a lot of inventory by the end of FY08. This low inventory turn over rate actually explain the low basic earning power of the company in FY08.
Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. The trend line indicates a decline in DSO during FY04 after which its been on a rise except for a decline in FY07 because the sales growth was higher in FY07 as compared to the increase in trade debts (accounts receivables).
In FY08, the average collection period increased because the sales growth slowed down while trade debts increased substantially. Thus, it took the company 30 more days to convert its sales into cash. High ITO and DSO ratios caused the operating cycle of the company to become longer. This lengthening of the operating cycle is unfavorable because it means that the quality of both the main current assets: inventory and trade debts deteriorated in FY08.
The effect of low sales growth during FY08 also reflected in the total asset turnover (TATO) and sales to equity ratios (S/E) for the period. Lower TATO depicts that the company was unable to generate sufficient volume of business with the total assets investments of the company.
DEBT MANAGEMENT
The debt to asset (D/A) ratio depicts that PAEL has a greater percentage of funds provided thorough debt rather than equity and in FY08 the D/A ratio increased further. The D/A ratio of the company has remained almost stable over the years except in FY06. During FY08, the return on assets (ROA) went down and higher (D/A) ratio cannot be considered favourable.
The debt to equity (D/E) ratio decreased significantly (2.2 to 1.8 in FY07) owing to higher increase in equity base than total debt. Also the proportionate increase in long term liabilities was greater than the modest increase in equity base, (as further evident by long-term debt to equity ratio). However the situation was reversed in FY08 as both D/E and long-term debt to equity ratios of the company increased. The long-term liabilities and current liabilities both increased in FY08.
The times interest earned (TIE) ratio had been on a rise till FY05 showing PAEL's increasing ability to cover its interest expenses. However TIE declined in FY06 and remained flat in FY07 owing mainly to significantly lower interest expense compared to an increase in EBIT. In FY08, the TIE ratio decreased showing that the high interest rates are having an impact on PAEL's ability to meet annual interest costs through its operating profit (EBIT).
MARKET VALUE
The company earned low profit in FY08, as compared to that generated in FY07, the earning per share (EPS) declined to Rs 4.14 per share. The trend in EPS and expected earnings in future are the major factors affecting the market value of any company. As PAEL's EPS had risen in FY07 owing to higher profits, the price to earning (P/E) ratio of the company increased during FY08.
The P/E ratio shows how much investors are willing to pay per rupee of the reported profits and reflects the investors' expectations concerning the company's future performance. It depends on the company's price per share and the earnings per share (EPS). PAEL's P/E ratio continued to rise in FY08 because of high expectations from it after a favourable profitability performance in FY07 and FY06. The share price of the company, however, has been fluctuating and fell in the end of FY08.
FUTURE OUTLOOK
In case of PAEL's appliances division, the market conditions do not seem to be very favourable. The cost increase has been passed towards the consumers in the form of rise in prices of the product due to rising commodity prices and inflation. Production costs are expected to increase further in FY09 and this will dampen the demand for PAEL's appliances as the economy is going through unfavourable phase, purchasing power has declined and overall consumption reduced.
Also, a regulatory duty on import of home appliances has been imposed through the finance bill and this will increase the demand for locally manufactured products. However, the outlook for PAEL's power division can be favourable as it has the opportunity to increase its sales in the future in the wake of the prevailing energy crisis. The power utility companies in Pakistan are expected to make investments.
PAEL's power division can cater and help the power utility companies in expanding their power generation capacity and upgrading the transmission network and power distribution system. Apart from local opportunities, PAEL can expect its exports to increase as some of its power division products have been approved by power utilities in GCC countries.
PAEL has received an order from Saudi Electricity Company and some orders for tailor made big distribution transformers from private sector in Saudi Arabia. Appointment of agents and building marketing and sales structure in other GCC countries is in process. This is promising for the company's future export sales. PAEL also expects to receive orders from the European market as well.
The company's new distribution transformer manufacturing facility is expected to start commercial production in the beginning of 2009. This facility will modernize and upgrade PAEL's existing distribution transformer manufacturing capabilities and will bring product innovation, production and cost efficiencies resulting in an improved product with world class design and technology to meet local as well as international requirements. PAEL's distribution transformers will give it a competitive edge over other companies in the market.
Manufacturing of power transformers is gaining momentum and PAEL has successfully completed proto type tests for the complete range in 132KV transformers comprising 13, 26 and 40MVA. This business is expected to contribute considerable sales revenues for PAEL in the future.
PAEL has focused on product development in energy meters business, and now has complete range of single and three phase electromechanical as well as digital meters with all applicable features. This business is expected to grow, as electromechanical meters will be converted into digital meters under dual tariff regime.
The company's switchgear business is also progressing well with PEL being a major player in the local market. PAEL's market share in the private sector has grown over the previous year with its share in utilities staying at almost the same level. PAEL is also in the process of in-house development of some key components.
PAEL had started its contracting business a few years ago, which has now started generating revenues. After establishing itself as a major player in the construction of 132KV grid stations on EPC basis, PAEL has received its first 220 KV sub-station construction contract. Parallel to construction of sub stations, PAEL is establishing itself in other turnkey electrical contracting activities.
Another major contract that PAEL has received is the construction of electrical distribution network for DHA Phase 8, Lahore, amounting to Rs 580 million.
==============================================================================
PAK ELEKTRON LIMITED - KEY FINANCIAL RATIOS
==============================================================================
Profit Margin 4.40% 5.62% 4.20% 4.70% 4.93% 3.58%
Gross profit margin 25.76% 21.71% 21.94% 21.77% 21.42% 22.43%
Return on Assets 2.64% 4.11% 3.56% 4.37% 5.04% 2.76%
Return on Equity 7.05% 11.66% 10.21% 14.05% 14.32% 8.05%
------------------------------------------------------------------------------
LIQUIDITY RATIOS 2003 2004 2005 2006 2007 2008
------------------------------------------------------------------------------
Quick Ratio 0.56 0.52 0.69 0.61 0.83 0.87
Current Ratio 0.90 0.93 1.16 1.04 1.33 1.42
------------------------------------------------------------------------------
ASSET MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008
------------------------------------------------------------------------------
Inventory Turnover(Days) 94.91 99.20 106.95 100.81 78.38 103.95
Day Sales Outstanding (Days) 84.06 71.61 98.32 100.04 89.83 119.73
Operating cycle (Days) 178.96 170.80 205.27 200.85 168.21 223.67
Total Asset Turnover 0.60 0.73 0.85 0.93 1.02 0.77
Sales/Equity 1.60 2.07 2.43 2.99 2.91 2.25
------------------------------------------------------------------------------
DEBT MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008
------------------------------------------------------------------------------
Debt to Asset 0.63 0.65 0.65 0.69 0.65 0.66
Debt to Equity Ratio 1.67 1.84 1.87 2.21 1.84 1.92
Long Term Debt to Equity(%) 0.44 0.47 0.34 0.29 0.57 0.74
Times Interest Earned 1.53 1.74 1.86 1.73 1.74 1.63
------------------------------------------------------------------------------
MARKET RATIOS 2003 2004 2005 2006 2007 2008
------------------------------------------------------------------------------
Earning per share 5.96 11.70 4.27 5.79 6.65 4.14
Price/Earnings Ratio 12.91 4.57 14.87 5.13 10.90 17.34
Dividend per share 2.50 4.00 4.00 2.50 0.00 0.00
Market prices(Year End) 76.93 53.45 63.50 29.70 72.46 71.81
==============================================================================