The performance of Pakistan Cables is highly dependent upon the global movements in the commodity prices of copper and aluminium.
During most part of FY10, copper prices showed an upward trend, increased to $7,745 per ton in April 2010 as compared to $5,216 in FY09. However, with the decrease in the demand gap for copper in the global market as most recovery projects came online, the average copper prices eased to a significant level of $6,499 in June 2010.
Aluminium mimicking the movements of copper rose steadily but modestly from July 2009 to April 2010, finally declining to a level of $1,931 per ton in June. Given that both these metals are prime raw materials in the company's product portfolio, the impact of such volatility in prices was reflected in the financial performance of the firm during this past year.
The leading position that the firm enjoys in the cables and wires segment, stands heavily contingent on the strength of demand for the industrial base of our nation; the firm continued to extend its support to famous names such as BYCO, Tetra Pak, Coca Cola, Engro, FFC, Siemens and Descon during this financial period. The introduction of Triple Extruded 15kv medium voltage cables was a significant achievement as far as the innovative capacity of Pakistan Cables is concerned. The company continued its strong delivery in the Alum-Ex product category having successfully formed association with army housing schemes, basic health units and safari villas besides other public sector projects during the year.
FINANCIAL PERFORMANCE
Within the context of a staggering economy plagued by political instability, law and order indiscipline, acute water and electricity shortages and ambivalent external economic circumstances, the operations of a company with demand derived from the performance of the industrial sector like Pakistan Cables can only be expected to deteriorate. With the rising prices of copper and aluminium, the pressure on the operating performance of the firm increased significantly.
The 13% rise in sales over the previous fiscal year reflects not just a rise in the prices of the products as the firm passed on some of its rising cost burden onto the customers but also a sustainable increase in sales volume. However, as the graph below depicts a significant rationalisation in the gross margin of the firm's sales, this decline was a function of tough competitive position, rising import costs with rupee devaluation and the inability of the company to pass an exhaustive burden of rising costs onto the customers.
Moreover, the figure above provides insights into the possible reasons for the trim down of the net profit margin from an already low 1.9% to 1.2%. Other than the rising cost of goods sold and the reasons thereof cited above, we see that the firm has implemented extensive cost control with respect to overheads. Whether it is selling or administrative expenses both have been brought down by a significant margin however, there has also been a decline in the other income head. This reduction in the income buffer is potentially one of the causes that prevented the net margin from increasing despite extensive expense control.
As far as the efficiency of operations is concerned, a significant let down seems to have come about during this tenor in the productivity of the firm's operations. The debtor, inventory and total asset turnover all declined substantially, indicating that the firm moved on to adopt significantly liberal credit policies in an effort to increase sales while the decline in the overall economic activity was reflected in the other indicators.
As far as the debt position and absorptive capacity of finance costs is concerned, the firm's capital structure seemed to have been fairly altered during the fiscal year. Debt rose to a phenomenal 62% of total capital, making the company highly leveraged and increasing its risk profile. However, at the same time the finance costs were significantly controlled during the year as interest expenses actually fell despite the take on of additional debt. The prime factor that explains such contradictory moves is the switch that the company made towards high value short-term import financing; the competitive rates that the firm enjoyed through this mode of financing helped to reduce the finance costs but at the same time the tough economic circumstances forced the company to take on additional amounts of loans than prior years, aptly reflected in the altered debt to equity structure. A marked improvement was seen in the interest cover as it swelled from a modest 1.4 times in 2009 to 2.3 times in 2010 again reflecting the same alteration in debt composition discussed above.
Lastly, from the investor's perspective Pakistan Cables' performance was not hit strongly as some might have feared. The EPS declined to 2.12 per share from 2.98 in the previous year a decrease of 28.9%. However, owing to the revaluation surplus and ploughed back earnings, the book value of the firm remained consistent at Rs 65 per share. The fluctuation in share price however tells us the complete story with the average price gone up to Rs 54 per share in 2010 as compared to Rs 34 in 2009; one cannot refute the fact that prospective investors see some merit in Pakistan Cables as a viable investment option. The cause of such an increase is the positive expectations associated with the future performance of the company after the imminent investment in its shares by the leading General Cables in September 2010.
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PROFITABILITY FY09 FY'10
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Gross profit margin 15.9 10.9
Profit margin 1.9 1.2
Return on Total Asset 2.1 1.2
Return on Common Equity 8.9 6.3
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LIQUIDITY RATIO
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Current Ratio 1.1 1
Quick Ratio 0.4 0.5:1
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ASSET MANAGEMENT
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Debtor turnover (Times) 10.4 6
Inventory turnover (Times) 4.3 3.4
Total assets turnover (Times) 1.1 1
Creditor turnover (Times) 14.1 15.1
Capital employed turnover (Times) 1.8 2.1
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DEBT MANAGEMENT FY'09 FY'10
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Debt 53 62
Equity 47 38
Times Interest Earned (Times) 1.4 1.3
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PER SHARE FY'09 FY'10
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Earning per share 2.98 2.12
Price earning ratio 11.4 24.1
Market value per share Rs 34 54
Break-up value per share including
surplus on revaluation Rs 65.2 65.3
Dividend payout % 75.6 70.7
Dividend yield %* 6.61 2.94
Dividend Cover (Times) 1.4 1.3
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