Emco Industries Limited (PSX: EMCO) was set up in 1954, as a joint stock company under the repealed Companies Act, 1913 (now Companies Act, 2017), by the name Electric Equipment Manufacturing Company (Private) Limited. Subsequently, in 1983, it was converted into a public limited company and its name was also changed to EMCO Industries Limited. The company manufactures and sells high/low tension electrical porcelain insulators and switchgear.
Shareholding pattern
As at June 30, 2020, over 40 percent shares are owned by the directors, CEO, their spouses and minor children. Of this, Mr. Pervaiz Shafiq Siddiqui, a non-executive director, and the chairman, Mr. Javaid Shafiq Siddiqui are major shareholders. Over 43 percent shares are owned by the local general public, and 16 percent in associated companies, undertakings and related parties. The remaining 1 percent shares are with the rest of the shareholder categories.
Historical operational performance
The company has seen a fluctuating topline over the years, while profit margins have also been unstable particularly after FY15.
During FY17, the topline contracted by 5 percent. Export sales saw a 50 percent growth while local sales dropped by 10 percent. Since local sales made a major part of the total revenue pie, a 10 percent drop in local sales translated into a 5 percent overall contraction in revenue. Despite this, production was higher 4,817 tons, from 4237 tons. Cost of production, on the other hand, reduced to 78 percent of revenue, from 82 percent seen in the previous year. As a result, gross margin improved to over 22 percent. Although distribution expense increased year on year, it was offset by the growth in other income and reduction in finance expenses. Therefore, the higher gross margin also reflected in higher net margin that was recorded at 2.9 percent for the year.
In FY18, the company saw one of the highest revenue growth rates seen since FY11; export sales doubled year on year, while local sales grew from Rs1 billion to Rs1.3 billion. As per the company, the market demand for insulators is expanding as the government is attempting to improve energy transmission and distribution network. However, cost of production for the company increased drastically to make up 86 percent of revenue. This was primarily due to the rising cost of energy coming from a combination of indigenous natural gas and imported LNG in the form of RLNG. Therefore, gross margin dropped to 13.7 percent, with pre-tax loss recorded at Rs25 million. Net margin, on the other hand, grew marginally to over 3 percent, due to a positive tax figure.
Revenue growth was even higher in FY19, at 21 percent. Export sales more than halved year on year, while local sales continued to dominate the total revenue pie. Moreover, the variation in demand led production to be lower at 4,556 tons, compared to 4,817 tons in FY18. During the period, the industrial gas tariff changed from a combination of natural gas and RLNG to only RLNG which is pegged to crude oil and USD. Since the company needs continuous gas supply for heating kilns, cost of gas increased. This, coupled with currency devaluation, made the company increase prices, which could have resulted in the higher revenue, as gross margin was recorded at its highest of 25 percent, that also trickled down to the bottomline; net margin was also at its all-time high of over 10 percent.
Topline continued to grow during FY20, with both local sales and export sales increasing. However, with the outbreak of the Covid-19 pandemic, the plant was shut down, which was reflected in the lower production at 4,198 tons, compared to 4,556 tons in FY19. Although Covid-19 related shut down was for two weeks, the plant did not begin production for another week “due to heating up of kilns to the desired temperatures”. On the other hand, cost of production increased slightly to over 76 percent of revenue, bringing gross margin down to 24 percent. However, operating margin increased slightly to over 16 percent due to the drop in other expenses that had been unusually higher for the last three years. But owing to the finance expense, net margin was lower year on year at 7.4 percent.
Quarterly results and future outlook
Revenue in the first quarter of FY21 was higher by 12.4 percent year on year, while cost of production was lower as a share in revenue, at 73 percent, compared to over 76 percent seen in 1QFY20. As a result, profitability was also better in 1QFY21, despite significantly lower other income.
The second quarter saw revenue higher by over 18 percent year on year. the company produced and sold more tons that the same period last year. Production cost was also lower at 74 percent, combined with higher other income, therefore net margin was double in 2QFY21 year on year.
Third quarter also saw revenue higher, by 39 percent. While production cost was similar year on year, the higher revenue, combined with notable support coming form other income, profitability was improved in 3QFY21. Cumulatively too, net margin was higher at over 10 percent.
Given that the company increased revenue during the pandemic, and the financial performance for the nine months has also been better than the same period last year, FY21 can end at a good bottomline. Moreover, the company has also expanded its export destinations while also looking towards diversification.