Waves Corporation Limited (previously known as Waves Singer Pakistan Limited) (PSX: WAVES) is incorporated in Pakistan as a public limited company. The principal activity of the company is the manufacturing and assembly as well as trading and retailing of domestic consumer appliances. The company is also engaged in the trading and retailing of light engineering products.

Pattern of Shareholding

As of December 31, 2022, WAVES has a total of 281.406 million shares outstanding which are held by 8053 shareholders. Directors, CEO, their spouse and minor children are the major shareholders of WAVES with a stake of 48.41 percent in the company. This category is followed by general public holding 42.16 percent shares of WAVES. Joint Stock companies account for 6.98 percent of the outstanding shares of the company. The remaining shares are held by other categories of shareholders, each having less than 1 percent of the company.

Historical Performance (2018-22)

Since 2018, WAVES’s topline has tumbled twice i.e. in 2020 and 2022. Its bottomline posted a downtick in 2019 and 2020. The gross and operating margins of the company posted a rise in 2019 and then followed a downward trajectory thereafter with the exception of 2021 where the gross margin posted a trivial growth. Net profit margin had been descending until 2020 and then rebounded in 2021 and 2022 (see profitability ratio graph to get further clarity on the trend). The detailed performance review of each of the years under consideration is given below.

In 2019, WAVES topline grew by 11 percent year-on-year on the back of rise in sales volume coupled with systematic price increase to make up for the surging cost of production on account of inflation, Pak Rupee depreciation and spike in the prices of components of appliances. During the year, the government made it compulsory to print the CNIC of the buyer on the sales tax invoice along with the inclusion of home appliances in the third schedule of sales tax. This affected demand and pricing, yet the company was able to muster high sales volume. Gross profit grew by 15 percent year-on-year with GP margin growing up to 27.7 percent in 2019 from 26.7 percent in 2018. The company undertook cost rationalization and was able to reduce its operating expense by 3 percent year-on-year in 2019. Other expense also dropped by 22 percent year-on-year as no provision was booked against doubtful debts. Moreover, the company incurred a loss on property, plant and equipment due to fire and disposal in 2018 which created a high base effect and culminated into shrinkage in other expense in 2019. Other income grew by 321 percent in 2019 which was the result of reversal of loss allowance against trade debts. Operating profit grew by 66 percent in 2019 with OP margin climbing up to 13.7 percent from 9.2 percent in 2018. Finance cost grew by 102 percent in 2019.on account of higher discount rate coupled with increased borrowings. Higher debt took WAVES’s debt-to-equity ratio from 50 percent in 2018 to 80 percent in 2019. Finance cost was somewhat offset by earned carrying charges. Profit before tax grew by 22 percent in 2019; however, 89 percent increase in tax charges mainly on account of changes in tax rate translated into a 1 percent dive in the net profit. Net profit for 2019 clocked in at Rs.378.3 million with an NP margin of 4 percent, down from 4.49 percent in 2018. EPS also marched down from Rs.2.04 in 2018 to 2.02 in 2019.

In 2020, WAVES’s topline slid by 10 percent year-on-year as the company’s peak summer season was compromised due to nation-wide lockdown on account of COVID-19. The cost of sales plunged by only 3 percent on account of Pak Rupee depreciation, fuel price hike and an increase in the prices of raw materials and components in 2020. This resulted in a 30 percent decline in gross profit with GP margin tapering down to 21.6 percent in 2020. The gross margin would be even leaner had the authorities not reduced the custom duties on high value imported raw materials in 2020.The operating expenses collectively dipped by 4 percent. Other expense also posted a 50 percent nosedive on account of no exchange loss incurred during the year coupled with lesser provisioning for WWF and WPPF in 2020. Other income continued to shine and multiplied by 196 percent in 2020 which was primarily because of reversal of loss allowance on trade debts and liabilities no longer payable written back. Despite cost controls and operational efficiency management, operating profit slumped by 32 percent year-on-year in 2020 with OP margin slipping to 10.4 percent. Finance cost barely grew by 1 percent in 2020 as the SBP took monetary easing stance during the year. Debt-to-equity ratio surged to 83 percent in 2020. While earned carrying charges magnified by 38 percent during the year and somewhat counterbalanced the finance cost, net profit narrowed down by 66 percent in 2020 to clock in at Rs.127.468 million with an NP margin of 1.5 percent and an EPS of Rs.0.61 – the lowest among all the years under consideration.

2021 appears to be the most fortunate year for WAVES whereby its net sales grew by 22 percent to clock in at Rs.10,439.01 million – the highest ever net revenue mustered by the company. Increase in urbanization and the trend of nuclear family setup with multiple sources of earning have greatly improved the lifestyle of people, resulting in a staggering revival in the demand of home appliances. The topline growth was the result of a 20 percent rise in local sales and 21.6 percent growth in the retail business. The export sales somewhat dropped in 2021 as geopolitical tension owing to Russia-Ukraine crisis spurred macroeconomic uncertainty in many countries. Cost of sales also grew by 22 percent due to Russia Ukraine crisis which increased the prices of raw materials in the international market. Nevertheless, robust sales volume and upward revision in prices resulted in a 24 percent uptick in gross profit with GP margin slighting inching up to settle at 21.9 percent in 2021. Marketing and administrative expenses grew by 11 percent and 21 percent respectively on the back of higher sales volume and inflationary pressure. Higher provisioning against WWF, WPPF as well as loss allowance on trade debts and exchange loss translated into 187 percent higher other expense in 2021. Other income which had been growing tremendously in the past two years slumped by 46 percent in 2021 on account of lesser reversals of loss allowance against trade debts. Despite a staggering growth in topline, operating profit thinned down by 6 percent in 2021 with OP margin contracting to 8 percent in 2021. Finance cost dropped by 20 percent in 2021 which coupled with a 48 percent hike in earned carrying charges culminated into a 157 percent growth in net profit. Net profit clocked in at Rs.327.89 million in 2021 with an EPS of Rs.1.13 and an NP margin of 3.1 percent.

WAVES’s topline receded by 5 percent year-on-year in 2022. Overall the appliances industry suffered during the year due to restrictions imposed on the import of basic raw materials. WAVES took the timely decision of switching to local raw materials which not only allowed it to continue its operations amidst supply chain impediments but also evade the negative effect of steep depreciation of Pak Rupee. WAVES’s wholly owned subsidiary Waves Marketplace Limited (WML) showed growth in 2022 while its home appliances business which was handed over to its subsidiary Waves Home Appliances Limited (WHALE) posted a plunge due to decline in the purchasing power of the consumers owing to high inflation and discount rate. Cost of sales slid by a lesser magnitude of 2 percent year-on-year in 2022 on the back of a spike in fuel and electricity charges and high indigenous inflation. Gross profit slashed by 14 percent year-on-year in 2022 with GP margin falling down to 19.7 percent – the lowest among all the years under consideration. Lower sales volume culminated into a 6 percent dip in the marketing and selling expense in 2022 while administrative expense inched up by 1 percent during the year. Other expense also plummeted by 24 percent in 2022. While exchange loss was relatively higher in 2022, lesser provisioning against WPPF and no allowance against debts did the trick. 56 percent dip in other income is representative of the fact that a huge amount of liabilities were written back in 2021 which was not the case in 2022. Operating profit slumped by 46 percent in 2022 with OP margin of 4.5 percent – the lowest since 2018. The company was able to trim down its finance cost by 44 percent in 2022 despite multiple rounds of monetary tightening during the year. This was due to significant reduction in WAVES’s borrowing during the year which also pushed down its debt-to-equity ratio to 75 percent in 2022 from 87 percent in 2021. Earned carrying charges also dropped by 14 percent in 2022. While profit before tax was 25 percent lesser as compared to 2021, reduction in the tax charge for 2022 due to prior year tax charge and differential under normal and final tax regime resulted in a 12 percent higher net profit in 2022. Net profit for the year stood at Rs.366.088 million with an NP margin of 3.7 percent versus 3.1 percent in 2021. EPS also climbed up from Rs.1.13 in 2021 to Rs.1.25 in 2022.

Recent Performance (1HCY23)

WAVES’s net sales massively tumbled by 59 percent year-on-year in 1HCY23 due to lackluster demand. Cost of sales also dipped by 61 percent during the period which translated into a 49 percent dip in the gross profit in 1HCY23, however GP margin improved from 20.7 percent in 1HCY22 to 25.8 percent in 1HCY23. Marketing and administrative expense also declined by 35 percent and 25 percent respectively in 1HCY23 while other income took a 29 percent dive during the period. Despite contained expenses, lower sales resulted in a 65 percent thinner net profit in 1HCY23 with OP margin of 7.8 percent versus 9.1 percent in 1HCY22. Despite monetary tightening backdrop, WAVES was able to cut down its finance cost by 42 percent during 1HCY23 due to lesser borrowings on account of low capacity utilization and lackluster demand. The bottomline shrank by 61 percent in 1HCY23 to clock in at Rs. 169.012 million with an NP margin of 5.7 percent down from 6.1 percent during the same period last year. EPS also fell to Rs.0.6 in 1HCY23 versus Rs.1.56 in 1HCY22.

Future Outlook

The changes in the weather conditions over the years call for an increase in the demand of refrigeration and air conditioning. Moreover, changes in lifestyle and increase in double income nuclear families also point towards the same.

However, the appliances industry still has a household penetration rate well below the world average which will only increase when the economic and political dust settles. Steep rise in the prices of appliances coupled with high electricity prices and high interest rates also keep the potential consumers at bay. Hence, the appliances industry is expected to take a further hit in the coming times.