Initially established under the name of Batala Engineering Company (BECO) in 1950, the Pakistan Engineering Company (PECO) produced light engineering products. Historically, the company manufactured high quality machine tools, pumps, power looms, concrete mixers, cranes, power presses, electric motors, bicycles, steel rolled products, electricity transmission towers, structure and general fabrication.
The plant was originally set up at Badami Bagh, Lahore spanning 34 acres, with the neighbouring area subsequently converted into the steel centre of Pakistan. Due to rapid addition of products, the land area became inadequate for further expansion and 247 acres land was acquired in 1960 at Kot Lakhpat industrial zone, Lahore for relocating factory premises in the future.
After take over by the government in 1972 under the nationalisation reforms, it was rechristened Pakistan Engineering Company (PECO). Subsequent to the takeover the areas gaining particular focus included steelmaking with steel rolling mills to roll bigger size steel angles added in line with future trends. A modern laboratory for mechanical, chemicals and non-destructive testing was also set up including an ultrasonic flaw detector and magnetic particle separator.
For better precision, state of the art CNC machines for punching, marking and shearing of steel angles were also installed in the years 1983 and 2007. The company is qualified for manufacturing electricity transmission towers up to 500 KV. Currently, the annual assessed production capacity of steel structures on a single shift basis is 30,000 tons.
In 2002 the government decided to restructure the company with all machines, equipment, steel sheds moved from Badami Bagh to Kot Lakhpat. It was decided to close down unprofitable segments of the company including low technology products such as machine tools, power looms. The corporate structure of the company was altered with private shareholding increased to 67 percent and government shareholding reduced to percent. This has encouraged more efficiency and effectiveness in the operational running of the company.
Historical financial and operational performance
PECO has had a turbulent past with operational and financial performance taking a hit in the past five years. The company witnessed consistently negative profitability margins and a declining sales revenue trend year-on-year. In FY14 the company generated sales of only Rs220 million which was 43% lower than last year's sales of Rs386 million. PECO recorded a net loss of Rs66.6 million for FY14 with negative gross and net profit margins. The EPS was also negative with loss per share of Rs11.71.
The company attributed the abysmal performance in sales revenue and profitability to poor orders in hand, delay in award of one of the major projects, constraints in procurement of raw material and delay in renewal of credit facilities by NBP. There was also intense competition for 11 and 132 KV towers and load shedding of electricity and gas that plagued the operations of PECO. There was no notable demand of telecommunication towers during the year coupled with low demand of pumps and motors as well.
In FY15 PECO generated sales revenue of Rs923 million which was 316% higher than FY14 sales revenue of Rs222 million. The company also registered positive profitability margins for the first time in the last five years. The gross profit and net profit margins for FY15 were 15.37 and 4.90 percent respectively. The improvement in earnings is mainly due to revenue growth, prudent management of raw material costs, cost rationalization in operations and production efficiencies. The profit before tax during FY15 was Rs63 million against previous year's loss of Rs124 million. EPS of the company during FY15 was Rs7.96 as compared to loss per share of Rs11.71 during last year, depicting an increase of Rs19.67 per share.
PECO witnessed a golden year in FY16 with the company achieving the highest turnover in its history. Sales grew at a whopping 152 percent on a year on year basis while gross profit also increased by 233 percent. The company attributes its robust performance in the year due to uninterrupted supply of raw material and better financial management. It was also able to source orders at better margins which helping the gross margin increase to 20 percent from last year's 15 percent. The company managed to increase its bottom-line by 386 percent in FY16 as compared to the previous period.
Recent performance
During FY17 the flat steel product segment saw a growth of 12 percent. Initial expectations were that the sector will see continued investment on the back of development expenditure but the recent slash in PSDP expenditure by the government might have a significant impact going forward. The company realised low margins on its new orders in light of the volatile global alloy prices coupled with increased foreign competition. During the year the company enhanced its credit ceiling from the Ministry of Finance to Rs1 billion.
The 9MFY18 period saw PECO's revenue increase by 26 percent while the gross profit saw a 47 percent decrease. As the company is focusing on expanding volumes to increase market share, its margins on new orders have reduced while increase in raw material prices have also put profitability margins under stress. Particularly the unprecedented increase in the international prices of zinc and steel coupled with depreciation of the rupee played in important part in increase the COGS and reducing profit.
Future outlook
PECO continues to experiment with different strategies when it comes to product development and penetration. The company believes the new prototype 500kV will help it raise its dwindling sales volumes. It has also focused on increasing volume by lowering profit margins to increase its market share.
The company faces tough competition in its currently main product line which is supply of transmission towers to DISCOs and NTDC. According to the company's annual report for FY17, "PECO's relative comfort in winning tenders has become unpredictable." The cost of raw materials is going up impacting margins whereas other light engineering products that PECO formerly had a strong presence are not being manufactured with most divisions idle or shut down. To remain competitive, the company is in the process of arranging joint ventures (JV) to bring about operational and financial synergies.
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Pakistan Engineering Company Limited
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Rs (Mn) FY11 FY12 FY13 FY14 FY15 FY16 FY17
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Net sales 712 523 386 222 923 2,329 1,353
COGS 680 593 465 280 781 1,857 1,187
Gross profit 32 -71 -79 -58 142 472 166
SG&A 72 57 54 54 67 84 105
Net profit -31 -100 -83 -67 45 220 66
Gross profit margin (%) 4.5 -13.5 -20.5 -26.2 15.4 20.3 12
Net profit margin (%) -4.3 -19.1 -21.5 -30.0 4.9 9.5 5.00
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Source: Company accounts
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PECO Pattern of Shareholding % shares held
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Directors, CEO & their spouse/minor children 0.15
Associated Companies, Undertaking and related Parties 24.88
Banks, DFI's, NBFIs, insurance/takaful firms, modarabas 8.75
& pension Funds
General public 30.21
Joint Stock Companies 10.56
Others 25.26
Total 100
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