EMCO Industries Limited

The roots of Electrical Equipment Manufacturing Company Ltd. (EMCO) date back to pre-partition days when the Imperial Electric Company (Pvt) Ltd. was established in 1931. It started off with production of electrical insulators used in power systems. With the help of Japanese and French companies EMCO was able to set up manufacturing in 1954.

Subsequently, the Imperial Electric Company merged with Associated Engineers (Pvt.) Ltd and a new manufacturing facility was set up in 1968 with the help of NGK Insulators Japan. The company adopted the name EMCO Industries Limited when it became publicly listed in 1983.

The company’s product range also includes chemical porcelain derivative such as acid proof lining bricks, raschig rings, saddles and special refractory. The products are used by beverage factories, milk plants, chemical, edible oil, fertilizer industries and for acid proof wares.

EMCO signed a licensing agreement with Siemens, Germany in 1995 which allowed the company to manufacture surge arresters from 66kv to 420k. The company also set up a manufacturing unit for the production of decorative wall tiles with an annual capacity of 700,000 square meters in 1983. This move came about due to the long presence of the company in the ceramics sector.

Another facility for the production of floor tiles with an annual capacity of 1,000,000 square meters was also commissioned in 1991 by EMCO in partnership with Italian based SACMI. Further capacity expansion took place in 1996 to cater to the increased demand where the wall tile plant saw its capacity go up from 700,000 to 1,500,000 square meters per annum. However, the tile division incurred heavy losses during the past several years following which the management decided to halt production and divest the tile plant due to unavailability of cheap gas and intense competition from Chinese manufactures.

Shareholder pattern and stock performance

The largest shareholder of the company is Mr. Munaf Ibrahim who owns almost 8.7 percent of EMCO Industries Limited followed by Mr. Pervez Shafiq and Javaid Shafiq who own 6.9 percent each. EMCO’s stock has outperformed the KSE-100 index by a wide margin since Mar-19.

Historical performance

The past couple of years have been slightly better for EMCO as far as profitability is concerned. FY18 has been the third consecutive year that the company has managed to report a green bottom-line. The company’s production of insulator’s remained stable at 4862 tons in FY18 as compared to 4817 tons during the previous year.

According to the management, the company’s pre-tax loss in FY18 was a result of several one-off events, which included realising the impairment charge of the tile division machinery and related spare parts. The management also made provisions of bad debts outstanding for the tile division.

Even though the tile division has been closed, the company is charging its costs to the insulator division, which have certainly impacted profitability adversely. Recall the EMCO had decided to divest its tile division assets as it sees no economic sense in continuing production at the tile division. The decision was spurred on by the expensive gas mix whereby the industry in Punjab was mostly supplied more costly RLNG while only a minor proportion was system based gas.

The move is beneficial in the long term as it will allow the company to focus on its core insulator division. It will also help with depreciation charges of the tile division will not drag down financial performance of the insulator division as a result of the divestment.

For the 9MFY19 period the company booked further impairment of Rs16 million but still managed to beat last year’s profit by more than three times. The top-line grew by 7 percent accompanied by only a small increase of 2 percent in the COGS resulting in the gross profit doubling over the same period last year. The finance cost picked up by 38 percent but other income helped the company post a PAT of Rs106 million registering growth of 266 percent as compared to 9MFY19.

Future outlook

Even though the company has expressed confidence in the demand for insulator going forward, it remains to be seen whether this demand can sustain in a general economic slowdown. Things have cooled off in the way of development expenditure and funding cuts have also been applied to revamping the power distribution structure. The company should focus on growing its export sales as well, which are currently a small portion of the overall top-line. EMCO is currently utilising almost full production capacity but hopes to invest in BMR activities to further enhance production. The funds for expansion are expected through the sale of its tile equipment, which is in the final stages as well as unutilised plant land.