EMCO Industries Limited

EMCO’s has been present in Pakistan for more than eighty years with its original parent company, The Imperial Electric Company (Pvt.) Ltd., being established in 1931. Electrical Equipment Manufacturing Co. Ltd. (EMCO) was the pioneer in production of all types of insulators including those required for extra high tension lines.

The company set up a manufacturing plant in collaboration with Japanese and French assistance in 1954. After the merger of Associated Engineers (Pvt.) Ltd. with EMCOs parent company, further expansion took place with a new plant being set up in 1968 under the guidance of NGK Insulators, Japan with which a fifteen years’ technical collaboration agreement was also signed. `

In 1983, this company became publicly listed and was rechristened as EMCO Industries Limited. In addition to electric porcelain, the company is also involved in the production of chemical porcelain such as acid proof lining bricks, raschig rings, saddles and special refractory. This line is now fully developed to cater to the requirements of beverage factories, milk plants, chemical, edible oil, fertilizer industries, for acid proof wares. EMCO, in 1995, signed a licensing agreement with M/S. SIEMENS, Germany to manufacture surge arresters from 66kv to 420kv.

In 1983, EMCO decided to expand its manufacturing activities and utilize long experience in ceramics by adding a plant for the manufacturing of decorative wall tiles with an annual capacity of 700,000 square meters. This plant was commissioned in 1985 and used machinery from German and Italian manufacturers according to the company.

The company set up another plant for floor tiles having an annual capacity of 1,000,000 square meters, which was commissioned in 1991 in collaboration with SACMI, Italy. EMCO increased the capacity of its wall tile plant from 700,000 to 1,500,000 square meters per annum in 1996 after increase in demand. The overall capacity of the plant is now 2,500,000 square meters and ceramic production is over 30000 tons according to the company’s website.

Historical performance

After suffering consecutive losses for the past nine years, EMCO managed to turn a green bottom-line in FY16. The reasons for the poor performance of the company could be attributed to the constant increase in prices of electricity and gas as well as severe load shedding which made operations costlier and affected exports as well as local production.

In FY14, the company decided to undertake operational restructuring that involved temporary suspension of manufacturing at its tile division given the crippling gas shortage it faced during the period. EMCO chose to focus on improving production at its more profitable segment, which is the porcelain insulator division. As a result, full year depreciation of the tile division was charged to the profit making insulator segment in FY15 as well as FY16.

During FY15, only the insulator plant was operational and the production of the insulator plant increased by 116 percent and sales by 85 percent during the period. The total orders in hand for insulators were 2600 tons and another 2000 tons were in the pipeline. FY15 showed a higher loss as compared to FY14 but the director’s report attributed this to charging depreciation of Rs53 million on the tile division as well as creating a provision of more than Rs22 million against doubtful receivables.

EMCO also arranged beneficial structural financing arrangements with banks against confirmed orders from DISCOs and NTDC. The Management injected Rs89 Million during the year to plug the liquidity crunch which the company was facing due to a string of losses in the past decade.

Similarly, in FY16 even though the supply of gas was improved, the company focused on enhancing production in insulator segment, which had the desirable results this time around. There was an increase in production of 31 percent in the insulator division, which had a positive impact on the gross profit. The company was also able to repay borrowings of over Rs100 million during the year.

There was an increase of 31 percent in the production (4237 tons from 3200 tons) of the insulator division during this year, which had a positive impact on the gross profit. Revenue of the company increased by 35 percent during the year and it was able to repay its borrowings by more than Rs100M. Therefore, after nine years the company made an after tax profit of Rs27.2 million despite the tile plant was being closed and all its costs being charged to the insulator division.

FY17 saw EMCO increase production of its insulator division by almost 14 percent, which had a positive impact on profitability. According to its annual report for the period, EMCO’s current orders in hand stood at more than 1240 tons while the company expected more than 3500 tons to be completed in the current financial year. EMCO’s direct export sales increased by 185 percent while indirect exports more than doubled. However, exports hold an insignificant share at this point in the company’s overall revenue mix.

Keeping in view the rising cost of gas because of imported R-LNG, which is more expensive than system-based gas, EMCO has decided to divest its tile division assets. This move is beneficial in the long term as it will allow the company to focus on its core insulator division. Also, the depreciation charges of the tile division will not drag down financial performance of the insulator division as a result of the divestment.

Recent snapshot

The 9MFY18 period saw EMCO increase its top-line by 9 percent as compared to the same period last year and this growth was driven solely to the insulator division. Gross profit clocked in 25 percent lower which the company attributed to investment in improving building infrastructure and test certifications from internationally accredited laboratories for local and export markets.

The company’s other income dropped significantly while its finance cost remained the same as compared to the 9MFY17 period. This led EMCOs PAT to decline by 17 percent while the EPS dropped from Rs1 in 9MFY17 to Rs0.83 in the current period.

As far as the divestment of the tile division goes, a buyer for the equipment has been finalised and a NOC from one of the financial institutions is all that is awaited. EMCO is also pursuing the sale of unutilised land at the rear end of its plant to generate additional cash flows for BMR and reducing debt financing.

Stock performance

The script moved in tandem with the benchmark KSE-100 till Oct-17 but has since significantly underperformed the index. The latest result has also been below investor expectations. However, with the divestment of tile division and better performance of the insulator division the coming year could be better for EMCO in terms of profitability.

Future outlook

The rise in demand of insulators as a result of the government’s focus to improve the power sector infrastructure has been a positive trigger for EMCO. However, direct export sales have decreased considerably in the past year to meet the local demands of Disco’s and NTDC as well as increased competition in the international market.

EMCO is currently operating at almost full production capacity but hopes to invest in BMR activities to further enhance production.

It also plans to introduce new products in light of the developing power sector in the country. It hopes to arrange cash flow for BMR from the sale of its tile equipment which is at the final stages while also planning to sell unutilised plant land.