Pak Elektron Limited
Pak Elektron Limited (PSX: PAEL) is a heavy weight in the local appliances market, commonly going by the brand name PEL. Set up by Malik Brothers in 1956, the company was a manufacturer of transformers, switchgear and electric motors in technical coloration with AEG of Germany.
AEG exited in the late 1960s by selling of their shares to Malik Brothers. Subsequently, the group was acquired by the Saigol Group of Companies in 1978 after which it diversified from solely power equipment market and entered into the home appliances sector.
The company has two segments: power division and appliances division. Power division focuses on manufacturing and marketing of goods such as transformers and energy metres and accounted for 36 percent of its top-line in 2017. The latter segment is a household name for home appliances and contributed 44 percent to total revenue and 75 percent to profit before tax.
Industry overview
In the 1980s, fiscal incentives offered by the then government allowed the home appliance industry to be established in Pakistan. Initially, low economies of scale and high production costs were offset by protectionism in the form of high tariffs.
1990s saw the onslaught of imported products as tariffs were adjusted downwards. Since the market had expanded, domestic consumption could absorb output by local players as well as imports. Imports still pose a problem as more and more foreign brand are investing to capture the rise in consumerism with the trend moving towards smart home appliances with technologies not commonly had by local producers.
News reports indicate that in the power division PEL has a market share of 42 percent followed by Siemens at 34 percent. In home appliance, Dawlance leads the market with nearly 50 percent market share, followed by PEL at 29 percent.
Financial history
In recent pre-2014 history, the company was in dire straits with single digit net profit margin. Higher interest rates, over leveraged balance sheet, unfavourable commodity prices and lack of demand from local market prevented growth in top-line.
2013 marked a turning point with 2014 registering growth of nearly 30 percent in the top-line and gross profit margin increasing from 25 percent to 31 percent, helping net profit to nearly quadruple. Improvements in macro indicators such as rupee appreciation, declining oil prices, lower inflation, lower interest and marginal improvement in electricity supply aided in improving financials. The main operational drivers were cost efficiencies and improved productivity that boosted its profitability.
2015 continued the trend with demand for electrical capital goods such as refrigerators and deep freezers growing. Rural areas witnessed an upsurge in demand for domestic home appliances as well. 2016 was also a good year for the company as appliances witnessing nearly 30 percent growth though power division top-line increase was limited to 3 percent.
2017 witnessed the higher turnover ever at Rs42 billion. This was led in part by the successful launch of new models in all products of the appliances division. As a result, the appliance division increased by 42 percent on the back of increased market penetration through increased sales of air conditioners and deep freezers with invertors technology. While on the whole power division did not witness any growth because of slowing down of orders from Wapda and Discos, revenue from the EPC business doubled since 2016. Energy meter business also saw nearly 40 percent of volumetric growth.
1HCY18
The company has not fared too well in first half of this year. On one hand, appliances division that saw growth last year reported lower sales. On the other hand, currency devaluation, rise in petroleum prices, international commodity market fluctuations and higher interest rates took its toll on the bottom-line. Power division also saw a dip due to lower orders from Wapda.
Appliance division revenue clocked in at about Rs18 billion, nearly 10 percent less than same period last year. Aggressive marketing campaign however allowed deep freezers, microwave ovens, and water dispensers to register an aggregate growth of 32 percent though this rise was not able to offset the decline in other segments. PEL hypothesis’s that it was political uncertainties prior to the election that led the decline in appliance sales. In the second half, the company plans to launch LED TVs as well.
As regards the power generation, historic trends indicated good growth possibilities this year. In the past, there was a strong rural electrification wave in the period gearing up to election. But given the political climate, this turned out not to be the case so far this year. While the company foresees that the incumbent government will resume outstanding T&D infrastructure projects and hence sales will rise, it is by no means certain given the twin deficits.
Future outlook
Last year’s annual report foresaw company’s growth as 15,852 MW projects under the CPEC banner were in the pipeline and privatization of Discos was underway. The austerity drive, talks of renegotiating CPEC deals and the general slowing down of economic activity may throw a spanner in the works however.
In 2011 when Wapda did not invest in system augmentation and expansion to new villages, PEL’s sales plummeted by over 30 percent, resulting in a loss of over a billion rupees. Similarly, in the current year growth has been restrained due to limited purchases from Wapda. High dependence on one big government entity makes the company fortunes vulnerable since nearly 40 percent of sales are generated through the power division.
Pakistan’s market has players such as PEL, Waves Singer, and Dawlance as well big global brands. Hence the sector faces persistent pricing pressure amidst strong competition.
On the other hand, emerging middle class, speedy urbanization, growth in disposable incomes as well as demand for electrical home appliances in growing. Better availability of electricity and energy efficient air conditioners have increased their demand. Housing sector schemes and upgrading of grid stations are demand drivers for its power division. Therefore there is potential for PEL to grow further but it faces a lot of challenges along the way.
