Karachi, December 29, 2022 (PPI-OT): PAEL: Management optimistic on the Power division

With the belief that top-down demand determinants for the company’s offerings in Pakistan are anticipated to remain intact, Pak Elektron Limited’s (PAEL) management projects its Power distribution equipment sales and household appliance penetration rates to increase, as the need for electricity increases with rising urbanization.

In order to improve the working capital cycle, management is focusing on the Power division and expects its revenue contribution to rise to 60% from c. 50% at present. Management is of the view that because of the mix shifting to Power, the overall debt burden of the company is also expected to reduce going forward.

During the outgoing quarter, company’s top-line grew 33% YoY to arrive at Rs 12.1bn, mainly due to revenue growth in the Power division, backed by healthy demand for electrical equipment. PAEL’s management held a Corporate briefing session yesterday to discuss the recent financial results and outlook of the company.

Lower urbanization shows growth potential

PAEL’s management anticipates that rising urbanization will accelerate its growth in order to cater to expected demand in future. Pakistan has a very low urbanization percentage at ~40% compared to western countries where this percentage is 70- 80%. The Company’s home appliances division has a production capacity of 650k refrigerators, 100k deep freezers, 300k air-conditioners, 150k TVs, and 100k washing machines. Company expects to add further capacities by year 2025 due to expected demand for these products. At present, PAEL has a market share of 24% in refrigerators, 8% in ACs, 4% in washing machines, 27% in water dispensers and 4% in the LED segment. For its home appliances segment, PAEL was allotted 40–50% import quota of the previous year’s import volumes. The management believes that SBP’s latest circular may not prove as beneficial for its home appliances division as the import allowance has a priority list, which could limit PAEL’s chances.

Power division to help steer the company in green

There is a vital need to upgrade the T and D infrastructure in order to meet country’s increased demand for energy, all of which calls for a strong market for electrical equipment. The company’s Power division is expanding quickly, and it is anticipated that in 2023, the revenue mix will tilt towards the Power division. Management expects that going forward, Power division will contribute 60% of the revenue whereas Home appliances’ revenue contribution will drop to 40% from current ~50%. The company’s power division has sales orders scheduled for the following six months. The revenue increase in recent quarters is backed by robust product demand of electrical equipment at WAPDA Distribution Companies. In the Power segment, PAEL has a 90% market share in Power transformers, 25% in Distributor transformers, 73% in MV and LV switch gears and 19% in Energy meters.

Management is of the view that because of the mix shifting to Power, the overall debt burden of the company is also expected to lessen going forward as working capital cycle improves. Management shared that receivable days for the power sector are less than 60 days, however they are noticeably greater for the appliances division.

PAEL managed to increase profitability during 9MCY22

PAEL’s profitability for 3QCY23 clocked in at Rs343mn translating into an EPS of Rs0.4, +1% YoY taking nine-month profitability to Rs1.5bn (EPS: Rs1.7) depicting a 9% YoY growth. During the last quarter, top-line grew 33% YoY to arrive at Rs 12.1bn, mainly due to revenue growth in the Power division backed by healthy demand for electrical equipment. On a QoQ basis the revenue declined by 35% owing to slow sales due to extended monsoon and floods in the country. Gross margins however remained flat compared to previous quarter despite run up in raw-material costs due to global commodity price hikes and weaker local currency translations.