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Pak Elektron Limited (PAEL or PEL) is the pioneer manufacturer of electrical goods in Pakistan. The company is listed on all the three stock exchange of Pakistan. Its principal activity is to manufacture and sale of electrical capital goods and domestic appliances.

THE COMPANY COMPRISES TWO DIVISIONS:

-- Appliances Division (Air-conditioners, refrigerators and deep freezers, microwave ovens, colour televisions and washing machines)

-- Power Division (energy meters, transformers, switchgears, kiosks, compact stations, shunt capacitor banks etc)

Like the air conditioners, its refrigerators are also in great demand. Currently, the PAEL Crystal has a market share of 30%. PAEL deep freezers are also the preferred choice of the companies like Unilever.

In addition PAEL is one of the major electrical equipment suppliers to Water and Power Development Authority (Wapda) and the Karachi Electrical Supply Corporation (KESC), the largest power utilities in Pakistan.

Over the years, PAEL electrical equipment had been used in numerous power projects of national importance.

PAEL was established in 1956 in technical collaboration with M/s AEG of Germany. In October 1978, the company was bought by the Saigol Group, which runs under the name of "Kohinoor Industries Limited".

Since its inception, the company has always been contributing in advancement and development of the engineering sector of Pakistan by introducing quality electrical equipment and home appliances as well as producing hundreds of engineers, skilled workers and technicians through its apprenticeship schemes and training programmes.

In spite of stiff competition from emerging local and multinational brands, PAEL Group's appliances and electrical equipment have remained in the spotlight due to constant innovation. PAEL is synonymous with quality. Strategic partnership with the multinationals, have enabled it to incorporate new technologies in its existing products range, thus giving the Pakistani market access to innovative, affordable and quality products.

The sales in the half year 2007-08 have decreased by 4.5% on account of slower demand from the power sector, the appliances segment however performed better. The gross profit is 23.8%, lower compared to 24.2% in the corresponding period last year. The other operating income has declined greatly, while the administrative and the distribution expenses along with financial charges have increased marginally. These expenses are expected to further increase in view of rising fuel prices and the inflationary pressures.

PAEL has incurred capital expenditures for which the long term debt has been secured with the issuance of bonus shares. The financial charges may show an upward trend till the debt is paid off. The capex is expected to increase the productivity and reduce the costs.

Financial performance (FY03-FY07):

The company has achieved more than 25% growth for the sixth consecutive year. The consistency in sales growth observed across the product categories. During FY07, the company has shown progress by maintaining growth momentum in sales and profit. Gross sales of Rs 13.077 billion from Rs 11.042 billion in the last year, with Rs 8.075 billion, Rs 6.077 billion and 3.983 billion in FY05, FY04 and FY03 respectively have shown a consistent growth.

Growth in sales and profit after tax in FY07 have been 26% and 32% respectively. However, the robust sales growth was mitigated by high COGS as a result of which the gross profit margin remained flat. But, the overall profit margin was slightly higher than the previous year 2006, due to higher net profit. The ROE and ROA showed a slight increase in FY07 due to higher increase in profits compared to that in assets and equity base.

All the current ratios being less than 1 indicate that the company has higher portion of current liabilities over the years. The current ratio increased in 2003 onwards but has decreased slightly from 0.69 to 0.61 in 2006. This showed that company's current liabilities (mainly due to higher trade payables and short term borrowings) were rising far more than its current assets, reflecting a decline in its ability to pay off its short-term obligations. But this is proved wrong by FY07 results in which the trend is opposite mainly due to reduction in current liabilities.

Quick ratio, a better measure of liquidity followed a trend similar to current ratios, first declined slightly in 2004 then rose again in 2005, while suffered a slight fall in 2006. The drop can be attributed to the 54% increase in current liabilities compared to just 24% increase in quick assets in that year. Just like CR, QR recovered again in FY07, mainly due to reduction in current liabilities.

Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO for PAEL has been rising until 2004, after which it declined in FY06 and later in FY07 by 22 days. The decline is to be explained by the proportionate increase in net sales being higher than the increase in average inventory kept by the company. This shows an efficiency of PAEL to quickly convert its inventory into sales.

Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. The trend line indicates a decline in this ratio in 2004 after which it was on a constant rise, but declined again in FY07, due to proportionate increase in net sales being higher than that in trade debts (which have been doubling every year after 2004) indicating that the company is trying to mitigate the risk of debt evasion and reformulating its credit policy.

The operating cycle hence showed a decline in FY04, FY06 and FY07 due to fall in DSO and ITO in the respective years. Also both TATO and sales/equity show a rising trend till FY06 on account of robust sales growth in last 4-5 years. Sales/equity remained flat in FY07 compared to increasing TATO because of greater increase in total equity base than in sales.

As far as debt management is concerned, both D/A and D/E ratios showed PAEL's greater reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.63 to 0.69) ratio has remained almost stable over the years where as D/E ratio has decreased significantly (2.2 to 1.8 in FY07) owing to higher increase in equity base than the total debt. Also the proportionate increase in long term liabilities is greater than the modest increase in the equity base. (As further evident by the long term debt to equity ratio)

The TIE ratio of PAEL has been on a rise till 2005 showing its increasing ability to cover its interest expenses. However this ability declined in FY06 and remained flat in FY07 owing mainly to significantly lower interest expense compared to an increase in EBIT. Looking at this, we can assume that the high interest rates are not having adverse impact on PAEL's operations and it is able to cover them efficiently.

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the earnings per share (EPS). PAEL's EPS has been erratic driven mainly by any changes in company's number of shares and its net income. Consequently, the P/E ratio also followed an erratic trend driven by the increases in EPS and market price of its share. On comparison of the share price to performance with KSE-100 index we see it has outperformed the index till FY05 but later on the trend was erratic.

Initially PAEL's book value per share was very high in 2004 onwards, but the company's book value per share nose-dived on account of nearly 5 times increase in number of shares compared to only a modest increase in total equity. It has now shown a consistent growth in recent years. The company has recommended a stock dividend (bonus shares) in FY07.

Power division: In the year 2006-07, demand for PAEL's products continued to grow mainly due to need for strengthening power supply network and village electrification. Also increasing demand for switchgears, transformers etc and increased order booking of these goods would help boost sales.

The outlook for the power division especially looks bright with increased focus of the government on power projects, resulting into higher demand for PAEL's products by Wapda and its distribution companies coupled with private sector clientele. PAEL is likely to benefit from this according to its market share.

PAEL has already made considerable investment in expansion and modernisation of its manufacturing plant. In order to utilise its experience in this business for half a century and to target the upcoming opportunities, the company has diversified into production of power transformers and turnkey construction of grid stations. It has successfully delivered first tranche of its products in this area in FY07. These products may become an important source of revenue for the company in the years to come and would also impact positively in sound development of PAEL's business.

Appliances division: With continued product improvement and deepening sales network through augmentation of consumer marketing, the company hopes not only to maintain its present share but aims to enhance it through the launch of additional products. PAEL has planned to capture a big share of the market in microwave ovens, colour televisions and washing machines categories in future.

In light of the dismal economic scenario, rising inflation and consumer lending rates, it is fair to expect that the growth rate of the appliances sector would stagnate. However, the increase in duty on the electronic appliances may reduce the competition from imported counterparts. But increase in cost of production is imminent in near future due to inflationary pressures and greater fiscal measures' pressure.