A performance review of EMCO Industries Ltd in Pakistan

EMCO Industries Ltd. (EMCO) conducted a Corporate Briefing Session (CBS) earlier this week to discuss the Company’s 9MFY21 financial results and future outlook.

Key takeaways are as follows:

Production:- Shortage of natural gas negatively affected EMCO’s production for 9MFY21.

Capacity Utilization:-

The plant is usually operated at full capacity but due to shutdown of three weeks during COVID, EMCO’s plant has been operating at a capacity of 90%. The company is making all out efforts to run the Plant back on 100% capacity; Production capacity of insulators is 5,000 per annum. EMCO is the sole manufacturer of Surges/Disconnection Switches with annual production capacity of Surges/Disconnection Switches being 250 pieces per year and with the Company having substantial sales orders on hand. Sale of Surges began from March 2021 with the Company having sold 55 pieces up until now, allowing EMCO’s management to be optimistic about achieving sales target of 250 pieces/annum;

Solar Power Plant:- In May 2021, EMCO installed a solar power plant of 982 KW — the management is optimistic that it can save up to Rs.15-16 million/annum due to power derived from this solar plant leading to an annual savings of 40 to 45 paisa in EPS; Revenue:-

During 9MFY21, EMCO’s Top-line stood at Rs.1.46 billion — the management indicated that it will be able to achieve its FY21 Top-line target of Rs.2 billion by focusing mainly on the core business of insulators; 85% of revenue is generated by selling locally in Pakistan while the remaining 15% stems from exports to Europe, UK etc.

Going forward the management believes a growth of 20% in revenues is achievable for FY22.

Exports:

Export markets of EMCO include Afghanistan, Qatar, UAE, US, and Canada while the Company is aiming to increase its outreach to Turkey;

The company has plans to change its revenue mix in a ratio of 50:50 for local and export sales in future;

There can be a 6% increase in the exports of the company in next year with more depending on the expansions undertaken during the upcoming years;

Recently, a subsidy of 3% was received on exports.

Products:-

Suspensions Indicators (Bread & Butter)

Ceramics

Medium Voltage Insulators

Substation Equipment

CAPEX is the way:-

The CAPEX target of EMCO for FY22 is Rs.100 million;

Recently, EMCO invested Rs.40 million in its testing labs besides investing in RTV contract.

The Company also plans to develop new kilns as the last kilns were developed ~15 years ago;

Name Plate Capacity:-

The name plate capacity of EMCO will increase 30% or more after expansion (Current Capacity: Insulators (Tons), 5,000/-).

Tiling Business:- The company commenced it Tiling Business in 2017 and closed the same in 2018 due to shortage of natural gas and inability to compete with Tile players in Sindh;

Product Age:- The insulators produced by the company hold a product age of 25 to 30 years with substation equipment constituting product age of 18 to 20 years.

Room Temperature Vulcanization (RTV) Coating:-

Room Temperature Vulcanization (RTV) Coating is a coating of rubber base material which enhances the quality of insulators during heavy pollution and fog and is approved by NTDC to be used in Pakistan;

In FY20, EMCO entered into a profit sharing mechanism with a Chinese company – with the share of profit predominantly skewed towards the Chinese firm – wherein EMCO began to import RTV coating from China to apply it onto the Company’s insulators for better quality. Now, EMCO has also begun to service it for its clients.

The RTV Coating contract will positively impact the annual financials of FY21.

Market Share:

EMCO’s market share in Pakistan’s Electrical Transmission Insulators’ segment is 75% while 25% is met by other players.

Product Pricing:-

The prices of EMCO’s products are set on a Cost Plus Basis by accounting for cost of inputs, primarily being gas, electricity, and raw materials;

Tender to tender based pricing strategy is followed.

Customers:-

National Transmission & Despatch Company (NTDC)

Government businesses.

Discos;

Courtesy – AL Habib Capital Markets (Pvt) Ltd.

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