The second session was of Topline Pakistan Mid Cap Call Conference 2024 – Day 3 on Pak Elektron (PAEL) held on May 23, where the key speaker was Mr. Syed Manzar Hassan, CFO of PAEL.
PAEL is targeting a significant expansion in the export market, aiming for US$50mn in power and distribution transformer exports within the next three years. This is a substantial increase from the average of US$2-3mn over the past three to four years. Our target for 2024 is US$4mn, and we are confident that we can reach US$10mn by 2025.
PAEL has already received orders from the USA and has several queries in the pipeline, indicating a strong demand for our products. One of our key advantages is the 35% duty on US imports from China, which does not apply to Pakistan. Additionally, our efficient delivery system allows for a lead time of just six months, compared to 18 to 24 months for suppliers from the USA and Mexico.
Due to increased volumes, the company targets 35% sales growth in 2024. Category-wise, fridges are expected to increase by 65%, and Air Conditioners and Deep Freezers by more than 100%. In volumetric terms, these three constitute 83% of the appliances division.
The threat from Chinese imports is low due to the high duties on CBU imports, which protect the local industry. Also, one of the major players in the market is facing financial hardships, so PAEL is regaining its volumetric share in the market.
PAEL’s strategic focus is maintaining margins rather than solely pursuing volume growth. This approach was demonstrated in 2023 when appliance division volumes decreased by 50% due to LC issues. Despite this, we increased prices by an average of 40%, reflecting our commitment to maintaining profitability.
Hence, gross margins improved to 29% in 2023 and stood at 27% in 1Q2024, compared to 20% in 2022.
In terms of volumes, the market size for fridges, Air Conditioners, Water Dispensers, Washing machines, and LEDs is 1.9 million, 1.2 million, 0.2 million, 1.9 million, and 0.9 million units, respectively. PAEL has a 20%, 8%, 33%, 4%, and 3% share in these products, respectively.
The market size for power products such as power transformers, distribution transformers, switch gears, and energy meters is 70, 50k, 3mn, and 3mn units per year, respectively. PAEL is a market leader, and this division has higher barriers to entry due to the main customer being government DISCOs
The company has improved its cash flow cycle and plans to be long-term debt-free in 36 months.
The localisation of raw materials for the company is 30-40% and varies in different products.
Due to deferred taxation, PAEL has an effective tax rate of around 50%, and this trend is expected to continue for the next two years.
Although the company has not incorporated a major policy rate decline in its business plans, a 100bps decrease would increase profit by Rs150mn.
Courtesy – Topline Research
