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PAEL- Analyst Briefing Takeaways, (AKD Off the Analyst's Desk Dec 08, 2023)

Pak Elektron (PAEL) conducted its corporate briefing session yesterday and the following are the key takeaways:

 

• LC restrictions imposed by the SBP remained a  problem and hampered the company’s ability to import raw material hence depicting a decline in volumetric sales in 2023. However, aggressive pricing compensated for this resulting in gross margins to elevate.
• However, the management believes that given the easing of import restrictions, sold volumes are bound to grow which will help result in increased gross margins (estimated to be 27% in CY24). In the appliances division, company lost 50% of their volumes due to Forex limitation but the company effectively passed on the rising costs to customers in the form of increased prices by 40% to recover gross margins in 2023.
• PAEL aims to maintain their market share in the appliances division.
• The expected EBITDA margin for CY24 is 16%.
• The company is making consistent efforts to reduce their total debt level and aim to make it down to PkR9.8bn by end CY24 when compared to PkR23.7bn in CY2022.
• With the retained profits, the company has been paying down their accumulated deb but with reduced debt levels, the company will then be in a position to pay out dividends.
• The company is also striving to reduce working capital across both divisions. The cash conversion cycle in power division is expected to improve by reducing credit and inventory days from 37 days to 24 days and 80 days to 53 days respectively. And in the appliances division, cash conversion cycle is anticipated to improve in line with efforts to reduce credit days from 126 days to 83 days and inventory from 128 days to 119 days.
• The expansions of distribution network under power division (as recommended by government to bring efficiency and consistency in the stream), is expected to elevate volumes by 5-7%YoY.
• Company holds a market share of 20%, 8%, and 4% in Refrigerator/Freezer, Air Conditioner and Washing Machine products, respectively. And the company enjoys being the market leader in Transformers segment with a market share of more than 90%.
• As part of the collaboration between Panasonic and PAEL to provide premium and locally fit products to the Pakistani market, the company is expecting to achieve their targets for the coming year which were previously hindered by LC restrictions and dollar shortage.
• With regards to the corporate restructuring of the company, the management is still looking for suitable investors to move forward with the demerger plan.
• For CY24, the power division is expected to actualize sales worth PkR35bn of which PKR14-16bn amount orders are already in hand. As part of their product portfolio, energy meters (power division) and air conditioners (appliances division) bear healthiest gross margins.
• 70% of the raw material is imported and over 30% is locally sourced. A major raw material is copper. Therefore, the exchange rate risk is prevalent which the company mitigates with higher pricing.
• Raw materials like CRC and Hot Dip Galvanized steel are mostly sourced from International Steels Limited (ISL) but if the company is unable to provide the required grade of steel then PAEL has to depend on imported material.
• As of now the company doesn't have any major capacity expansion plans for the power transformer segment.
• The company’s main export venues are Africa and Middle East (Botswana, Jordan, UAE). However, there is a possible export opportunity to the US given their levied tariffs against the Chinese products. PAEL’s product quality and pricing may give them the ability to tap in this market.