A baseline assumption: any refrigerator sold in Pakistan must come with its own jingle. Think Dawlence’s ‘Dawlance liya toh baat bani’, or Waves’ ‘Naam hi kaafi hai’. Pak Electron Limited, or PEL, is no different. In the last three years it launched some of the slickest TV commercials for fridges, TVs and deep freezers, even launching the hashtag #PELFridgeStories.
We at Profit also have a PEL fridge story to share: the company currently has the second largest market share of refrigerators, at 25% (Dawlance sneaks in at 27%). Not only are sales for fridges expected to jump, but so are the sales for ACs, and other appliances in general.
According to Sunny Kumar, research analyst at Topline Securities, in a note issued to clients on July 27, the company is helped by short term changes like pent up demand from Covid-19 and a decline in interest rates, but also long term changes like urbanisation and rising temperatures due to climate change.
PEL has two main segments: appliances, such as ACs and fridges, and power, which includes grid stations and energy meters. In 2015, power used to contribute around 40% to the company’s profitability; by 2019, this had fallen to 16%. Still, the breakdown does not matter for PEL, because sales in both segments are expected to pick up, leading Kumar to expect earnings of Rs2.4 per share in 2020, and Rs4.7 in 2021.
First, let us look at appliances. Overall, this segment has done very well: between 2015 and 2018, the division recorded an annual growth of 18%. However, in the last one year, appliance sales were somewhat subdued. The imposition of an CNIC condition on business to business transactions impacted the market, and the Covid-19 related lockdown for between March and May in 2020 did not help (who will buy a new deep freezer in the middle of a pandemic?).
However, during the same period, the interest rate was cut by 625 basis points, from 13.25% to 7%. According to historical data, consumer financing for appliances picks up around six months after a policy rate cut, which bodes well for PEL. It is also good news for the company’s financials, since the company has a debt-to-equity ratio of 57%. The fall in interest rates should translate to savings of Rs600 million in interest costs.
In addition, farmers have more liquidy these days, thanks to a spate of helpful government measures: a cut in the Gas Infrastructure Development Cess (GIDC) on urea bags, a subsidy for fertilizers, a rise in the wheat support price, and distribution of funds under the Ehsaas program. All of this means more cahs flows for farmers on a whole, and more money to spend on nice appliances.
This pent up demand is why Kumar expects sales of appliances to grow by 20% year-on-year to 414,999 units in 2021, compared to 345,832 units in 2020.
And exactly which two appliances are growing? Well, refrigerator sales of the company have grown at an annual rate of 12% over the last three years. That being said the Covid-19 lockdown and higher interest rates caused refrigerator sales to decline 19% year-on-year in the first quarter of 2020, and is expected to decline by 25% year-on-year in the second quarter. And yet, since the lockdown has been lifted, Kumar expected sales to pick up and for the remaining two quarters to show 15% year-on-year growth.
In ACs, the company holds only a 10% market share – but AC sales have shown a five-year compound annualised growth rate (CAGR) of 64%. Kumar expects 15% year-on-year growth during the second half of 2020, after a subdued first half (again, because of Covid-19 lockdowns).
“During 2021, we estimate ACs sales to grow by 20% YoY to 90,997 units compared to 75,831 units in 2020,” notes Kumar.
PEL is also benefiting from slew of factors outside of its control. Pakistan is becoming more urbanized (at 43% in 2019, compared to just 33% in the year 2000. Between 2012 and 2020, per capita income and remittances have grown at CAGRs of 7% and 6% respectively. The central bank has made it mandatory for banks to allocate 5% of their private sector advances for the construction sector. And finally, Pakistan has grown warmer, experiencing a 0.6 degree Celsisu jump in the last century.
So: a more urban population, moving into brand new homes, with money in their pockets and finding that their fans just will not cut it in this heat: this means a greater demand for electrical goods in the future.
It is not just PEL that has picked up on this trend: Panasonic Marketing Middle East & Africa has partnered with PEL on high-end goods. So far, high-end ACs have been introduced. But growing incomes, and rising urbanization, means that Panasonic thinks that there will be more ‘high end’ customers to cater to in the future.
Now, to the second segment: power supplies. PEL dominates in the power transformer sector, holding an 81% share in the market after Siemens exited. Similarly, it holds the highest share in the distribution transformers market, at 31%.
The last year was not too great: in 2019, the power division contributed 26% in gross revenues, compared to 30% in 2018. This decline was mostly due to a decrease in sales of distribution transformers.
But come the first quarter of 2020, and the power division tells a whole different story. The company recorded year-on-year growths of 88% in distribution transformers, 500% in power transformers and 54% in energy meters.
What happened? The government is trying to improve the transmission and distribution infrastructure in order to increase energy generation requirements. Based on NEPRA forecasts, the supply capacity is expected to increase from 34,157MW in fiscal year 2020 to 49,009MW by fiscal year 2025. The newly announced construction package is also expected to boost sales for power division products.