The plant was originally set up at Badami Bagh, Lahore spanning 34 acres, with the neighbouring area subsequently converted into the steel centre of Pakistan. Due to rapid addition of products, the land area became inadequate for further expansion and 247 acres land was acquired in 1960 at Kot Lakhpat industrial zone, Lahore for relocating factory premises in the future.
After being taken over by the government in 1972 under the nationalisation reforms, it was rechristened Pakistan Engineering Company (PECO). Subsequent to the takeover, the areas gaining particular focus included steelmaking with steel rolling mills to roll bigger size steel angles added in line with future trends. A modern laboratory for mechanical, chemicals and non-destructive testing was also set up including an ultrasonic flaw detector and magnetic particle separator.
For better precision, state of the art CNC machines for punching, marking and shearing of steel angles were also installed in the years 1983 and 2007. The company is qualified for manufacturing electricity transmission towers up to 500 KV. Currently, the annual assessed production capacity of steel structures on a single shift basis is 30,000 tons.
In 2002 the government decided to restructure the company with all machines, equipment, steel sheds moved from Badami Bagh to Kot Lakhpat. It was decided to close down unprofitable segments of the company including low technology products such as machine tools, power looms. The corporate structure of the company was altered with private shareholding increased to 67 percent and government shareholding reduced. This has encouraged more efficiency and effectiveness in the operational running of the company.
Historical financial and operational performance PECO has had a turbulent past with operational and financial performance, taking a hit in the past five years. The company witnessed consistently negative profitability margins and a declining sales revenue trend year-on-year. In FY14 the company generated sales of only Rs 220 million, which was 43% lower than last year's sales of Rs 386 million. PECO recorded a net loss of Rs 66.6 million for FY14 with negative gross and net profit margins. The EPS was also negative with loss per share of Rs 11.71.
The company attributed the abysmal performance in sales revenue and profitability to poor orders in hand, delay in award of one of the major projects, constraints in procurement of raw material and delay in renewal of credit facilities by NBP. There was also intense competition for 11 and 132 KV towers and load shedding of electricity and gas that plagued the operations of PECO. There was no notable demand of telecommunication towers during the year coupled with low demand of pumps and motors as well.
In FY15 PECO generated sales revenue of Rs 923 million which was 316% higher than FY14 sales revenue of Rs 222 million. The company also registered positive profitability margins for the first time in the last five years. The gross profit and net profit margins for FY15 were 15.37 and 4.90 percent, respectively. The improvement in earnings is mainly due to revenue growth, prudent management of raw material costs, and cost rationalization in operations and production efficiencies. The profit before tax during FY15 was Rs 63 million against previous year's loss of Rs 124 million. EPS of the company during FY15 was Rs 7.96, depicting an increase of Rs 19.67 per share over FY14.
PECO witnessed a golden year in FY16 with the company achieving the highest turnover in its history. Sales grew at a whopping 152 percent on a year on year basis while gross profit also increased by 233 percent. The company attributes its robust performance in the year due to uninterrupted supply of raw material and better financial management. It was also able to source orders at better margins, which helped the gross margin to increase to 20 percent from FY15's 15 percent. The company managed to increase its bottom-line by 386 percent year-on-year in FY16.
Snapshot 9MFY17 Unfortunately, sales revenue again took a hit for the period decreasing 34 percent on a year-on-year basis in the first nine months of FY17, whereas gross profit plunged by almost 51 percent. Even though the company managed to supply transmission line towers to major DISCOs such as IESCO, QESCO, LESCO along with the National Transmission and Despatch Company Limited (NTDCL), it continues to flag intense competition as a major threat going forward. The period also saw lower margins for new orders, while rising raw material prices shrunk margins even further.
Stock performance Even though PECO stock outperformed the KSE-100 index in FY16 the recent past has not been kind to the script on account of worsening fundamentals and increased competition that has been eroding margins for the company. PECO has been sliding steadily since the start of CY17 and has been underperforming the benchmark KSE100 index with a widening margin.
Outlook The company faces tough competition in its currently main product line, which is supply of transmission towers to DISCOs and NTDC. The cost of raw materials is going up impacting margins, whereas other light engineering products that PECO formerly had a strong presence in are not being manufactured with most divisions idle or shut down.
To remain competitive, the company is in the process of arranging joint ventures (JV) to bring about operational and financial synergies.
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Pakistan Engineering Company Limited
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FY10 FY11 FY12 FY13 FY14 FY15 FY16
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Net sales (Rsmn) (LHS) 1,677 712 523 386 222 923 2,329
COGS 1,371 680 593 465 280 781 1,857
Gross profit 306 32 -71 -79 -58 142 472
Admn, gen. & selling exp. 87 72 57 54 54 67 84
Net profit 115 -31 -100 -83 -67 45 220
Gross profit margin(%) (RHS) 18.3 4.5 -13.5 -20.5 -26.2 15.4 20.3
Net profit margin (%) (RHS) 6.8 -4.3 -19.1 -21.5 -30.0 4.9 9.5
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Source: Company accounts
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PECO Pattern of Shareholding Percentage
share held
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Directors, CEO & their spouse/minor children 0.15
Associated Companies, Undertaking and related Parties 24.88
Banks, DFI's, NBFIs, insurance/takaful firms, modarabas 8.75
& pension Funds
General public 30.21
Joint Stock Companies 10.56
Others 25.26
Total 100
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Source: Company accounts
Copyright Business Recorder, 2017