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Electronic Industry in Pakistan

The Pakistani consumer electronics market had total revenues of $10.0bn in 2017, representing
a compound annual growth rate (CAGR) of 15.4% between 2013 and 2017. The
communications equipment segment was the market's most lucrative in 2017, with total
revenues of $7.7bn, equivalent to 77.2% of the market's overall value. Recovering agricultural
prices and stronger prospects for manufacturing helped to buoy Pakistan’s economy in late
2017, boosting market performance.
[ CITATION Con \l 1033 ]

 Continuing on its strong growth trajectory, the electronics industry posted a growth of 7.8pc
during the first quarter of the fiscal year 2018-19, the State Bank of Pakistan (SBP) reported.
The uptick was driven primarily by an increase in the production of electric motors and various
cooling equipment, according to SBP’s first quarterly report on the State of Pakistan’s Economy
for FY19. “Improvement in electricity supplies alongside an extended summer season drove the
demand for the electronic goods,” the report stated, adding that the consistent growth of the
segment has attracted the attention of the foreign investors as well. The country’s large-scale
manufacturing (LSM) witnessed a broad-based contraction of 1.7 percent, according to the
report. The overall macroeconomic environment, the report continued, remained challenging
during the first quarter of FY19. “The primary concern was the steep rise in global crude prices,
which not only reinforced the already strong underlying inflationary pressures in the
economy but also eclipsed emerging improvements in the external sector,” it stated.

[ CITATION Ele19 \l 1033 ]

About Waves Singer

Singer has been around in the subcontinent for over a century. It was in 1877 when the first
Singer sewing machine was put up for sale at a Singer store. Over the years, it has diversified its
portfolio to encompass several brands across a range of household and industrial categories.
With over 750 stores, Singer Pakistan has the largest retail network in South Asia and 140 shops
in Pakistan alone. Waves story is a lot more recent. It traces its history back to 1970 when a
local home appliance engineer invented the first deep freezer of Pakistan manually at home.
This freezer was gifted to United Bakery in Lahore for testing purposes. In 1975, it started
commercial production of deep freezers with the first office of Cool Industries being set up in
1983. Over the years, Cool Industries has introduced refrigerators, washing machines and other
home appliances. In 2015, the tough competitive landscape and succession issues within the
sponsor family created many bottlenecks and hurdles in the company's operations.

As a result, Waves Singer Pakistan Limited (PSX: WAVES) came into existence after the merger
between Cool Industries (Pvt.) Limited (CIPL) and Singer Pakistan. The combined entity also
owns subsidiary Electronics Marketing Company Pvt Limited which deals in buying and selling
products of renowned brands to generate retailer margins. These products include a diverse
range such as TVs, generators, and motor bikes. Together, their network of warehouses, service
centers, dealers, and workshops consist of nearly 2,000 outlets in the country.

Financial history

Since Singer was a listed company, and Cool Industries was a private limited company, the
financials available prior to the merger are of Singer. Singer's performance was strong from
2010 to 2013, despite massive damages to its retail stores during 2010's floods. In 2014,
however the company reported losses for the first time in recent history with 25 percent YoY
decline. The main reason was a policy decision to reduce credit sales to improve cash flows.
This strengthened Singer's collections and improved its cash sales by 19 percent but was
unpopular among customers, putting significant pressure on the top-line.

Given the competitive environment Singer is operating in, along with competition from Chinese
imports, Singer was forced to increase its marketing, selling and distribution budget which
further decreased the bottom-line. These challenges continued on in 2015 but losses
diminished somewhat.

In 2016, the company pulled itself out of losses by changes in strategies such as cost savings,
efficient material planning, effective resource utilization, planned logistic activities, reduction in
administrative expenses, and revaluation of investment assets. As a result its gross and net
profit margins rose.

2017 was a happening year for the company. Singer merged with Waves in 2017 and also
successfully launched glass door refrigerator models and inverter air conditioners under the
Waves banner. Marketing investments were made in promoting the refrigerators by using
Fahad Mustafa and TVCs. CY17 also saw the Electronic Marketing Company begin commercial
operations. Another important milestone for the company was the merger with Linkwel Pvt
Limited (LWL), a marketing company.

1QFY18

Following the merger, the company's top-line and bottom-line jumped several times as sales of
both companies combined. Gross profit margin and net profit margins have declined however.
Growth in sales volume of refrigerators through dealer's network did not achieve levels that the
company expected despite additional discounts and credit. Intense competition and teething
problems in setting up sales team network may have resulted in lower margins. It is pertinent to
note that WAVES EPS has increased from 1.01 to 1.1 YoY. This reflects an improvement in profit
after tax despite the large increase in share capital base due to merger with CIPL and LWL.

More recently, a fire broke out earlier this year at the production facility of Cool Industries and
extensively damaged the factory. The fire started at the dispatch area causing damage to
finished goods under dispatch as well as some in the production facility, related building area
and work-in-progress pieces.

However, the company issued a statement that production will resume in a few weeks. It is
likely that this event will impact this year's financials but since it has managed to overcome the
more significant losses caused by 2010's floods, the fire's impact should not be material.

Future outlook

The thought behind the merger of the two entities is to take two smaller companies with
similar business lines and turn it into one big company with economies of scale. Both Waves
and Singer have established brand reputation and have been household names for decades.
Waves slogan of "Naam hi kafi hai" is expected to increase the company's intangible asset base
and give better marketing and advertising opportunities.

A number of factors are expected to expand WAVES market, such as better energy supply, GDP
growth which leads to a rise in per capita income, and thus increase in purchase of consumer
durables. Increase in urbanization and growth in middle-class families is also expected to drive
growth. Factors such as high cost of electricity increases demand for energy-efficient air
conditioners and hence the recent invertors line by WAVES. As per Euromonitor, Pakistan has
amongst the lower household penetration rate of consumer durables in the region. This offers
opportunity for future growth.

Another point in WAVES favour is the recent devaluation of the currency. Since the company
faces strong competition from cheap Chinese imports, the slide of the rupee will enable it to
grow its market share. [ CITATION Bus18 \l 1033 ]

FINANCIAL ANALYSIS
Trend analysis technique has been used in this study to compare the performance of company
over a period of 5 years with the base year i.e. 2014. There are 5 different categories of ratios
including profitability, liquidity, solvency, activity and valuation ratios. All of these have been
calculated and analyzed to make conclusions about the company’s performance.

Profitability Ratios

Profitability Ratios
40.00%

30.00%

20.00%

10.00%

0.00%
14
A
1 5A 1 6A 1 7A 1 8A - Q1 - Q2 - Q3 - Q1 - Q2 - Q3
-10.00%
2 0 20 20 20 20 18 18 18 19 19 19
20 20 20 20 20 20
-20.00%

-30.00%

Gross Profit Ratio Net Profit Margin Operating Profit Ratio

As compared to the base year, the gross profit margin kept fluctuating over the 5 years till 2018.
In 2014, however the company reported losses for the first time in recent history with 25
percent YoY decline. The main reason was a policy decision to reduce credit sales to improve
cash flows. This strengthened Singer's collections and improved its cash sales by 19 percent but
was unpopular among customers, putting significant pressure on the top-line.
and 2015, the gross profit margin declined due to decreased sales and increased cost of
production. Moving forwards, in 2016, the margin increased suddenly due to greater number of
operational days. Year 2017 was not a great year in terms of gross profits a possible reason might
be the transition Dinger was going through while becoming a Waves Singer coalition and had
slowed down sales giving a dip of 12.82% gross profit margin. 2018 was the worst year in terms
of gross profit margins due to decreased sales. In the quarters of 2018, the margins had an
increasing and then declining trend from quarter 1 to quarter 3 . However thr gross profit seemed
to recover in all the quarters of 2019. Given the competitive environment Singer is operating in,
along with competition from Chinese imports, Singer was forced to increase its marketing,
selling and distribution budget which further decreased the bottom-line. These challenges
continued on in 2015 but losses diminished somewhat. [ CITATION Bus18 \l 1033 ]
Net Profit Margin

went through the worst crisis ever in 2015 and incurred huge losses. In 2016, the company
pulled itself out of losses by changes in strategies such as cost savings, efficient material
planning, effective resource utilization, planned logistic activities, reduction in administrative
expenses, and revaluation of investment assets. As a result its gross and net profit margins rose.
Furthermore, the company’s increased sales led to an increase in net profit margin in 2017
followed by a slight rise in net profits mainly due to high sales price and lower finance cost in
2018. The net profit margin was at its worst in 2nd quarter of 2018 but showed slight increase
through the quarters of 2019.

Operating Profit Margin:

Operating profit margins had the opposite trends as gross profit margins from 2014 to 2018.
These margins were low due to low gross profit margins, due to lower sales and increase in
operating expenses uptill the middle of 2017 and 2018 when the trend got better. The quarters
showeds similar pattern as to that of gross profit margin

Return on Equity and Return on Assets:

10.00%

5.00%

0.00%
A A A A A 1 2 3 1 2 3
-5.00% 1 4 1 5 1 6 1 7 1 8 -Q -Q -Q -Q -Q -Q
2 0 2 0 20 20 20 0 1 8 0 1 8 0 1 8 0 1 9 0 1 9 0 1 9
2 2 2 2 2 2
-10.00% Return on Equity
-15.00% Return on Assets

-20.00%

-25.00%

-30.00%

-35.00%
The return on equity was negative from 2014 to 2015 due to occurrence of huge net loss in the

year. The ROE improved in the following two years due high sales leading to considerable net

profits. Improved asset turnover ratio in 2016 and 2018 was another reason for an improved

ROE. However, the ROE did not show a considerably positive return again due to heavy losses

incurred during the year on account of increased reliance on debt financing and decreased sales.

Such low returns on equity indicate poor profitability position of the company. Also, it depicts

that company was unable to use its investments effectively to generate growth.

Return on assets had a similar trend to that of ROE throughout the years but with lower values.

This was again due to very low net income of the company as compared to the assets. Net losses

in years 2014 and 2015 resulted in negative ROA indicating how unprofitable the company’s

assets were in generating revenue. Such low ROAs also indicate that the amount of assets was

not sufficient enough to generate income for the company.

REMINDER: ANSWER THE QUESTION


Liquidity ratios
1.40

1.20

1.00

0.80

0.60 Current Ratio


Acid Test Ratio
0.40 Cash ratio

0.20

0.00

1 4A 1 5A 1 6A 1 7A 1 8A - Q1 - Q2 - Q3 - Q1 - Q2 - Q3
20 20 20 20 20 18 18 18 19 19 19
20 20 20 20 20 20

Current Ratio:

Company’s current ratio has an unstable trend over the 5 years as compared to the base year. The
ratio decreased in 2015 mainly because the current liabilities exceeded the current assets. There
was a reduction in company’s current assets specifically in stock in trade and trade debts. The
company must have reduced credit sales, moreover, the company’s trade and other payables
increased substantially in 2015 (due to late payments to farmers) leading to a current ratio less
than 1. However, the current ratio increased after 2015 with values above 1, indicating
company’s enough capability to pay back its short term obligations. During the quarters of 2018
and 2019, the current ratio faced only slight dips while still staying above 1. This is because the
company’s stock in trade increased considerably in the quarters along with a reduction in short
term borrowings.

Acid Test ratio

The company’s ability to pay back its short term liabilities using liquid assets was lesser due to
the ratios being less than 1 but even lesser than current ratios. Current liabilities greater than
current assets caused the ratios to decrease. This indicates that the company relies more on
inventory or other less liquid assets to pay its short term liabilities. The quick ratios of quarters
were also less than 1 which means the company had limited ability to pay off its short term
liabilities even during quarters.

Cash Ratio:
The company’s cash ratio was almost zero in the base year and remained constant throughout
the next 4 years. Such a negligible cash ratio indicates that the company is totally unable to pay
off its short term debts using the most liquid assets i.e. cash and marketable securities. Similar
trend was observed during quarters i.e. cash ratio remained almost zero throughout. This was
because the company’s cash balance was very low during all these years.

REMINDER: ANSWER THE QUESTION


Solvency Ratios

Capital ratios
3.00

2.50

2.00

1.50
Debt to Equity Ratio
1.00 Debt to Capital
Debt to Total Assets
0.50

0.00
A A A A A 1 2 3 1 2 3
14 15 16 17 18 8 -Q 8 -Q 8 -Q 9 -Q 9 -Q 9 -Q
20 20 20 20 20 01 01 01 01 01 01
2 2 2 2 2 2

Activity ratios

Asset turnover ratio


0.60

0.50

0.40

0.30 Asset turnover ratio


0.20

0.10

0.00
A A A A A 1 2 3 1 2 3
0 1 4 0 1 5 0 1 6 0 1 7 0 1 8 8 -Q 8 -Q 8 -Q 9 -Q 9 -Q 9 -Q
2 2 2 2 2 0 1 01 0 1 0 1 01 0 1
2 2 2 2 2 2
Cash cycle

Cash Cycle
1600.00
1400.00
1200.00
1000.00
800.00 Cash Cycle
600.00
400.00
200.00
0.00

1 4A 1 5A 1 6A 1 7A 1 8A - Q1 - Q2 - Q3 - Q1 - Q2 - Q3
20 20 20 20 20 18 18 18 19 19 19
20 20 20 20 20 20

Investors

P/E Ratio
4000.00
3500.00
3000.00
2500.00
2000.00 P/E Ratio
1500.00
1000.00
500.00
0.00
-500.00 4A 5A A A A 1 2 3 1 2 3
0 1 0 1 0 1 6 0 1 7 0 1 8 8 -Q 8 -Q 8 -Q 9 -Q 9 -Q 9 -Q
2 2 2 2 2 1 1 1 1 1 1
20 20 20 20 20 20
EPS Basic
4.00

2.00

-
EPS Basic
A A A A A 1 2 3 1 2 3
0 1 4 0 1 5 0 1 6 0 1 7 0 1 8 8 -Q 8 -Q 8 -Q 9 -Q 9 -Q 9 -Q
(2.00)
2 2 2 2 2 1 1 1 1 1 1
20 20 20 20 20 20
(4.00)

(6.00)

(8.00)

Activity

How well the company is utlising its assets. Also depicts the performance of he company

Activity Ratios

Asset Turnover Ratio:


Asset turnover ratio
0.30
0.25
0.20
0.15
0.10
0.05
0.00
2014A 2015A 2016A 2017A 2018A 2018-Q1 2018-Q2 2018-Q3 2019-Q1 2019-Q2 2019-Q3

Asset turnover ratio

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