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Powerspeed reduced to mere merchants

The new year always brings a fresh spell of optimism.

Report by Victor Makanda

It is widely expected to be much better in every respect than the one before it. This year, however, it is likely to be a bumpy ride as the world’s woes are far from over, six years after the global financial crisis first broke out.

The US economy continues to be saddled by fiscal issues, mainly debt management, the Euro Zone crisis is still there whilst closer to home labour unrest and sluggish growth are likely to haunt South Africa.

In our own beloved country the economic train seems to be losing steam with lack of funding being one of the factors that has seen GDP growth slowing down to below the regional rate for Sub-Saharan Africa, which we have been outpacing for the past three years.

Under such a dreary scenario, business leaders for both listed and unlisted concerns ought to have medium-term survival strategies if they are to soldier on.

Powerspeed’s latest financial results show the certain level of pragmatism required in 2013.

Hyperinflation and the need for the multi currency system saw the Zimbabwean economy reduced to a retail economy, with more than 65% of the products sold locally being imported from South Africa from and as far away as Asia.

This simply means that Zimbabwe has become more of a market for other nations’ goods and services in terms ofboth capital and basic consumption goods.

Powerspeed Electrical Limited, which has been operating since the 1970’s predominantly as a manufacturer of electrical products, now stands out among the current retailers since the manufacturing sector has gone down the drain.

The interesting thing about Powerspeed is that it has managed to stay afloat in a sector where others have closed shop, Mutare Board & Paper and Hunyani Paper Mills being a few of those examples, whilst some are downsizing. Worse still, the Confederation of Zimbabwe Industries (CZI) in their 2012 manufacturing survey forecast a deepening of the sectors’ crises.

Powerspeed has nonetheless been profitable for the past three consecutive years to September 2012, with the major game changer being the recent gradual shift in their business model from manufacturing retailing.

Powerspeed’s turnaround is premised around the executive management having adopted a strategy to build their business on retailing rather than the traditional manufacturing. This was after it dawned on them that Zimbabwe’s costs structure is relatively high compared to that of our peers, especially in light of globalisation.

The high cost structure due to low capacity utilisation, which averaged 44% in 2012, and high utility costs meant high costs of production, hence higher prices making local products dearer relative to imports.

This realisation by Powerspeed in the past financial year saw costs related to manufacturing being cut and their resources channeled towards retailing coupled with rebranding of operations, branch relocation and new openings.

Such a reality check resulted in revenue growth outpacing overhead costs growth by 2 percentage points in their latest results whilst operating profit margins grew by 0,4% to 4,7% compared with the prior year. Such positive developments, despite being marginal, are better than the heat most manufacturing concerns are facing with their old business models.

The beauty about the new business strategy from Powerspeed is that their retailing model is moving towards a cash basis system and this, in an illiquid market, has gone a long way towards improving their working capital requirements.

In their latest results, besides generating positive cash flows from operations of US$64,989, compared with a negative US$429,510, their current ratio also improved to 1,5times from last year’s 1,4 times whilst their debtors dropped by 17% to US$2,65 million.

Positive cash flow generation coupled by improving debtors management in an economy where default rates are increasing bears testimony to significant efforts made by Powerspeed executives appropriate to the current environment.

The proactive approach by Powerspeed is also a realistic way of facilitating business operations, especially when local shareholders do not have new money to pump into their existing business or for retooling after the coming out from the lost decade.

Another company that has also partially adopted this shift from manufacturing is Art. This seems to be slowly putting them on a better footing especially in the Eversharp business where they recently entered into a joint venture with an Indian firm.

The deal will see Eversharp retailing pens and other products rather than producing locally.

The key risk for Powerspeed, however, is that the retail business is a low margin business that is facing stiff competition from as far as Asia and this may result in margins falling.

Moreso, the stock turnover ratio for Powerspeed, considering the hard-line goods it sells, might affect its revenue growth going forward as it is likely to be low compared to fast moving consumer goods retailers.

Overall, Powerspeed’s turnaround is a positive step in the right direction compared with other loss making manufacturing concerns that expect to produce positive results using the same old methods.

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