But EFOODS seems to have a penchant for surprising investors and analysts alike and they’ve gone ahead and done it again. Reporting its third quarter results, which is way below analysts’ expectations Engro Foods reported a whopping 79 percent year-on-year decline in net profits.
A slowdown in the UHT milk market bore down on Engro during the quarter but an even bigger culprit seems to be the distribution difficulties plaguing the firm, leading to another decline of five percent in revenues, which slipped to Rs28 billion at the nine-month mark.
Industry watchers say that a rapid-–and some may say too rapid—expansion might be to blame for some of these inefficiencies in the firm’s supply chain. They believe that the distribution network had not been designed to effectively cater to the high-season demand. As a result the firm was unable to make use of the hike in demand during Ramzan, which fell in the third quarter.
Apart from low volumes, a significant deterioration in gross margins also led to this whittling. Increasing price competition from Nestle kept Engro’s prices largely in check and the inability to pass rising costs to consumers led to sharp decline in gross margins.
On the bright side, lower interest rates brought finance costs at the end of the nine-month mark down by 13 percent to Rs586 million, while a reduced effective tax rate lowered tax costs to Rs502 million from Rs814 million paid out.
This less than stellar performance—while in no way un-anticipated—comes at a time when the optimism associated with Pakistan’s FMCG sector in the last few years has been shaken up a bit. Consumer stocks—especially foodcentric—have fast become the darling of investors on the local bourses and analysts have been touting these as sure fire investment options. But, the recent slow performance by both Nestle and Engro Foods raises some red-flags about the sector’s future.
Talking on this subject, Farid Aliani from BMA Capital told BR Research while the near term outlook for the FMCG sector remained largely neutral—it was mismanagement that really burned a hole in Engro’s pocket.
Inefficient and rapid expansions have been a major talking point in the market in this regard. While the volumes for the firm’s ice-cream and juice segments have remained predominantly bleak during much of the year, the two saving graces for the firm have been Olper’s and Tarang. But their out performance was shadowed by failures in other segments.
Engro’s juice segment in particular is doing worse than ever and while Engro Corp’s President has officially denied the news, rumours are going around the market that the firm is planning to shut shop on the juice front and will be making an announcement soon.
Going forward, EFOODS is planning to test pasteurized milk in Karachi apart from the meat pilot project announced for Lahore—a project that has already been making waves in the market. The former includes targeting loose milk consumers by providing a door-to-door service for delivering pasteurized milk, while the Lahore meat project entails targeting the highest meat consumption market of Pakistan by providing cleaner abattoir services to the masses.