Finance cost trims Engro Foods profits

One of the biggest food groups of Pakistan, Engro Foods, has experienced excellent growth in sales during the outgoing quarter. The food-industry giant has experienced growth in all segments from juices and ice-cream to milk and tea whitener. Net sales experienced phenomenal growth of around 45.6 percent in the first 9 months of 2011 as compared to the same period in 2010. The net sales for the third quarter of 2011 stood at Rs.8,233 million as compared to Rs.5,490 million in the same period of last year. Even though in the third quarter of the calendar year, Engro Foods experienced a big jump in sales; revenue jumped by 49 percent, as compared to the third quarter of 2010, but net profit fell by Rs.24 million from Rs.215 million to Rs.191million over the same period. The increase in revenue was skimmed by increases in the cost of sales, distribution and marketing expenses as well as finance cost. The cost of sales jumped by 51 percent in line with the increase in sales, thus the ratio of cost of sales to net sales stayed at 0.77. Administrative expenses were 3.1 percent of sales in 3QCY10 but declined to 2.6 percent of sales in 3QCY11, still this improvement had a minimal effect on profitability given their minor contribution to total expenses. Other operating income fell by 56 percent in 3QCY11 as compared to 3QCY10. Sources reveal that this is due to a drop in valuation of cows. Cows are valued in dollars as per international accounting standards; the appreciation of the USD in 2010 inflated the value of cows, but this has not been the case this year. Another reason behind this drop was the change in the birth cycle of cows. It is anticipated that more calf births will take place in the last quarter of the year and this would make up for the low other operating income in 3QCY12. The operating profit for the 3QCY11 experienced a 34 percent increase compared to the same period of last year, but this increase in operating profit could not be carried down to the bottom line since the finance cost increased by 104 percent. The increase in finance cost was due to the companys policy of maintaining a fixed debt to equity ratio of 50-:50, hence in 2011 the increase in equity had to be balanced by debt. This balancing of debt and equity raised the finance cost whereas earnings per share in 3QCY11 fell to Rs.0.26; a decrease of Rs.0.14 in EPS compared to 3QCY10. Engro Foods has performed well this year, as its EPS in the first nine months of 2011 stood at Rs.0.56, showing a marked improvement of Rs.0.48 from the same period, a year earlier. So, even though the companys performance was somewhat muted in the outgoing quarter, it seems to be well positioned to do better in the next quarter.

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ENGRO FOODS
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(Rs mn)                               3QCY11       3QCY10            chg
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Net sales                             8,223        5,490             49%
Cost of sales                         6,376        4,224             51%
Gross profit                          1,847        1,265             46%
Gross margin                             22%          23%            -3%
Distribution & marketing expense        987          676             46%
Other income                             42           96            -56%
Finance cost                            368          180            104%
PAT                                     191          215             11%
EPS (Rs)                               0.26         0.40
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Source: KSE notice