Engro Foods goes on its merry way

Coming in slightly below expectations, Engro Foods opens the year on a relatively subdued note as the top line manages to shed 0.4 percent, even as earnings climb a healthy 34 percent year-on-year.
The high base effect on account of the phenomenal closing quarter in CY12 on the whole casts a shadow on the firms performance during 1QCY13 as the figures are marred by the sequential drop in earnings, which have slid 33 percent quarter-on-quarter as a result of a seasonal shift in demand which historically peaks during the winter season and outs at the onset of summer.
During the quarter, the firms top line shed some 11 percent as volumetric sales of the firms top selling ambient and chilled dairy remained flat. Meanwhile the drawn out winters in a large part of Punjab meant that sales for the firms juices and ice cream- which begin to pick up by this time- were also slow to gain momentum at the close of April.
However margin accretion for the rapidly growing food manufacturing giant remains right on track as improved process efficiencies helped ease some pressure off during the quarter.
Additionally, during the period from January to April, the flush season in milk production drives down the cost of this essential raw material for local food manufacturers, which also helped translate into a 6.18 percentage point gain year-on-year in the firms gross margins for the aforementioned period.
However, higher costs incurred in lieu of selling expenses whittled away Rs 2.8 billion from the gross profits during the quarter. During the last three months, Engro foods has introduced a new ice cream variant "Thunda Meetha Paan" for which extensive advertisement campaigns were run. Additionally, the unveiling of the newly re-launched Olpers milk also soaked up revenue, driving up distribution expenses by 18 percent quarter-on-quarter.
Going forward, the firm is likely to see a hike in costs of input as the second quarter marks the beginning of the lean period for milk collection. However the recent hike on the prices of dairy products is going to largely balance out this effect. Moreover, with the onset of summers is likely to come a strengthening in demand for the firms chilled dairy and juices, which will set the company back on the arc to capture record profits in time for the half year close.

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Engro Foods Ltd

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Rs (mn)                           1QCY12      1QCY13         chg

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Sales                              9,666       9,623       -0.4%

Cost of sales                      7,410       6,782       -8.5%

Gross profit                       2,256       2,841       25.9%

Gross profit margin               23.34%      29.52%

Distribution and other

 selling expense                   1,070       1,356       26.7%

Administrative expenses              230         279       21.3%

Finance cost                         209         200       -4.3%

NPAT                                 486         653       34.4%

Earning per share (Rs)              0.65        0.85           -

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Source: KSE notice