Despite operating in a booming consumer goods industry which is thriving on demand for packaged goods, "Packages Limited" looks increasingly fatigued. The packaging market leader declared net loss for the second successive quarter this year. The financial results for the nine months ended September 30, 2011, released yesterday, tell a story about the companys margins similar to that of recent years. The Companys gross sales are increased by Rs.17.87 billion in 9MCY11, owing to a 12 percent growth in local sales. However, the kicker is that export sales declined by nearly 82 percent, restricting the sales growth to just 6 percent. After deduction of taxes and duties, net sales grew by just over 4 percent during this period. Despite a lackluster top-line performance, the costs incurred in generating sales grew more than the net sales growth. According to Packages, the price-sensitive raw materials - including wood pulp, waste paper, packaging films, and chemicals - account for roughly 75 percent of its total buying budget. For every hundred rupees of revenue generated by Packages in 9MCY11, Rs.95.3 was expensed as cost of sales. The chronic non-availability of gas and resultant usage of high cost furnace oil also put significant pressure on the already frail margins. Resultantly, a considerable decline in the companys gross profits was witnessed during the period. Gross margins dropped to 4.68 percent in 9MCY11; a fall of 125 bps compared to the same period of last year. Operating expenditures inched higher also, on account of higher administrative expenditures during the period. The administrative expenses consumed 3.16 percent of revenues in 9MCY11, compared to 2.65 percent in 9MCY10. On the contrary, the distribution and marketing costs declined by 2.5 percent, thereby bringing this expenditure head down as a percentage of revenue to less than 3 percent. The companys other operating expenses declined by 21 percent over the period. However, the other operating income, which includes income from bank deposits, gains on foreign exchange as well as management and technical fees from related parties, increased by a whopping 60 percent during the period. The lowly growth in sales and the loosening grip over working capital and operating expenditures eventually led to an unimpressive overall operating performance in 9MCY11. Operating profits declined by 111 percent and the operating margin slipped by 126 bps down to negative 0.12 percent. To top all that, Packages spent over a billion rupees on finance costs in 9MCY11. This massive growth, whose origins are not known yet in the absence of detailed accounts, meant that Packages spent nearly 8 percent of net sales on financial charges in 9MCY11, higher than 6.26 percent spent during same period of last year. The investment income has always proven to be a breather for Packages. Under this head, the Company counts the investment income from related parties and the gains on sale of long-term and short-term investments. Adding to the ado, this head also declined during the period under review by over 18 percent. In the end, the sluggish sales growth, higher operating expenditures, lower investment income and higher financial charges led Packages to record a net loss of Rs.595 million in 9MCY11, compared to a net profit of Rs.123 million in 9MCY10. Net margins shed 484 bps over last years figure. Earnings per share also turned into red, nose-diving by roughly six times over same period last year. CY11 is turning out to be another tough year for Packages. To close the year on a profitable note, the operating margins would have to improve by a long shot in the final quarter - something improbable, but not impossible!
===================================================== Packages Limited ===================================================== Rs (mn) 9MCY11 9MCY10 chg ===================================================== Net Sales 14,944 14,344 4% Cost of sales 14,246 13,494 6% Gross profit 698 849 -18% Administrative expenses 472 380 24% Operating profit/(loss) (18) 163 -111% Finance costs 1,191 897 33% Investment income 729 891 -18% (Loss)/Profit after tax (595) 123 -584% EPS (Rs) (7.06) 1.46 =====================================================
Source: KSE notice
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