Packages: Slowing down

Packages Limited hasn had much of a promising year thus far. The packaging giants operating performance is debilitated by top line decline and cost pressures, as the financial results for three months ended March 31, 2012, show. If it wasn for the windfall investment income, the Company would have declared significant amount of net loss. The majority of the Companys customers on the packaging side are in the FMCG business, predominantly the multinationals. Packages CEO, in a recent interview with BR Research, revealed that roughly 70 percent of the Companys revenues originate through sales of packages while the remaining generate from paper products. While the top lines of consumer goods companies (mainly the MNCs) are growing in double digits; the net sales of Packages-their major supplier-declined by nearly 5 percent in 1QCY12. Apart from the seasonal demand factor, the capacity of the firm is also stunted due to a fire incident at the Companys Lahore plant in November last year. The fire had damaged stocks, tissue conversion equipment, stores and associated buildings, and Packages had to outsource its conversion operations to third party converters. The management expects to resume commercial production of its consumer products during 2QCY12. The increases in energy costs and the prices of local and imported raw materials have been narrowing the Companys margins, and this quarter was not different. The decrease in cost of sales was less than proportionate to the decline in top line at 1.58 percent. Consequently, for every 100 rupee of net sales in 1QCY12, Packages incurred a cost of Rs.95.11, higher than Rs.91.86 spent during the same period of last year. Therefore, the gross profits dipped sharply to Rs.241.4 million, and the gross margins lost 325bps over same quarter last year to settle at 4.89 percent. After accounting for the distribution and administrative expenses, Packages incurred an operating loss of Rs.22.15 million during the quarter, letting the operating margin slide to negative 45bps. As usual, the investment income-the dividend income Packages receives from related parties and the gains it makes on the sale of long-term and short-term investments-was the savior. Nearly Rs.588 million under this income head kept the Company from plunging into loss, and, in effect, helped it close the first quarter with a solid net profit of Rs.197.8 million, despite an unimpressive operating performance. There are a number of measures which, if implemented, can turn around the abysmal operating performance and improve the profit margins. The CEO had also mentioned setting up the Companys own waste paper collection operations, and moving within two years to agri-based fuels such as straw and corn stocks to reduce reliance on furnace oil, diesel and natural gas. The Packages is also looking to capture the market of imported high-quality paper products and the new paperboard plant at Kasur can be instrumental in that. Also under consideration is establishing manufacturing facilities in African countries like Kenya, Ethiopia and Tanzania which are all net importers of paper and paperboard products. These measures may help diversify the revenue streams and curb cost spikes, thereby increasing shareholders value.