Engro Foods shines, but for investors not enough

Most of the improvement in margins throughout the Company’s P&L is attributable to a whopping year-on-year increase in sales during 1HCY12. Both an increase in prices as well as in volumes of sales plausibly explains the uptick in revenues witnessed during the period. It appears that the second quarter had been a particularly great one for the Company so far this year, with revenues rising by about 5 percent quarter on quarter during 2QCY12 and gross margins improving by over 2 percentage points by the same comparison. This could majorly be attributed to the commencement of the summers in the country in the second quarter, during which ice cream sales are believed to have picked up. A 30 percent quarter-on-quarter increase in distribution and marketing expenses during 2QCY12 also reiterates this to an extent. The distribution and marketing expenses went up from 11 percent of sales in 1QCY12 to 14 percent in 2QCY12. While increased sales volumes, particularly for ice creams may account for this to some extent, greater marketing efforts by the Company seen recently, especially in light of some new product launches and marketing campaigns, also possibly explain this increase. Amongst new products and campaigns launched by the Company, ‘Omung Lassi’, and a new marketing campaign ‘Intekhab’ for Olpers milk have been the highlights for Engro Foods. The effects of the top line growth cascaded down into higher margins for the Company during 1HCY12 relative to the same period last year. Going forward, the Company will likely see a further improvement in revenues owing to the beginning of the month of Ramadan in the country, as well as greater sales of new products such as ‘Omung Lassi’. Ice cream sales are also expected to stay upbeat with the summer heat here to stay for another few months. Plans to invest Rs.8.7 billion in 2012 for the powdered milk business, capacity expansion and cold chain infrastructure development are also on the cards for Engro Foods. The results, however, were not up to the mark with most analysts’ expectations. Investors also responded negatively to the results, with the share price of the Company falling by more than 3 percent yesterday to Rs.67.7 per share. Either the positive aspects of the Company have largely been priced in by the market, or perhaps, investors are expecting something more from the emerging Company.

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Engro Foods
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(Rs mn)                    1HCY12   1HCY11    chg
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Net sales                  19,765   13,444    47%
Cost of sales              14,922   10,622    40%
Gross profit                4,843    2,822    72%
Gross margin                24.5%    21.0%    17%
Dist & marketing expenses   2,465    1,702    45%
Operating profit            1,977      822   140%
Operating margin            10.0%     6.1%    63%
Finance costs                 441      491   -10%
Profit after taxation       1,018      216   370%
Net margin                   5.1%     1.6%   220%
EPS (Rs)                     1.35     0.30
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Source: KSE notice