National Foods, the pioneers of packaged spices in Pakistan, has grown to become one of the biggest spices and additives makers in Pakistan. By committing to its principles of purity and quality, the Company has achieved many milestones and has now become a household name.
Starting as a small spice company more than four decades ago at a time when spices were sold loosely, the Company came up with the idea of branded, high-quality spices in attractive packaging. Soon the idea of packaged spices started to gain acceptance in the market and the Company began its journey to become a leading brand in the market. The Company then started diversifying its portfolio of products and came up with packaged salt, which proved to be a successful venture
The Company at present has a well-diversified product portfolio ranging from ketchup, jams, rice, desserts, drinks to recipe masala, Chinese, ready-to-eat items, etc, and now it has been manufacturing over 250 products under these categories; further these are being exported to more than 35 countries.
Pakistan, the sixth most populous country in the world with more than 60 percent of the population below the age of thirty, is a spices-loving country. Pakistani cuisine is generally considered spicier then other cuisines around the world, thus promising a bright future for National Foods as far as demographics are concerned.
Financial highlights
Despite devastating floods and high inflation, the Company is still able to achieve a top-line growth of around 23 percent in FY11 with the sales for FY11 standing at Rs 5.5 billion as compared to Rs 4.5 billion in FY10. The Company is able to achieve this extraordinary growth only due to excellent strategic planning, good promotion and marketing activities and a good product mix.
All the segments of the Company experienced good growth, but leading the growth are recipe masala, sauces and salt, with the latter witnessing a double-digit growth in the last fiscal year.
Profitability The increase in the cost of sales is attributable to a rise in packaging and raw materials' costs by roughly 25 percent that kept a constant pressure on the gross margins which fell from 30 percent in FY10 to 29 percent in FY11.
Even though gross margins fell, the operating margin stood at 8.8 percent as compared to 5.76 percent in FY10, largely because the distribution and administrative costs increased by only 0.7 percent. The main contributor is 18 percent decrease in advertising and sales' promotion costs and reallocation of a sizable portion of salaries and wages from distribution costs.
This slight increase in operating costs as compared to the increase in sales pushed up the profit after tax by a staggering 88 percent in FY11. This enormous increase in profitability is reflected in the ROE and ROA, which went up by a whopping 249 percent and 223 percent in FY11 as compared to FY10.
The nominal increase in operating expenses pushed up the operating leverage ratio from a negative 82 to a positive 386 due the relatively larger increase in sales compared to the paltry increase in operating expenses.
Short-term cash and debt management
The healthy operating cash flows in FY11 eased the pressure on the Company's working capital requirements; hence, the company was able to shield itself from short-term borrowing resulting in a decrease in current liabilities by 8 percent.
To meet the increased demand for its products, the Company had to increase its inventory, which was the biggest contributor to the increase in current assets. This is reflected by a big boost in the current ratio-22 percent-and a considerably small 5 percent increase in the quick ratio.
Efficiency
National Foods is able to increase the efficiency of collecting its receivables. The Company successfully implemented a tighter collection policy which enabled it to bring the number of days of receivables down to 18 days from about 21 days in FY10.
The downward trend that the inventory turnover has been following for over the past couple of years continued. The asset turnover increased slightly, despite a roughly 23 percent increase in sales in FY11 since the Company has to increase its stock in trade to cater to the surge in demand. This increase in assets curtailed the asset turnover ratio.
Long-term debt position and coverage position Long-term debt, that was 4 percent of the total capital in FY10 stood at nearly 9 percent in FY11, swelling mainly as the Company obtained mortgage-based loans against property and some fixed assets of their site factory. The capital generated would be used for further expansion programmes.
The increase in operating income enabled the company to pull up the interest coverage FY11 relative to FY10, but the Company has not yet reached the level it had in FY08.
Payout The overall profitability of the Company stood at Rs 230 million in FY11-a staggering 267 percent increase over the previous year. This translated into an EPS of Rs 5.56, while the dividend payout was 45 percent in FY11 as compared to 177 percent in FY10, since the company paid cash and a stock dividend last year. On the contrary, only a cash dividend of Rs 2.5 per share was given in FY10.
Outlook In the first quarter of FY12, the Company showed its resilience, when, despite floods, inflation and energy shortages the Company achieved sales of Rs 2 billion. Even though National Foods has a well-diversified portfolio of products, there is still a lot of room for further diversification.
The outlook for the food industry is bright, evident from the fact that in recent times we have seen numerous brands coming up with packaged milk, yoghurt, meat, ready-to-eat food, etc, to cater to the rising demand for high quality packaged food product.
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NATIONAL FOODS
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Key ratios unit FY11 FY10 FY09 FY08
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Gross Profit margin % 28.5 29.6 30.0 32.2
Operating Profit to Sales % 8.8 5.8 8.2 9.5
Return on Equity % 27.7 12.4 23.8 35.4
Return on Assets % 8.1 3.2 7.6 9.0
Current ratio times 1.2 1.0 1.1 1.1
Quick / Acid Test ratio times 0.2 0.2 0.3 0.3
Asset Turnover times 2.0 2.0 2.1 2.1
Invesntory Turnover times 2.4 2.7 3.3 3.4
Receivebles Turnover times 20.4 17.0 14.1 16.5
Earnings Per Share Rs 5.6 2.1 3.4 3.8
Price Earning Ratio times 13.5 21.0 17.4 12.8
Financial Leverage Ratio % 102.3 170.1 93.3 139.2
Debt to Equity Ratio % 18.4 3.0 11.3 24.5
Interest Coverage Ratio times 3.9 2.6 3.5 5.2
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Source: company reports
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