National Foods: devouring profitability

For National Foods, a renowned named in Pakistans food business, the first nine months of the current fiscal year appear to have borne well.
A remarkable increase in sales of 23 percent was observed in 3QFY11. The same tally for 9MFY11 stood at an equally impressive 24 percent, against the same period last year, most likely due to the passing on of rising costs to consumers. Rising inflation of non-perishable food items, which make up the product portfolio of National Foods, bear testimony to that (see graph).
At the same time, some categories enjoyed volumetric growth as well, Ketchup and Pickles, which witnessed double-digit volumetric growth in 1HFY11, were the most notable among these.
The surge in net sales was lead by local sales, which increased remarkably. However, growth in export sales was relatively muted, plausibly due to recessionary pressures in international markets.
Despite the healthy increase in turnover, the companys gross margins slipped year-on-year in both 3QFY11 and 9MFY11, most likely due to the inflationary impact of input costs.
High inflation is not a good indication for National Foods, since it dampens the purchasing power of consumers.
But operating efficiencies helped reverse the trend in operating margins, which depicted a rise in both 3QFY11 and 9MFY11. This was mainly because of the decline in distribution costs, which make up a significant proportion of the companys net sales.
Going forward, the companys efforts towards expanding the product portfolio are likely to help it perform well in the future. Rice was launched as a new category in the last fiscal year and efforts are rampant to increase National Foods presence in the powdered drink category, as evident from the extensive marketing for Fruitilty.
Overall, in achieving its Vision 2020 - to be a Rs50 billion, National Foods product diversification and ability to pass on costs to consumers will play a significant role.

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National Foods

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Rs (mn)             9MFY11      9MFY10         chg

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Net Sales            4,168       3,353         24%

Cost of sales        2,981       2,363         26%

Gross profit         1,187         991         20%

Gross margin           28%         30%         -4%

Distribution cost      694         705         -2%

Operating profit       352         178         98%

Operating margin        8%          5%         59%

PAT                    180          79        128%

Net margin              4%          2%         83%

EPS (Rs)              4.34        1.90

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Source: KSE notice