Consumer Products:-UNILEVER PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2003 - Q 2003 2007
Unilever Pakistan Limited (UPL), formerly known as Lever Brothers Pakistan Limited (LBPL) is a wholly-owned subsidiary of Unilever Overseas Holdings Limited, UK, whereas its ultimate parent company is the consumer products giant, Unilever PLC, UK.
Following a series of high-profile acquisitions, including US-based Bestfoods, Unilever's foods business is the world's third largest after Nestle and Kraft. It is a global leader in culinary foods, ice cream, margarine and tea-based beverages. Major brands include Knorr, Lipton and Magnum.
UPL was incorporated in Pakistan in 1948 as Lever Brothers Pakistan Limited and merged with Lipton in 1989 and Brooke Bond in 1997. It became the largest ice-cream manufacturers in Pakistan through amalgamation with Polka in May 1999. These acquisitions have further strengthened the distribution network of UPL. It is listed on all the three stock exchanges of Pakistan.
Currently, UPL is the largest fast moving consumer products (FMCG) company in Pakistan. It is engaged in manufacture and marketing of home and personal care products, beverages, ice cream and spreads.
UPL has adapted Unilever global brands such as Lifebuoy, Lux, Surf and Walls to local consumer needs at affordable prices. It has increased its leading market position over the years, in most of its core home and personal care and foods categories, eg personal wash, personal care, laundry, beverages (tea) and ice cream.
Unilever Pakistan is being exported a range of products catering to the "external constituency", for the last forty years. Since 1998, the company entrusted with the responsibility of developing the Afghanistan business through a dedicated sales and distribution network. A wide range of home care, personal care, foods, ice cream and beverage brands are offered for export.
In June 2007, Unilever Overseas Holding Limited, a wholly-owned subsidiary of Unilever PLC, UK, the ultimate parent company, purchased all the shares held by the Punjab government. This has increased its shareholding in the company from 67.04% to 70.4%.
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Company Name Unilever Pakistan Limited
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Market Capitalization (26.03.08) 10,972.84 million
Closing Price(26.03.08) Rs 1782
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Recent results (Q3 FY'07)
After tax profit for the third quarter increased by 20% due to strong volume increases in home and personal care and lower tealeaf costs. Sales increased 7%. The sales mix improved with robust growth in home and personal care. Beverages sales declined due to lower market selling prices and lower volumes. Ice Cream performance was flat due to an unfavourable business environment.
Year-to-date sales are up 10% and after tax profit up by 5%. The market environment remains very competitive and we continue to invest heavily behind our growing brands. UPL is concerned about the increasing volume of smuggled teas, rapidly rising input costs driven by high international oil costs and the impact on profit from the recently imposed tax on turnover.
HOME AND PERSONAL CARE:
sales for the quarter increased 26%. The star performers were Surf detergent powder, Sunsilk shampoo & Lux beauty soap. Volume growth and improved sales mix increased sector profit by 28%.
Beverages
Sales for the quarter were down 16% due to lower selling prices and volume loss to small local brands in the Punjab, however lower tea leaf costs resulted in profit for the quarter compared to a loss in 2006. Normal gross margins have been restored.
ICE CREAM AND SPREADS: Sales for the quarter increased 3%, well below expectations. In FY07, the monsoon was earlier and more severe, there were acute power shortages in the south and there were delays in completing the factory expansion project. Lower sales volumes and higher factory commissioning costs resulted in lower sector profits.
RESULT FOR 3Q'07: The sales for the 3 quarters ending September 30 2007 showed an increase in sales by 10% to Rs 17.544 billion. The maximum contribution in terms of sales and profits has come from home and personal care segment followed by beverages and then ice cream.
Profit before tax has increased by 4.7% to Rs 1.34 billion, while the EPS for the period under consideration has been Rs 101.54. Administrative and other expenses have increased marginally barring a significant increase in the distribution expense. The expenses are expected to be higher for FY08 due to increasing local fuel prices and increasing food inflation.
FINANCIAL PERFORMANCE (DEC'03-DEC '06): In FY06, home and personal care along with ice cream delivered significant profit increases. Beverage profitability was severely impacted by the cost of tealeaf arising from the drought in Kenya and UPL was unable to pass the full impact on to the consumer. This restricted the company's profit growth to 2.6%.
Overall, the company sales grew an impressive 18.8% (2005: 11%) as it built on the growth momentum started in 2005. Sharper focus and increased resource allocation in marketing and customer management were the prime drivers.
However this sales growth did not trickle down as it was mitigated by high COGS thereby lowering the gross and net profits and ultimately the gross and profit margins respectively.
ROA showed a decline to due a higher increase in assets base than in the profit after tax. However, ROE showed a positive trend on the account of declining equity base coupled with increasing profit after tax. All the profitability ratios of UPL are above the industry average.
All the liquidity ratios of UPL are above industry except in 2006. The current ratio has decreased from 1.04 in 2003 to 0.87 in 2006. This shows that company's current liabilities are rising far more than its current assets, reflecting a decline in Company's ability to pay off its short-term obligations.
Quick ratio, a better measure of liquidity followed a trend similar to current ratios, first increasing slightly in '04 and then declining then onwards. In the FY '06, the drop can be attributed to the 18.52% increase in current liabilities compounded by a 12.14% decrease in quick assets in that year.
Inventory Turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO for UPL, though has declined during 2004, but has been on a slight rise (increasing by approx. 1 day) then onwards. The slight increase is to be explained by the proportionate change (increase in 2006 by 195) in net sales being lower than the change (increase in 2006 by 22%) in inventory kept by the company. Reasonable ITO shows that UPL is able to efficiently turn its inventory into sales.
Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. The trend line indicates a sharp decline in this ratio in 2004 after which its been on a constant rise (slightly) due to the proportionate increase in net sales (19% in FY '06) being lower than that in trade debts (67% in FY06) indicating that perhaps the company is deliberately pursuing easy credit policy to attract large no. of creditors. However, its DSO is still very efficient as compared to the industry.
The operating cycle of UPL hence followed the same trend as that of DSO and ITO in the respective years. Initially it was much higher than the industry average but later it started declining to converge with the industry trend.
TATO of UPL has remained stable over the period under review, reflecting that the company is anticipating any increase in its sales and responding to it in a timely fashion by enhancing its assets base accordingly.
The Sales/Equity, on the other shows a rising trend after 2004 on the account of declining equity base (mainly due to decline in reserves) in the subsequent years. Also sales in FY06 have registered a positive growth unlike the previous years. Still both TATO and sales/equity ratios of UPL are well above the industry's ratio.
As far as debt management is concerned, both D/A and D/E ratios after 2004 (the decline in 2004 is because the UPL retired significant amounts of debt in that year) show UPL's increased reliance on debt financing rather than equity financing.
The trend lines in particular show that D/A (0.63 to 0.71) ratio has remained almost stable over the years where as D/E ratio has increased significantly (1.8 to 2.5) owing to increasing long term debts (as further evident by the long term debt to equity ratio) coupled with the declining equity base in the subsequent years. All these ratios of UPL are below the industry's ratios after 2003.
The TIE ratio for UPL has increased in 2004 but again nose-dived in 2005 due to the high interest rates offsetting the increase in EBIT, thus having an adverse impact on UPL's interest covering ability. However this ability increased in 2006 owing to comparatively lower finance costs. Looking at this, we can infer that UPL has responded to the adverse interest rate impact in a timely manner and its interest covering ability is better than the industry average.
The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its the earnings per share (EPS). UPL's EPS has been erratic (fluctuating between 120 and 130) driven mainly by any changes in company's profit after tax (as its number of shares have been constant so far in last 4 years).
The year-end market prices of UPL have been increasing over the 4-year period. Consequently, the P/E ratio also followed a rising trend driven by the increases in market price of shares, reflecting the investor's confident in UPL. As evident from the price chart, UPL has outperformed the 100 index in all years under consideration. Both the EPS and the market prices of UPL are way ahead but the P/E is lower than average industry. Initially UPL's book value per share was very high however 2004 onwards, the company's Book Value per share plummeted on the account of declining equity base (due to decline in reserves) compared to no change in the number of shares.
Also company's DPS followed the same trend as that of Book value per share till 2005. However, unlike book value per share, it showed a slight increase in the FY06. Overall both DPS and BPS of UPL are greater than the average industry showing that the good return to shareholders is the primary objective of UPL.
FUTURE OUTLOOK: The Pakistan market has become very lucrative for fast moving consumer goods (FMCGs) businesses and to new entrants, both local and international players, in the wholesale and retail industry due to sustained economic growth, rising disposable incomes and supportive Government policies in the rationalisation of taxes and market place liberalisation.
UPL capitalizes on this change by providing access to world class resources, research and development delivering a constant stream of innovation and consumer-relevant improvements to its products. UPL has a strong regional network leveraging scale for sourcing raw materials and finished products.
However, inflation and social disruptions arising from political uncertainty are a concern for UPL in FY 2007. Rising domestic inflation will put an upward pressure on the consumer prices. It is important that UPL maintains product affordability for its consumers. Currently both the crude oil prices and raw materials for soap are on the increase. Social disruptions make markets nervous, disrupt the Trade and shakes local consumer and international confidence.
Restoring beverage margins and returning Brooke Bond Supreme to growth is of key importance in FY07. Kenyan tealeaf prices are declining which should give room for greater market investment and margin improvement. It is hoped that the consumers will appreciate the improvements made to the Supreme blend and with a powerful marketing plan in place growth should be restored to the brand.
UPL has a strong competitive edge of continuous innovation, global and local scale delivering cost advantages, deep local roots. Hence one can foresee an overall positive outlook for the company.
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Unilever Pakistan Limited (UPL) - Financials
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Balance Sheet 2003 2004 2005 2006
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Property, plant and equipment 1,445 1,524 1,761 2,137
Other non-current assets 573 615 609 607
Inventories 2763 1930 1930 2362
Trade debts 470 84 105 175
Cash and cash equivalents 1,160 759 365 586
Current assets 4,803 3,753 3,437 3,686
Total assets 6,821 5,892 5,807 6,430
Ordinary share capital 664 664 664 664
Preference share capital 5 5 5 5
Reserves 1,345 1,437 1,178 1,161
Total equity 2,014 2,106 1,847 1,830
Surplus on revaluation of fixed asset 19 16 16 15
Non-current liabilities 153 90 369 348
Current liabilities 4,635 3,680 3,575 4,237
Total liabilities 4,788 3,770 3,944 4,585
Total equity and liabilities 6,821 5,892 5,807 6,430
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Income Statement 2003 2004 2005 2006
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Net sales 21,472 18,238 17,671 20,988
COGS 14,677 12,679 10,817 13,110
Gross profit 6,795 5,559 6,854 7,878
Operating profit / EBIT 2,600 2,242 2,559 2,561
Finance Cost 51 35 77 64
Profit before tax 2,521 2,167 2,482 2,497
Taxation 922 442 880 853
Profit after tax 1,599 1,725 1,602 1,644
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PROFITABILITY RATIOS 2003 2004 2005 2006
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Profit Margin 7.45% 9.46% 9.07% 7.83%
Gross profit margin 31.65% 30.48% 38.79% 37.54%
Return on Assets 36.96% 36.78% 42.74% 38.83%
Return on Equity 79.39% 81.91% 86.74% 89.84%
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LIQUIDITY RATIOS 2003 2004 2005 2006
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Quick Ratio 0.44 0.50 0.42 0.31
Current Ratio 1.04 1.02 0.96 0.87
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ASSET MANAGEMENT RATIOS 2003 2004 2005 2006
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Inventory Turnover(Days) 46.32 38.10 39.32 40.51
Day Sales Outstanding (Days) 7.88 1.66 2.14 3.00
Operating cycle (Days) 54.20 39.75 41.46 43.52
Total Asset Turnover 3.15 3.10 3.04 3.26
Sales/Equity 10.66 8.66 9.57 11.47
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DEBT MANAGEMENT RATIOS 2003 2004 2005 2006
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Debt to Asset 0.70 0.64 0.68 0.71
Debt to Equity Ratio 2.38 1.79 2.14 2.51
Long Term Debt to Equity(%) 0.08 0.04 0.20 0.19
Times Interest Earned 50.98 64.06 33.23 40.02
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MARKET RATIOS 2003 2004 2005 2006
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Earning per share 120.28 129.76 120.51 123.66
Price/Earnings Ratio 12.06 11.37 14.73 16.17
Dividend per share 126.00 135.02 119.98 122.01
Book value per share 151.50 158.42 138.93 137.66
No of Shares issued (in thousands) 13294.00 13294.00 13294.00 13294.00
Market prices(Year End) 1450.00 1475.00 1775.00 2000.00
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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