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Going by any metric, CY20 has been a good year for Frieslandcampina Engro (PSX: FCEPL). Topline staged a double-digit recovery in uncertain times, whereas pre-tax earnings have returned to positive territory after a two-year break, finally bidding farewell to bottom (For more, read “FCEPL: is this bottom?” by BR Research, published on 30 April 2020).

But it appears that the buoyant performance wasn’t enough for investors, as the stock price fell 6.50 percent, minutes after the announcement of annual results on the bourse yesterday. The steep fall came after an 11-week long rally, as market priced in expectations of a strong turnaround, fuelled by a Covid-led upsurge in packaged foods volume offtake.

Where did things go wrong for the dairy challenger? It appears that the pandemic has been good for the FMCG segment, but not nearly enough to permanently alter the dynamics of a – still, predominantly -informal dairy industry.

While the pandemic scare did inspire the public to stockpile on packaged food products, the premium over loose milk category remained far too significant to allow any breathing space for serious volume growth. In fact, analyst reports indicate that the nascent volume recovery witnessed in Dairy & Juices category during CY19 suffered a minor set-back (see illustration).

That the offtake of Ice creams category took a heavy battering while the whole nation shuddered at the sight of coughs and sneezes comes as little surprise, especially as new launches campaign season coincided with country wide lockdown and peak case fatality rate.

Then how exactly has the pandemic been good to the company if volumes are still struggling? Consider that the topline growth coupled with a long-awaited turnaround in financial scorecard has effectively come on the back of price increases across the product portfolio, first taken before the close of CY19, followed by another right at the cusp of lockdown in March 2020.

In fact, it appears that the pandemic led demand compression kept the company from taking further price increases towards the second half of CY20, especially considering that national average loose milk prices leapt ahead by 13.5 percent between April and December of last year.

And that means the future holds more price increases for the packaged milk industry – maybe as early as 2QCY21. Already, news reports suggest that the Dairy and Cattle Farmers Association has announced a Rs 20 per litre jump in prices effective from mid-Feb, citing increased production costs.

If that happens, the dairy segment may once again be forced to give up on hopes and dreams of category conversion – and instead, focus on fighting margin attrition. CY21 may be particularly harsh, especially once pandemic-led bump in CY20 volumes is accounted for (i.e, are subtracted). That means all eyes will be set on the performance of Ice cream segment, as the management gears up and lives to fight another day.


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