Punjab Oil Mills Limited (PSX: PMOL) was set up as a public limited company in 1981. It manufactures and sells ghee, cooking oil, specialty fats, laundry soap, mushroom and coffee at its plant located in Islamabad.
As at June 30, 2021, over 24 percent shares are with the directors, CEO, their spouses and minor children. Of this, majority are held by Mr. Furqan Anwar Batla, a non-executive director. Close to 49 percent shares are held by the local general public, followed by 10 percent in NIT & ICP. Another 8 percent shares are held in each of the following: modarabas and mutual funds, and associated companies, undertakings and related parties. The remaining about 1 percent shares is with the joint stock companies.
Historical operational performance
Except for three years, that is, FY15, FY16 and FY20, the company has seen a growing topline. Profit margins, on the other hand, have followed a gradual downward trajectory.
After contracting for two years, revenue in FY17 increased by over 5 percent due to an improvement in prices and volumes. The latter was seen mostly coming from the cooking oil segment. But the price of raw material rose, leading the cost of production to consume a higher share in revenue at over 84 percent, compared to nearly 81 percent in FY16. The burden of the increase in input cost could not be passed on to the consumer without losing market share. While other factors remained more or less same, the decrease in net margin at 3.24 percent, compared to nearly 5 percent was not as significant due to the reduction in tax expense.
Revenue in FY18 registered an 11.5 percent growth. This was chiefly attributed to the growth in volumes as prices had only changed marginally. However, this was not translated into higher profitability as cost of production grew, albeit marginally. Thus, was attributed to higher raw material costs as well as a higher contribution of low-margin products in the total revenue. Moreover, the higher marketing expenditure, coupled with an expansion of sales force increased distribution expense. Additionally, taxation expense was also higher year on year, therefore, net margin reduced to 1.4 percent, down from last year’s 3.24 percent.
Revenue growth in FY19 was stable at 11 percent, with topline crossing Rs 5 billion. This was attributed to a gain in volumes as well as selling price. Cost of production remained close to 85 percent, keeping gross margin more or less flat at around 15 percent. Distribution expense as a share in revenue reduced due to a conscious decision made by the company to curtail advertising expense. Thus, net margin improved slightly to 1.9 percent for the year.
In FY20, revenue contracted by 4.3 percent after rising for three consecutive years. Sales in the first half of the year was impacted by wholesalers and distributors being unwilling to come in the tax net, while the second half of the year was impacted by the Covid-19 pandemic that resulted in lower demand coming from entertainment and the restaurant industry. With cost of production reducing marginally, there was a slight improvement in gross margin to nearly 15 percent. However, net margin was lower, although marginally at 1.6 percent, due to slight increases in overall operating and finance expenses.
In FY21, the company witnessed the highest growth in revenue thus far, at over 13 percent. This was predominantly attributed to an increase in selling prices triggered by an increase in international edible oil prices. However, the price increase was not matched by the increase in input cost, therefore, cost of production increased to consume more than 88 percent of revenue. As a result, gross margin fell to 11.7 percent. The price increase could not be corresponded with the cost increase due to competition and market trends. With further expenses incurred, the company incurred a loss of Rs 17 million for the first time.
Quarterly results and future outlook
Revenue in the first quarter of FY22 was higher by nearly 48 percent year on year. This was attributed to a growth in volumes alongside a growth in prices. However, the similar trend remained of rising cost of inputs continued as is evident from cost of production consuming nearly 89 percent of revenue in 1QFY22 compared to nearly 83 percent in 1QFY21. Again, this could not entirely be matched by a similar rise in selling price. Thus, gross margin reduced to 11 percent, from 17 percent in the same period last year. This also trickled down to the bottomline, but the reduction was curtailed somewhat by notable decreases in administrative and distribution expense. Therefore, net margin was recorded at 1.5 percent, compared to almost 3 percent in 1QFY21.
The risk of future profitability continues to remain as volatility in the international oil prices lingers, that will adversely impact input costs for the company.