FCEPL: the worse is over

It got a lot worse before it could finally get better. After touching rock bottom in CY18, Friesland Campina Pakistan (PSX: FCEPL) has added Rs 6 billion (on average) every year to its top line. As per annual financials disclosed on the bourse yesterday, the company closed CY21 with net sales of Rs 52 billion, five percent greater than highest-ever revenue recorded six years ago (CY15).

Five years since its acquisition by foreign principal Friesland Campina (a Dutch dairy cooperative), FCEPL is a much leaner company today. Although it has not entirely amputated the tea-whitener and dairy beverage categories, the company seems to have doubled down on growing volume of full cream liquid milk category.

In an interview with BR Research last year, CEO Ali Ahmed Khan had indicated that if zero-rating GST regime is restored, category conversion (shall) once again become the core of growth strategy for dairy industry. The double digit (%) increase in flagship Olper’s volume seems to indicate that the management is delivering on its promise.

And with input taxes on raw material (packaging) now gone, profitability made a strong comeback in the books of processed dairy market leader. Gross margin stood at a solid 17 percent, up 348 bps over last year. Since the tax concessions implemented through the FY22 federal budget were only applicable for half of FCEPL’s financial year, margins remained below the good old’ pre-2016 days. Profitability may witness further upside in CY22, provided the PTI government does not reverse the GST exemption under IMF pressure come June 2022.

With dairy segment revenue returning to its full glory, revenue contribution from frozen desserts category may become less important to company’s portfolio going forward. Based on last 5-year average, ice cream’s share is now estimated to stand at 10percent of topline, assuming organic growth in volumes. However, past analyst briefings by the management suggest that due to its fatter margins, ice cream remains significant to company’s bottom-line. This may become particularly important if the company ventures into lower-priced category conversion initiatives, to expand the pie of processed dairy universe.

The primary risk to FCEPL’s growth in CY22 then may emanate from exchange rate stability, as price of raw materials from packaging; milk powder, flavours, to edible oil etc are all dollar-based. If production cost escalates, the company will advertently be forced to take price increases, hurting chances to grow volume.