Cherat Packaging Limited

Cherat Packaging Limited (PSX: CPPL) was established in 1989 as a public limited company. It manufactures, markets and sells paper sacks, polypropylene bags and flexible packaging material. It has an annual installed capacity of 595 million bags and 12.6 million kgs of flexible packaging material. The company has two manufacturing plants, both located in District Swabi.

Shareholding pattern

As at June 30, 2021, close to 28 percent shares are held under the associated companies, undertakings and related parties. Within this category, a major shareholder is Faruque (Private) Limited. Insurance companies hold almost 25 percent shares, followed by local general public owning almost 33 percent shares. The directors, CEO, their spouses and minor children hold about 5 percent shares, while the remaining around 10 percent shares are with the rest of the shareholder categories.

Historical operational performance

Cherat Packaging has mostly seen a growing topline, with the exception of FY10 and FY17 when it contracted by 3.7 percent and 6.5 percent, respectively. On the other hand, profit margins in the last six years have followed a downward trend before rising again in FY21.

In FY18, revenue was higher by 10 percent to cross Rs 7 billion in value terms. This was attributed to a rise in selling prices of bags which was in line with the market conditions. Additionally, the company also benefitted from the boost in the cement sector. However, production cost increased to consume 84.5 percent of revenue, compared to 80.5 percent. This was attributed to a rise in price of kraft paper and PP granules, coupled with currency devaluation. Thus, gross margin fell to 15.5 percent. However, net margin saw a marginal decrease by 10 percent, due to significantly lower taxation expense.

Revenue in FY19 grew by 14 percent to cross Rs 8 billion in value terms. While this was attributed to a rise in prices in line with rising input costs, the company also catered to other sectors such as sugar, chemicals, etc. in addition to the cement sector. Moreover, during the period, the company began full commercial operations of flexible packaging division that received a positive response from the market. Production cost reduced to nearly 83 percent, allowing gross margin to improve to 17.3 percent. However, net margin fell to almost 7 percent as finance expense escalated to consume a whopping 6.3 percent of revenue due to long terms loans acquired for new projects, higher working capital requirements and rising discount rates.

Topline in FY20 continued to rise despite the outbreak of the Covid-19 pandemic. While topline increased on the basis of rising selling prices, cost of production increased to consume over 87 percent of revenue. Thus, gross margin fell to 12.4 percent. With further expenses incurred and finance expense increasing to consume 8.3 percent of revenue, net margin fell to an all-time low of 0.7 percent. The rise in finance expense was attributed to long term loans, working capital requirement and rising mark-up rates. In value terms as well, bottomline stood at an all-time low of Rs 70 million, barring the loss incurred once on FY09.

In FY21, revenue grew by over 19 percent to reach an all-time high of over Rs 11 billion. This was attributed to significantly higher consumption of cement that increased sales of cement bags produced by the company. Moreover, sales volumes for flexible packaging material also rose as the company targeted new customers such as the FMCG sector. Combined with this was the reduction in production cost to almost 83 percent that allowed gross margin to take off to 17.2 percent. Moreover, a considerable reduction in finance expense further supported the net margin that reached 7.6 percent with bottomline recorded at Rs 855 million- the highest seen in the last five years. The reduction in finance expense was a result of a decrease in discount rates and availing low-cost wage financing.

Quarterly results and future outlook

In the first quarter of FY22 revenue was 22.7 percent year on year. This was on the back of rising volumes. In addition, sales from the flexible packaging material were contributing to the total revenue pie. There was also some reduction in production cost as a share in revenue, allowing profitability to improve year on year. Combined with this was the reduction in finance expense thereby allowing net margin to increase to 8.8 percent compared to 5.5 percent in the same period last year.

The second quarter also saw higher revenue year on year by 25 percent. This was again attributed to a growth in volumes, particularly for the flexible packaging material. But as production cost remained more or less similar year on year, profitability also saw a marginal change from 7.8 percent net margin recorded in 2QFY21, to 8.1 percent in the current period.

The third quarter saw revenue higher by 18 percent year on year again attributed to a volumetric gain, particularly in the flexible packaging material segment. However, it was matched by a more than corresponding rise in costs as production cost consumed 86 percent of revenue compared to nearly 83 percent in the same period last year. With finance expense also rising, net margin stood at 5 percent versus over 7 percent in 3QFY21. While there are positive expectations for the future in terms of economic recovery and demand, certain challenges such as global commodity prices such as oil, and the geopolitical environment can largely affect the profitability.