FrieslandCampina Engro Pakistan Limited

FrieslandCampina Engro Pakistan Limited (PSX: FCEPL) is a subsidiary of FrieslandCampina Pakistan Holding B.V (holding company) which in turn is a subsidiary of a Dutch multinational corporation Royal FrieslandCampina which is the ultimate parent company of FCEPL. The company was launched as Engro Foods in 2005. FCEPL is a public limited company. It has two production facilities in Sukkur and Sahiwal and a dairy farm in Nara with over 1300 milk collection centers. The company is engaged in the manufacturing, processing and sale of dairy products and frozen desserts.

Pattern of Shareholding

As of December 31, 2022, FCEPL has a total of 766.596 million shares outstanding which are held by 7192 shareholders. Associated companies, undertakings and related parties which includes FrieslandCampina Pakistan Holding B.V and Engro Corporation Pakistan hold 90.93 percent shares of FCEPL. This is followed by general public holding 5.78 percent shares of FCEPL. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

The topline of FCEPL has been riding an upward trajectory in all the years under consideration with the exceptional year-on-year growth of 44 percent recorded in 2022. In 2018 and 2019, the company recorded a loss before tax and received a group tax relief which translated into net profit in 2018. However, in 2019, the bottomline stays in the red zone despite accounting for the tax relief. In the subsequent years, the bottomline as well as margins show an uphill pattern. The detailed performance review of each of the years under consideration is given below.

In 2019, FCEPL’s topline ticked up by 19 percent year-on-year which came on the volumetric growth in both dairy and frozen dessert segments. However, sharp increases in commodity prices and Pak Rupee depreciation pushed the cost of sales up by 23.5 percent in 2019 which trimmed down the gross profit by 5.3 percent. GP margin also fell from 15.9 percent in 2018 to 12.7 percent in 2019. Distribution expense plunged by 12.5 percent despite higher sales volume on account of lesser advertising budget. Administrative expense multiplied by 30 percent year-on-year in 2019. Other expense registered a steep rise of 128 percent due to massive provisioning done for culling of biological assets and a sharp increase in the loss on death/disposal of biological assets. Other income didn’t turn out to be favorable either and dropped by 34 percent as the company booked reversals of WWF in 2018 which inflated its other income, however, it was not the case in 2019. The operating profit slumped by 76 percent year-on-year in 2019 with an OP margin of 0.3 percent as against 1.6 percent in 2018. To add to ado, finance cost soared by 81 percent in 2019 on account of higher discount rate. This pushed FCEPL’s bottomline into a net loss worth Rs.954.86 million in 2019 as against the net profit of Rs.63.78 million in 2018. Loss per share of Rs.1.25 was recorded in 2019 as against an EPS of Rs.0.08 in 2018.

In 2020, the topline grew by 14.5 percent year-on-year despite shutting of retail and leisure outlets due to COVID-19 related lockdown. Despite high food inflation, supply chain bottlenecks and Pak Rupee depreciation, the company’s cost optimization and a prudent sales mix enabled the gross profit to grow by 22 percent year-on-year with a GP margin of 13.5 percent in 2020. The company kept a check on its distribution expense and administrative expense which inched down by 0.5 percent and 7.3 percent respectively. Other expense also plummeted by 28 percent year-on-year as the company didn’t book any provision for the culling of biological assets and didn’t incur any loss on the death/disposal of its biological assets in 2020. The operating performance was further buttressed by other income which enlarged by 32 percent year-on-year on the back of gain on the disposal of biological assets and operating assets as well as amortization of government grant on long-term finances. All these factors contributed in boosting the operating profit by over 11 times in 2020 with an OP margin of 3.4 percent. Finance cost posted a marginal 1.4 percent rise due to monetary easing during the year owing to COVID-19 which took its toll on the economic growth of the country. FCEPL recorded a net profit of Rs.176.93 million in 2020 with an NP margin of 0.4 percent. The company posted an EPS of Rs.0.23 in 2020.

2021 proved to be an incredible year for FCEPL as its topline surpassed the strategic target of Rs.50 billion to clock in at Rs.52.094 billion reflecting a year-on-year rise of 18 percent. The sales growth was the result of record breaking sales volume attained by the company in both dairy and frozen dessert segments despite cutthroat competition from the existing and fresh entrants in the industry. Despite high inflation, the company managed to register a 48.5 percent year-on-year rise in its gross profit which pushed the GP margin to an unprecedented level of 17 percent in 2021. The operating expenses which were abridged for quite some time took a high jump in 2021. Distribution expense grew by 24 percent on the back of high advertising and promotion budget, outward freight charges, travelling and communication charges as well as salaries and wages to account for rapidly growing inflation. Administrative expense also posted a year-on-year rise of 14.6 percent in 2021. Huge provisioning against WWF and WPPF pushed the other expense up by 77.7 percent in 2021 while other income also magnified by 45.6 percent. The main growth propellers were changes in fair value of biological assets, gain on disposal of operating assets, scrap sales as well as a considerable increase in interest on bank deposits. Operating profit climbed up by 128.5 percent in 2021 with OP margin mounting to 6.6 percent. Finance cost declined by 30.5 percent in 2021 due to downward revision in discount rate. The bottomline posted a stunning growth of 920 percent year-on-year in 2021 to clock in at Rs.1804.08 million with an NP margin of 3.5 percent. EPS stood at Rs.2.35 in 2021.

The growth trajectory continued in 2022 whereby FCEPL delivered a 41 percent year-on-year growth in topline backed by robust volumes, improved sales mix and expansion in footprint. Devastating floods in the southern region of the country, Pak Rupee depreciation, dwindling foreign exchange reserves, commodity super cycle as well as record high inflation and political instability built up the prices of raw materials resulting in a 42 percent year-on-year rise in cost of sales in 2022. Despite that, gross profit grew by 37 percent year-on-year, however, GP margin slightly tumbled to clock in at 16.5 percent in 2022. Operating expense climbed up by 30 percent year-on-year in 2022. High profitability resulted in higher WPPF in 2022. Moreover, FCEPL booked provisions on culling of biological assets. This drove the other expense up by 42 percent in 2022. Other income also enlarged by 66 percent on the back of changes in the fair value of biological assets as well as profit on saving account deposits. Operating profits enlarged by 55 percent in 2022 with an OP margin of 7.3 percent. Finance magnified by 60 percent on the back of multiple rounds of monetary tightening during the year. This diluted the growth momentum of bottomline which rose by 37 percent in 2022 to clock in at Rs.2465.67 million with an NP margin of 3.4 percent. EPS clocked in at Rs.3.22 in 2022.

Recent Performance (1QCY23)

FCEPL’s topline touted a year-on-year rise of 62 percent in 1QCY23. The cost efficiencies across value chain delivered a gross profit growth of 68 percent year-on-year in the face of economic slowdown, currency devaluation and unparalleled level of food inflation. GP margin inched up to 19.2 percent in 1QCY23 from 18.5 percent in 1QCY22. Aggressive advertising and promotion, freight charges as well as market induced rise in salaries pushed the distribution expense up by 71 percent in 1QCY23. Administrative expense also increased by 19 percent during the period under review. Other expense posted a massive rise of 269 percent year-on-year in 1QCY23 to reach 1.2 percent of sales as against 0.5 percent of sales during the same period last year. Other income also built up by 66 percent during the period. Despite growth in expenses, operating profit inclined by 67 percent year-on-year in 1QCY23 with an OP margin of 8.8 percent as against 8.5 percent in 1QCY22. Finance cost gave no respite in 1QCY23 due to high discount rate. The net profit mounted by 49 percent in 1QCY23 to clock in at Rs.990.36 million with an NP margin of 4.4 percent. NP margin slightly plunged from 4.8 percent in 1QCY22 due to rise in finance cost and taxation. EPS surged from Rs.0.87 in 1QCY22 to Rs.1.29 during the period under review.

Future Outlook

Record high inflation, foreign reserve constraints, import restrictions, high finance cost, currency depreciation will continue to pose serious challenges to FCEPL. However, with better sales mix, retail expansion, price revisions to match the hike in the prices of raw materials as well as cost efficiencies across the value chain, the company is expected to sail through the storms with its chin up.