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Pakistan Paper Products Limited (PSX: PPP) was incorporated in Pakistan as a private limited company in 1984 and was converted into a public limited company in 1962 and was converted into a public limited company in 1964. The principal activity of the company is the manufacturing and sale of exercise books, pro-labels and sensitized papers.

Pattern of Shareholding

As of June 30, 2022, PPP has a total of 8 million shares outstanding which are held by 822 shareholders. Directors, CEO, their spouse and minor children have the majority stake of 36.98 percent in the company, followed by general public holding 32.42 percent of PPP’s shares. Management and Enterprises (Private) Limited, an associated company of PPP holds 11.34 percent of its shares while Banks, DFIs, NBFIs, Modarabas, Mutual Funds, Insurance, Joint stock companies collectively account for 8.07 percent of the company’s shares. Around 7.83 percent of PPP’s shares are held by NIT and ICP and 3.36 percent by public sector companies.

Historical Performance (2018-22)

PPP’s topline has been ascending since 2018, conversely, its bottomline rose only twice during that period i.e. in 2021 and 2023. PPP’s margins which eroded until 2020 posted a staggering rebound in 2021. In the subsequent years, PPP’s gross margin continued to pick up while its operating and net margins dropped in 2022 and faintly grew in 2023 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, PPP’s topline posted 11 percent year-on-year growth. The growth primarily came on the back of an excellent performance of pro-labels segment which registered 19.79 percent improvement in sales. The sale of exercise books however stayed constant during the year as the Sindh government changed the start of the school season from April to July. Consequently, seasonal sales hike which occurred in March-April was shifted in June-August. Another important segment of PPP is sensitized paper which showed terrible performance in 2019 with sales falling by 14.15 percent owing to fall in demand coupled with shortage of raw materials as this was considered to be an obsolete product all over the world and was increasingly being replaced by plotter paper. Given the demand pattern, PPP operated its exercise books, sensitized paper and pro-labels plants at 95 percent, 12.5 percent and 175 percent capacity respectively in 2019. Cost of sales grew by 18 percent year-on-year in 2019 which was the effect of Pak Rupee depreciation, steep rise in international commodity prices, high indigenous inflation, electricity tariff etc, culminating into 23 percent year-on-year drop in gross profit with GP margin receding from 16.5 percent in 2018 to 11.3 percent in 2019. Operating expense grew by a marginal 2 percent in 2019 due to massive cut in sales promotion expenditure. Payroll expense continued to grow despite cutback in HR tally from 120 in 2018 to 115 in 2019. Operating profit plummeted by 36 percent year-on-year in 2019 with OP margin sliding down from 10.1 percent in 2018 to 5.8 percent in 2019. Finance cost radically grew by 77 percent year-on-year in 2019. This was due to high discount rate coupled with elevated borrowings owing to delay of Exercise books season as well as extended payment period of pro-label sales which created liquidity issues for the company. PPP’s net profit slipped by 64 percent year-on-year in 2019 to clock in at Rs.17.97 million in 2019 with NP margin of 2.1 percent versus 6.4 percent in 2018. EPS also nosedived from Rs.8.34 in 2018 to Rs.2.25 in 2019.

The topline growth momentum slowed down to 4.3 percent year-on-year in 2020. While the sales of pro-labels grew by 15.57 percent year-on-year in 2020, exercise books posted a sales decline of over 13 percent due to closure of educational institutions in the 4QFY20 on account of COVID-19. Sale of sensitized papers also declined by 17 percent year-on-year in 2020. The capacity utilization of exercise books, sensitized papers and pro-labels segment slid to 86 percent, 7.9 percent and 154.9 percent respectively in 2020. During the year, PPP increased in pro-label production capacity by 500,000 square meters due to robust demand. Cost of sales grew by 5 percent year-on-year in 2020 on account of fluctuations in the value of local currency and supply chain impediments, resulting in idle capacity and low absorption of fixed cost. High inventory cost of exercise books segment also led to higher cost during the year. Gross profit shrank by 2 percent year-on-year in 2020 with GP margin falling to 10.6 percent. Operating expense escalated by 9 percent year-on-year on the back of higher carriage and forwarding charges as there were restrictions on the movement of people and goods owing to COVID-19. High payroll expense also contributed towards elevated operating expense in 2020. Operating profit inched down by 13 percent year-on-year in 2020 with OP margin climbing down to 4.9 percent. Finance cost contracted by 16 percent year-on-year in 2020 due to monetary easing in the later part of the year. Short-term borrowings, however, grew during the year due to tighter liquidity position. Bottomline narrowed down by 13 percent year-on-year in 2020 to clock in at Rs.15.57 million with NP margin of 1.7 percent and EPS of Rs.1.95.

With a topline growth of 19.6 percent year-on-year, 2021 appears to be the year of recovery for PPP. Pro-label sales grew by 22.4 percent in 2021. Exercise books also posted a sales growth of 14.5 percent in 2021; however, given the low-base of 2020, the turnover didn’t prove to be as exciting for the company. Sensitized paper sales grew by 11.92 percent during the year, however, its contribution to PPP’s total sales pie has squeezed to just 1.1 percent. The company was also mulling over discontinuing this line completely as procurement of raw materials for this segment was challenging for the company due to lack of suppliers. Cost of sales grew by 14.2 percent in 2021, resulting in a tremendous 66 percent rise in gross profit in 2021. This was on account of favorable movement of local currency during the year. Operating expense was cut down by 4 percent year-on-year due to curtailed payroll expense during the year which reversed the impact of increased sales promotion. During 2021, PPP also registered exchange gain worth Rs.4.86 million and amortization of deferred government grant worth Rs.2.67 million which drove its other income up by 53 times during the year. Operating profit rebounded by 154 percent in 2021 with OP margin touching a new height of 10.3 percent. Finance cost squeezed by 30 percent year-on-year in 2021 despite increased borrowings during the year. This was due to monetary easing in 2021. Lower finance cost provided further impetus to bottomline which grew by 353 percent year-on-year in 2021 to clock in at Rs.70.55 million. EPS jumped up to Rs.8.82 while NP margin improved to 6.5 percent.

In 2022, PPP witnessed a 13 percent year-on-year growth in its net sales. Pro-label sales remained flat during the year in terms of PKR with 10 percent drop in volume due to low demand and intense competition in the industry. Exercise books performed really well during the year and registered a robust 45 percent growth in sales which was led by high volume as well as upward revision in prices. The sale of sensitized paper drastically plunged by 27.9 percent in 2022 (see the graph of segment-wise production and capacity utilization to get a gist of production volumes during the year which were in line with demand). Steep depreciation of Pak Rupee, high inflation and elevated global commodity prices, increase in energy tariff etc culminated into 12 percent spike in cost of sales. However, as the company was able to pass on the effect of cost hike to its customers, gross profit improved by 17.6 percent in 2022 with GP margin further rising to 15.3 percent. Operating expense shot up by 25 percent year-on-year in 2022 which was the effect of high payroll expense, freight charges as well as sales promotion. Number of employees grew from 111 in 2021 to 118 in 2022. Operating profit registered 8.8 percent rise in 2022; however, OP margin slightly fell to 10 percent. Finance cost soared by a huge 103.5 percent in 2022 which was mainly due to exchange loss amid drastic depreciation of Pak Rupee as majority of PPP’s raw material is imported. High discount rate as well as increased borrowings also wreaked havoc on finance cost in 2022. This translated into a 12.5 percent thinner bottomline in 2022. Net profit clocked in at Rs.61.74 million in 2022 with an EPS of Rs.7.72 and NP margin of 5 percent.

Recent Performance (2023)

With an impressive year-on-year rise of 41.5 percent, 2023 leads in terms of topline growth due to robust performance of both pro-labels and exercise books. According to the latest available financial statements of 9MFY23, exercise books and pro-labels registered a sales growth of 69.21 percent and 27.29 percent respectively. Pak Rupee depreciation took its toll on the cost of sales of PPP as it uses imported raw materials particularly in the pro-labels segments. However, price increase coupled with phenomenal volume resulted in a 54 percent rise in gross profit and GP margin burgeoning to 16.7 percent in 2023. Operating expense grew by 9 percent year-on-year on account of higher payroll expense and freight charges, albeit, it couldn’t impede the operating profit which rose by 76 percent year-on-year in 2023. OP margin also climbed to 12.4 percent in 2023. Finance cost soared by 158 percent year-on-year in 2023 due to high discount rate as well as exchange losses borne during the year. This somehow diluted the bottomline growth to 44.2 percent in 2023. PPP’s net profit stood at Rs.89.03 million in 2023 with an EPS of Rs.11.13 and NP margin of 5.1 percent.

Future Outlook

While the demand of the company’s products is projected to stay strong, steep depreciation of Pak Rupee, unprecedented level of inflation and elevated discount rate may suppress the financial performance of PPP. Amid increasing competition and shrinking purchasing power, the company may not pass on the effect of cost spike entirely to its customers and have to bear the brunt itself too, resulting in thinner bottomline and tapered margins.

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