Shezan International Limited

Shezan International Limited (PSX: SHEZ) is a smaller but a prominent member of Pakistan's close net FMCG sector. The company was incorporated in 1964 as a joint venture between Alliance Industrial Development Corporation (AIDC) of the United States and Shahnawaz Group of Pakistan. However, AIDC sold all of its shares to the current majority owners Shahnawaz Group in 1971 and the Company became a publicly traded entity.
Although the Company is known for its mango juices, but is also a major producer and exporter of pickles, jams and ketchup, the firm has been relentlessly expanding both into local and in international markets ever since. To better serve its customers the company has been slowly expanding itself. To make sure it won't face any supply issues in exports back in 1980-81, Shezan has established a separate unit in Karachi, which now caters for Karachi, Sindh and export demand.
Shezan has a juice factory in Hatter, Khyber- Pakhtunkhwa and a bottle filling plant in Lahore, which has increased its productivity significantly. Shezan also owns and operate an independent Tetra Brik plant. The firm's head office is located in Lahore and has distribution offices in United Kingdom and Canada. The company exports its food products to more than 40 different countries, including UK, USA, Australia, Canada, etc.
Financial performance
Shezan Pakistan Limited from FY10 to FY14 has seen its top line expand at a compound annual growth rate of 14 percent. The performance of the juice company unlike its other counterparts in the FMCG sector is relatively slow, but it has been quite steady compared to big names. Besides the growth in domestic sales, the firm is quite successfully able to increase its export footprints over the years. Shezan's export during the period under discussion in terms of net sales has grown from 6 percent in FY10 to 14 percent in FY14. On the other hand, the profits of Shezan have risen to new heights during this time. There is no doubt Shezan took the advantage of growing consumerism and urbanism in the country.
In FY10, the top line continuously increased and reported a 29 percent growth year-on-year. But the firm faced a high commodity prices environment in which commodity prices escalated to unprecedented levels. Most notable was the hike in the price of sugar, an essential ingredient in the top line products which took an exceptional surge in the core cost. This increased put pressure on the gross profit margins for the year.
The financial year 2011 was the growth year for the company. Shezan continued to focus on its growth strategy, led by its juice products in Tetra packaging including juice brands like "All Pure" and "Twist". The food products other than juices and drinks grew by 20.49 percent during the year. FY11 was also a good year for export growth, which, grew rapidly by 35.44 percent. In a decade or so Shezan has started to face significant competition from the big names in growing consumer sector of Pakistan. To keep the pace with stiff competition Shezan had to enhance the advertisement and sales promotion expense.
The company gave a mediocre performance during the first six months of FY14, but, Shezan ended the year on a high note. The domestic competition from Nestle in the juice and drink sector intensified, and that put a negative impact on the local sale performance. However, during the year, export sales of juices in the bottle have seen unprecedented growth. Shezan saw its exports grew by 66 percent year-on-year and in terms of net sale, the export portion was 14 percent, highest in the Shezan's history. Keep in mind that during FY14 the government stopped gas supply to industries in Punjab and the company was unremittingly dependent on furnace oil to run its boilers and diesel was used to run the generators. All these issues created the higher cost of production.
As the domestic competition from Mitchell's and Nestle started to heat up, it was expected from Shezan to continue to increase its export sales. During the first half of the FY15, export sales showed an active growth, but this momentum was not sustained in the later part of the financial year in the backdrop of the sharp decline in the oil prices. For this very reason the African exports were much affected, and now the company believes that it will be a significant challenge for the firm to regain the growth momentum in this part of the world. Segment wise reporting shows that the firm's juice and drinks business that contribute about 82 percent of its total saw five percent decline year-on-year. However, the pickle, condiments, and others items saw a growth of 36 percent year-on-year in FY15. Beside higher advertising cost which is expected due to the nature of the business, the finance cost has increased substantially due to massive borrowings to stock the seasonal fruits, pulps and packaging materials to fulfil the sales demands of products. Further, company obtained a long-term loan of Rs 300 million to enhance its production capacity in the shape of new Tetra Pak type A-3 machine.
Snap short of 1QFY16
Shezan started the financial year 2016 on a negative note. During the first quarter, sales amounted to Rs 1.703 billion, compared to Rs 1.910 billion in the corresponding period of the previous year. Unfortunately, it is evident that the top brass in FMCG is taking over the market share of Shezan. As per the directors' report the increase in the minimum threshold of wages also affected the profit margins. During the first quarter, export sales showed a continuous downward all these plus higher operating expenses put the juice company in red for the quarter.
Future Outlook
As the company is getting ready to present its half-yearly result, it faces multiple challenges ahead. Since next quarter falls in the leanest season, it's wrong to expect excellent results. Without a doubt, Shezan Pakistan is a well-established brand, but the competition is growing around the brand.
The company should either more focus on its exports or further diversify itself. However, one this is for sure Shezan is a food producing business, and so there is always a bright light at the end of the tunnel for the food business.

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Shezan International Limited

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Rs (mn)                  1QFY15  1QFY16           YoY

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Sales                     1,910   1,703        -10.8%

Cost of sales              1344   1,229         -8.6%

Gross profit                566     474        -16.2%

Gross margin                30%     28%  Down 200 bps

Admin expense                52      54          4.0%

Distribution cost           324     292         -9.9%

Other operating expenses     47      51          8.5%

Other income                 16      14        -13.7%

Operating Profit            159      92        -42.3%

Operating profit margin      8%      5%  Down 300 bps

Finance cost                 11      14         27.2%

Proft before tax            148      77        -47.9%

Taxation                     53      21        -60.4%

Proft after tax              95      57        -40.3%

Net Profit margin            5%      3%  Down 200 bps

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