The growth momentum of Fauji Foods Limited’s (PSX: FFL) topline was interrupted in CY19. FFL registered a negative growth in topline for the first time since its acquisition of Noon Pakistan Limited. The company’s gross margins dipped further into the negative due to rising cost of sales.
During the year under review, the 10 percent sales tax on tea whitener and 5 percent additional custom duty on skim milk powder import made the dairy product more expensive. Moreover, the dairy sector continues to face high input costs brought about by the elimination of zero rating sales tax regime in 2016.
In the global arena as well, the prices of imported skim milk prices increased, specifically in the last quarter. This added to the industry’s input costs. The effect of this was also seen on the local milk prices, which increased in the second half of the year.
Moreover, the government’s policies to rectify macroeconomic challenges such as increasing policy rate to double digits, currency devaluation to encourage exports, and documenting the economy to increase revenue collection further increased the costs for the dairy sector.
Amid high cost environment, FFC decided to adjust prices of the tea whitener. However, the industry at large remained unmoved, which resulted in loss of market share for Fauji Foods. To redress this, the company had to incur extra costs to regain the lost volumes.
‘Other income’, jumped from Rs18 million to Rs98 million. A major component of this apart from profit on saving accounts was a one-off gain on disposal of plant and equipment- a non-recurring item. However, it is too small to absorb any cost pressures.
An unprecedented hike in finance costs and taxation pushed the company further deep into losses - rendering it their sixth loss incurring period, consecutively.
In essence, the factors which have hampered the take off of the companies in this sector are consumer preference for fresh milk, subsistence dairy farming, and lack of supportive government policies.. Moreover, extensive capital is required to develop cooling infrastructure, without which, the supply and production is not possible. What is really required is to research and invest in low-cost technologies along with creating awareness and marketing for clean and hygienic milk.