Pakistan Paper Products Limited

Pakistan Paper Products Limited (PSX: PPP) in 1962 as a private limited company. Two years later, in 1964, it was converted into a public limited company. With its plant located at S.I.T.E, Karachi, the company’s principal business is production and sale of exercise books, pro-labels, and sensitized papers. Some of its clients in the pro-label category include Caltex, Shell Pakistan, Atlas Honda, Reckitt Benckiser, Unilever, Engro Foods, and Getz Pharma.

Shareholding pattern

Holding 34 percent of the shares, the directors, CEO, their spouses, and minor children are the major shareholders of Pakistan Paper Products Limited. Within this, Mr. Abid Sayeed, the CEO of the company, holds the biggest share. About 11 percent are held in associated companies that solely includes Management & Enterprises (Pvt.) Limited. About 36 percent is held under the category of individuals, while NIT & ICP and banks, DFIs, NBFIs, etc. each hold roughly 8 percent shares.

Historical operating performance

Although topline has consistently been on the rise, the same cannot be said for the profit margins; the latter has been declining for a large part of the decade, with FY20 seeing the lowest net margin and earnings.

Looking at the company’s performance in the last five years, in FY15 Pakistan Paper saw a 14 percent increase in its topline. This was mostly driven by sensitized paper and photocopy paper that saw nearly 35 percent and 127 percent improvement in revenue respectively, while exercise books and pro labels also exhibited decent growth at 17 percent and 7 percent, respectively. The reason for growth in sensitized paper is due to “government’s decision to hold census next year which led to large scale buying of this paper” whereas exercise books’ growth was demand driven. In spite of the double-digit revenue growth from multiple sources, profit margin remained flat due to a more than corresponding increase in cost of production.

Topline was growth relatively lower in FY16 at 6 percent. Exercise books and Pro Labels largely contributed to this growth in revenue, whereas sensitized paper and photocopy paper that saw unprecedented revenue growth in the previous year actually registered a 34 percent and 50 percent fall in revenue during FY16. While improvement in Pro Labels was a result of an investment done last year in a new press, growth in revenue from exercise books was brought about by aggressive marketing. Sensitized paper and photocopy paper sales reduced in comparison to the previous year as growth in sensitized paper in FY15 was a result of an unusually large demand from the census department while photocopy paper saw a large institutional order, both of which was absent in FY16. Despite the rise in revenue, an increase in administrative expense primarily coming from “sales tax receivable written off” kept the profit margin from improving.

Topline grew at almost 8 percent during FY17 derived from sales of exercise books and Pro Labels that saw an increase of 2 percent and 13 percent, respectively. Pro Labels section saw good growth as the per capita consumption was quite low with promising prospective demand in the future coming from the FMCG sector. Sensitized paper saw reducing demand; this factor was a worldwide phenomenon as users switched to plotter paper instead of manual drawings. Cost of production, on the other hand, rose to consume 81 percent of the revenue, reducing operating margins whereas net margin improved to some extent due to lower tax expense.

At a little over 19 percent, Pakistan Paper Products saw the highest revenue growth in FY18 driven by exercise books and Pro Labels; the latter saw a 26 percent rise in its revenue. The self-adhesive industry has been in its beginning stages, hence experiencing growing demand. This also meant new entrants into the industry. Improvement in exercise books was due to government’s restoration of zero-rating in the last budget. Sensitized paper and photocopy paper saw reasonable growth in sales at 6 percent and 10 percent, however, within the photocopy paper segment, the company has chosen to focus on plotter paper because of better margins. Nonetheless, profit margins continued to tank due to persistent rise in cost of production.

Topline continued to increase at 11 percent in FY19. Pro Labels saw its sales revenue growing by 20 percent due to developing demand. Exercise books, on the other hand, had a tough year due to change in school starting date from April to July. Despite the rise in revenue, cost of production jumped to 88 percent of the revenue, considerably lowering the profit margins. In addition, finance expense also rose of which 40 percent was contributed by the exchange loss due to currency depreciation. The delay in school starting date also meant that inventory had to be held for longer than usual adding to costs.

Recent results and future outlook

In FY20, the total sales grew by a mere 4 percent- comparatively lower than the usual above 5 percent. Most of the revenue was generated during the last two quarters of the year that primarily came from Pro Labels. Exercise books, which is another major contributor to the revenue pie saw a decline as due to the outbreak of Covid-19, schools were shut down and the reopening was delayed. Due to gravity of the situation schools continued to remain shut and have only recently started opening (September 15, 2020). In addition, currency depreciation also eroded profits in the form of exchange loss.

With sensitized and photocopy paper already on a decline, and exercise books also seeing a reduction, the primary contributor to revenue is Pro Labels. However, the company believes that continuation of revenue from this segment also remains a challenge as raw material procurement became difficult due to pandemic and resultant decline in shipping services.