Packages Limited

Packages Limited (PSX: PKGS) was established in Pakistan, a decade after independence in 1957. It was a joint venture between the Ali Group of Pakistan and Akerlund & Rausing of Sweden. Gradually, over the years, the company has added to its portfolio, in addition to adding and upgrading machinery. Packages Limited manufactures and sells packaging materials and tissue products. In addition to catering to the domestic market, the company also sells in the international market.

Shareholding pattern

With nearly 42 percent shares held under this category, associated companies, undertakings and related parties are the major shareholders of Packages Limited. Within this category, IGI Investments (Pvt) Limited hold the largest number of shares. The local general public holds around 15 percent shares in the company followed by a little over 14 percent under “others”. The directors, CEO, their spouses, and minor children hold a small 3 percent shares. Some 8 percent and 7 percent are held by each of the following category respectively: modarabas and mutual funds and foreign general public. The remaining about 11 percent is with the rest of the shareholder categories.

Historical operational performance

In the last decade, the company has seen rising topline for the most part barring CY12. While gross and operating margins have been relatively stable, net margin has been fluctuating notably.

During CY15, there was a 6 percent rise in topline. Although both, the packaging division and the consumer products division saw a rise, the latter saw a 20 percent rise in sales, while the former made a larger share in the total revenue pie making it a significant contributor. Cost of production decreased significantly to 79 percent of revenue, down from previous year’s 85 percent. This was due to lower raw material costs and fuel and energy costs. With most other elements remaining roughly similar, the gain in year-on-year gross margin was also reflected in the bottomline; net margin for the year improved to 20.6 percent, up from 16.8 percent in CY14.

The company continued to grow its topline during CY16, at 5 percent. Although in volumetric terms, the increase was 15 percent. Due to deflationary trend in the raw material and fuel and power expenses, the benefit had been passed on to the consumers in terms of price discounts. Note that this was done for the customers of the packaging division. Cost of production reduced marginally 78.5 percent raising gross margins slightly.

However, distribution cost rose to more than 5 percent of revenue that affected operating profit margin. Most of this increase was due to higher advertising and salaries expense. Finance expense also increased, although this increase was a one-time occurrence due to redemption of preference shares. Despite the increase in expenses, profitability was improved due to investment income that exceeded gross profit in value terms. Thus, net margin was 33 percent for CY16.

Growth rate of topline was consistent at around 6 percent in CY17 as well, though in volume terms the growth was 7 percent. The consumer products division exhibited a 14 percent increase in sales while the packaging division saw a 6 percent growth. However, this did not reflect in gross and operating margins due to increase in raw material costs that were not passed on to the consumer. Administrative expense rose to nearly 6 percent, combined with lower other income, the operating margin was adversely affected. Finance expense also returned to previous levels. Despite lower operating margin, net margin rose to nearly 35 percent due to investment income that was consistent at above Rs 6 billion for two consecutive years.

Topline witnessed double-digit growth in CY18 after a break of four years, at 15.7 percent- the highest seen since CY14. Contrary to previous years, consumer products division saw a lower sales growth rate at 9 percent compared to packaging division’s 18 percent. Owing to significant currency devaluation, combined with an inflationary trend, raw material expense increased that increased the cost of production to 84 percent. This brought down gross margin to almost 16 percent. Both administrative and distribution expense crossed Rs 1 billion, while as a percentage of revenue they remained stable at around 5 percent. A major hit to profitability was brought about by halving of the investment income. This was as a result of decline in dividend income from Nestle and Tetra Pak. Thus, net margin dropped to 13 percent from last year’s near 35 percent.

During CY19, sales growth was recorded at 10.7 percent. Consumer products division regained its momentum as its sales grew by 16 percent, while packaging division sales growth was at 9 percent. While distribution and administrative expense hovered around 5 percent of revenue each, other expenses climbed up nearing Rs 1 billion. This was due to impairment on investments in associate. So, while gross margin improved on the back of lower cost of production at 81 percent, net margin fell to its lowest seen in six years, to nearly 6 percent. The latter was due to drop in investment income in addition to a rise in finance expense that was a result of higher KIBOR.

Quarterly results and future outlook

Topline fell to a mere Rs 30 million during the third quarter of CY20. However, this was not due to the adverse effect of the ongoing pandemic. Rather, in the previous year, CY19 the company’s board of directors and shareholders had “approved the internal restructuring of the company including folding cartons, flexible packaging, consumer products, and mechanical fabrication and roll covers along with all relevant assets, operations, and corresponding liabilities (Converting business) to a newly formed wholly owned subsidiary, i.e., Packages Convertors Limited (PCL)”. Approval from SECP was received at the start of CY20 while the transfer was made in the second quarter. Thus, the sales made by the converting business were recorded in consolidated financial statements.

The company has been consistently upgrading and improving machinery, along with investing for better efficiencies. With the current situation of the pandemic and competition, the company aims to expand and diversify revenue streams and customer base.