FrieslandCampina Engro Pakistan Limited

FrieslandCampina Engro Pakistan Limited (PSX: FCEPL), previously Engro Foods was established in 2005. After entering into a partnership with Royal FrieslandCampina of Netherlands, it changed its name to FrieslandCampina Engro Pakistan.

The company manufactures, processes, and sells dairy products, beverages, ice cream and frozen desserts. It also owns and operates a dairy farm.

Shareholding pattern

With almost 91 percent shares held under this category, the associated companies, undertakings, and related parties are the key shareholders of FCEPL as of December 31, 2019. Within this category, FrieslandCampina Pakistan Holding B.V. holds the largest number of shares at 51 percent, while Engro Corporation Limited holds nearly 40 percent. The local general public holds around 5 percent shares while the directors, CEO, their spouses, and minor children hold an insignificant share.

Historical operational performance

Topline growth for the company has been fluctuating over the years while profit margins have been on a gradual decline since CY15.

During CY16, topline contracted by nearly 12 percent. This was attributed to several factors; a growth in competition with the rise in multiple players in the industry; changes in the GST regime and an imposition of regulatory duty of 25 percent on import of dairy powders. This led to an increase in cost of production, although it was not huge, from nearly 77 percent of revenue in CY15, to a little over 77 percent in CY16. The fall in operating and net margin was due to a rise in distribution expense combined with a reduction in other income that was higher last year due to “gain arising from changes in fair value of biological assets”.

In CY17 the company saw the highest reduction in sales revenue at 21 percent. This was in part due to a loss of volumes. Owing to the change in tax regime, and higher duties on imported dairy raw material, the dairy industry faced challenges. The resultant cost pressures led to a price increase that widened the gap between the price of loose milk; latter being undocumented and untaxed also provides a benefit to it, posing a challenge for the documented industry. This is also reflected in the higher cost of production, at nearly 84 percent of revenue. The effect of this also translated into a lower bottomline, that fell to Rs 379 million, from over Rs 2 billion in CY16.

Sales revenue fell for the third consecutive year in CY18 by over 6 percent. This was due to lower volumes owing to the negative perception in the minds of the consumers. This in turn was a result of a misalignment regarding food laws between the federal and provincial domains. In addition to this, due to the high interest rates and devaluation of the local currency, cost of production also increased to over 84 percent of revenue. Moreover, the rise in distribution expense due to advertising, in addition to finance expense, also affected profitability adversely during the year; net margin fell below 1 percent whereas net profit was the lowest seen at Rs 64 million.

The company witnessed positive growth in its topline, at nearly 20 percent, after a period of three years, in CY19. This was largely contributed by the dairy and beverages segment, primarily the core brands “Olpers” and “Tarang”, both of which were relaunched in CY18. Despite the improvement in topline, cost of production, due to currency devaluation and high interest rates, continued to eat away profitability. Cost of production increased to more than 86 percent of revenue; with a significant distribution and finance expense, both beyond Rs 1 billion, the company incurred a loss of Rs 955 million for the first time in a decade.

Quarterly results and future outlook

Among the three quarters of CY20, the first quarter saw the lowest sales revenue, although comparing it to the same time last year, there has been a 14 percent increase. The dairy and beverages segment continued to grow, while the impact of Covid-19 that led to a lockdown was seen more on ice cream and frozen desserts segment, which is more of an impulse purchase product. With a lockdown in place, there was a lower footfall in retail and leisure spots. However, the high distribution expense did not allow room for margins to grow therefore, the company posted a loss for the period of Rs 131 million.

During the second quarter there was an improvement in topline both on a quarter-on-quarter basis and year on year basis. Olpers continued to lead the dairy and beverages segment while the ice cream and frozen dessert segment also saw a revenue of Rs 1.9 billion that was higher than 1QCY20 due to summer season; however, it was lower than Rs 2.2 billion seen in 2QCY19. With some reduction in cost of production, distribution expense and support coming from other income, net margin stood at 4 percent, compared to previous quarter’s loss.

Third quarter saw another rise in topline at over Rs 12 billion. While Olpers continued to bring a large share of revenue, the ice cream and frozen dessert segment also continued to increase its share in the total revenue pie, contributing Rs 3.4 billion. Although 3QCY20 saw the highest cost of production at over 88 percent of revenue, the lower finance expense helped maintain profitability; net margin although positive, was down from previous quarter, to less than 1 percent.

Owing to the pandemic and hence a declining purchasing power combined with high costs, the company foresees a challenging environment in the future.