National Foods Limited

National Foods Limited (PSX: NATF) was established in 1970 as a private limited company under the Companies Act, 1913. It was converted into a public limited company under the repealed Companies Ordinance, 1984. The company’s product offering includes convenience-based food products such as spices, recipe mixes, salt, ketchup, jam, etc.

Shareholding pattern

As at June 30, 2021, nearly 39 percent shares are held by the directors, their spouses and minor children. Within this category, the major shareholders are Mr. Khawar M. Butt and Mr. Abrar Hasan. Another over 33 percent shares are held under associated companies, undertakings and related parties that includes ATC Holdings (Private) Limited. Over 15 percent shares are held under foreign companies while the remaining roughly 12 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has consistently seen a growing topline since FY10, while profit margins have largely remained stable, particularly in the last six years.

Topline growth in FY18 stood at 9.5 percent that was rather subdued compared to the double-digit growths seen consistently seen FY11. During the year, the company expanded its portfolio by adding mayonnaise and snacks, both of which were well-received in the market. With cost of production reducing to 65.6 percent, versus 67 percent in FY17, gross margin improved to over 34 percent. However, this did not translate into a higher net margin that was recorded at 5.8 percent, versus 6.7 percent in FY17. This was attributed to an increase in administrative expense in particular due to rising salaries expense, depreciation, repairs and maintenance.

In FY19, revenue growth was at its lowest at 2.6 percent. This was attributed to the uncertain economic and business environment as the year began with general elections. On the other hand, the company started production at its new facility in Nooriabad, while also adding garlic mayo to its product portfolio. However, due to inflationary pressures, cost of production consumed nearly 69 percent of revenue that reduced gross margin to 32 percent. But net margin improved, although marginally, to 6.6 percent due to considerable support from other income. The latter came from a net exchange gain due to currency devaluation.

Topline growth reverted to double-digits as it was recorded at 16 percent in FY20. Brand loyalty and promotions encouraged local sales, while export sales grew due to currency devaluation that made exports more competitive in the global market. During the year, the company launched Rozana Recipe that served the making of daily meals. It also rebranded its Recipe Mixes range. With cost of production remaining close to 68 percent, gross margin was also stable at 31.7 percent. Net margin at a lower 5.7 percent was due to comparatively higher taxation expense.

Revenue in FY21 grew by 20 percent to cross Rs 23 billion in value terms. The company engaged actively with marketing campaigns to encourage sales and grow volumes by conducting in-store trials and collaborating with community bloggers, etc. But with cost of production increasing marginally as a percentage of revenue at over 69 percent, gross margin reduced to 30.4 percent. This also trickled down to net margin that was also marginally lower at 5.5 percent. In terms of value, however, bottomline was recorded at an all-time high of almost Rs 1.3 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 11 percent year on year as lockdowns eased and volumes grew. The company continued to conduct brand and consumer led activities to encourage sales. On the other hand, with cost of production reducing to almost 66 percent of revenue, compared to 69 percent in 1QFY21, gross margin was also higher at 34 percent compared to nearly 31 percent in the same period last year. This also trickled to the net margin that was also better in 1QFY22 at 9.4 percent.

The second quarter of FY22 also saw topline higher year on year by 8.3 percent. The company’s core business witnessed a growth of 11 percent in 1HFY22. With little change in cost of production as a share in revenue, gross margin was similar year on year at around 29 percent. But with considerable support from other income and a reduction in finance expense, net margin was better in 2QFY22 at 4.8 percent compared to 1.5 percent in the same period last year.

The third quarter saw revenue higher by 23.3 percent year on year, while the core business saw a growth of 15 percent. The company also benefitted from Ramadan buying cycle. Cost of production as a share in revenue went down to 64 percent, versus 68 percent in 3QFY21. Again, other income also provided support to the bottomline. Thus, net margin was also better year on year at 8.6 percent compared to 7.6 percent in same period last year. While the topline has been growing for the company, and it has also maintained its costs as a share in revenue, despite rising commodity prices, there is still considerable political and economic uncertainty that can have an adverse impact on future profitability.