Pakistan Paper Products Limited

Pakistan Paper Products Limited (PSX: PPP) was set up as a private limited company in 1962. It was later converted into a public limited company. The company produces and sells sensitized papers, pro-labels, and exercise books. As of June 2021, the company has a production capacity of 58,632 exercise books; 216,000 rolls of sensitized paper, and 3,500,000 square meters of pro-labels. Clientele, particularly in the pro-label category include Atlas Honda, Shell Pakistan, Caltex, Unilever, Reckitt Benckiser, Getz Pharma, and Engro Foods.

Shareholding pattern

As of June 30, 2022, 37 percent of the shares are owned by the directors, CEO, their spouses, and minor children. Of these, the majority are owned by Mr. Abid Sayeed, the CEO of the company. Another 32 percent are held under the category of “individuals”, followed by over 11 percent in associated companies. This category solely includes Management & Enterprises (Pvt.) Limited; 8 percent shares are held in banks, DFIs, NBFIs, etc. the breakup is shown in the illustration

Historical operational performance

Paper Pakistan Products has seen a consecutive rise in its topline since FY11, albeit at varying rates. However, its profit margins have, over time, followed a downward trend.

In FY17, the topline grew by 7.7 percent. This was largely due to a rise in sales of exercise books and pro-labels, which registered an increase by 2 percent and 13 percent, respectively. The self-adhesive label industry in Pakistan had been in a relatively budding stage as suggested by the low per-capital consumption; but it did look promising, considering the growing focus on higher quality packaging and the rapidly developing FMCG sector. Production cost, on the other hand, grew to 81 percent of revenue, reducing the gross margin to 18.8 percent, from 20.4 percent in FY16. But the net margin improved to 9 percent due to an overall decrease in operating expenses as a percentage of revenue, in addition to a notably lower taxation expense.

The company witnessed the highest growth in topline, thus far, in FY18, by 19.4 percent. this was largely brought on by exercise books and pro-labels. Pro-labels recorded a 26 percent growth in sales, in value terms. As per the company’s report, a lot of the companies have switched from sheet-fed wet glue labels to self-adhesive labels. With the growth and hence opportunity seen in this segment, a lot of companies have also invested in this category, thus increasing competition. Production costs, continued to rise, consuming nearly 84 percent of revenue. This is due to a combination of factors: currency devaluation, an increase in international paper price, and an increase in the price of paper by Century Paper Board mills, the main supplier for the company. Thus, the gross margin fell to 16.4 percent; this also trickled down to the bottom line, with the net margin recorded at 6.4 percent.

Growth momentum in the topline was maintained in FY19, as the latter registered an 11 percent rise. As per expectations of future growth in the segment, pro-labels recorded a 20 percent rise in revenue. Exercise books, however, were adversely affected due to the change in the school year from April to July. Currency devaluation and rise in interest rates have proved to be rather a challenge as input prices increased, which could not be passed on to consumers entirely. In addition, the increase in sales of pro-labels worsened the working capital requirement due to delayed payments; moreover, with the change in the school year, the company had to hold the inventory for a long. Thus, the gross margin and net margin reduced to 11.3 percent and 2.1 percent, respectively.

Revenue growth in FY20 was relatively subdued at over 4 percent. The majority of this revenue was concentrated in the last two quarters of the year, and in the segment of pro-labels. However, sales for exercise books, which is another major contributor to revenue, saw a decline due to school closures owing to the Covid-19 pandemic; their reopening was delayed until June, but since, cases continued to rise and the virus mutated, schools remained closed for much longer than predicted and planned. On the other hand, production cost, rose marginally, reducing the gross margin to 10.6 percent. Net margin was also marginally lower at 1.75 percent.

Revenue growth in FY21 was at an all-time high of 19.7 percent, crossing Rs 1 billion in value terms. Pro-labels posted a growth of 22.4 percent, as demand recovered that had been contained due to the pandemic. Moreover, the company had also been adding to its capacity in this segment to cater to the growing demand. It is also looking to add another printing machine by January 2022. Exercise books saw a growth of 14.5 percent; schools opened and closed intermittently as Covid-19 positive cases declined and increased. Given the low number of sales seen last year, the growth in the current period seems exaggerated. Due to a certain degree of currency appreciation, production costs were reduced to 85 percent, allowing profitability to improve. The gross margin stood at 14.5 percent; the net margin was also considerably higher year on year at 6.5 percent, owing to a low finance cost as a result of low-interest rates.

Recent results and future outlook

In FY22, the company’s revenue growth stood around 13 percent year-on-year. The main profit segment – pro-labels however was not able to post sales growth during the year due to weak demand and rising competition. On the other hand, the exercise books saw a sales growth of 45 percent in FY22 versus FY21.

The company remained below FY21 levels in FY22 despite the growth seen in the top line. This was primarily due to rising inflation and finance cost and devaluation of the currency. As a result, the earnings for FY22 were down by around 13 percent year-on-year.

After a challenging FY22, FY23 started on a much more difficult note as the economic slowdown severely impacted the business environment. However, PPP’s revenue growth stood at 5.5 percent in 1QFY23 year-on-year despite these challenges. Pro-label sales were back to their robustness and grew by 25 percent year-on-year, while exercise books showed a growth of 5.88 percent, which was lower than in previous years due to flood disruptions. During the quarter, the company also started its production from its new Gallus machine in July 2022, which also supported revenue growth.

The growth in topline did not translate into bottom-line growth as it stood 4 percent lower on a year-on-year basis. This was due to currency devaluation, and rising administrative and finance costs. Finance cost was significantly up by 218 percent year-on-year in 1QFY23.