Merit Packaging Limited

Merit Packaging Limited (PSX: MERIT) was incorporated in Pakistan as a public limited company in 1980. The principal activity of the company is the manufacturing and sale of printing and packaging material. The company caters to a wide range of sectors including food & beverages, surgical instruments, consumer goods, textile etc. the company belongs to The Lakson Group of companies.

Pattern of Shareholding

As of June 30, 2023, MERIT has a total of 199.96 million shares outstanding which are held by 1660 shareholders. Associated companies, undertaking and related parties have the largest stake of 81.54 percent in the company followed by local general public holding 13.01 percent shares. NIT & ICP have 2.31 percent stake in MERIT. The remaining ownership is distributed among other categories of shareholders.

Financial Performance (2019-23)

Barring year-on-year decline in 2020, MERIT’s topline has been riding an upward trajectory since 2019. However, the company has never posted net profit during the period under consideration. Its net loss magnified until 2020 and then started dipping thereafter. The company’s gross margin dived to negative zone in 2020 and 2021 and then recovered thereafter. Its operating margin which stayed in the negative territory until 2021 also rebounded in 2022 and 2023 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, MERIT’s net sales registered year-on-year growth of 17 percent which was the result of increased market share and sales volume. Cost of sales mounted by 28 percent year-on-year in 2019 primarily on account of higher fixed overhead cost to cater increased sales volume. Insufficient supply of electricity compelled the company to switch to diesel generator during the year. High cost of raw materials, Pak Rupee depreciation, higher import tariff and regulatory duties on the import of raw materials also took toll on the company’s gross margin which drastically dropped from 9.22 percent in 2018 to 0.19 percent in 2019. Gross profit also shrank by 98 percent in 2019. Administrative expense remained intact during the year while distribution expense inched up by 2 percent on account of higher travelling & conveyance and outward carriage charges due to higher sales volume and escalated prices of POL products. MERIT registered operating loss of Rs.126.53 million in 2019 versus operating profit of Rs.95.40 million in 2018. Finance cost surged by 66 percent year-on-year in 2019 on account of high discount rate and a steep rise in short-term and long-term borrowings to finance working capital requirements and CAPEX respectively. MERIT’s debt-to-equity ratio soared from 278 percent in 2018 to 354 percent in 2019 (see the graph of total debt-to-equity ratio & finance cost). MERIT posted net loss of Rs.310.54 million in 2019, up 37 times from 2018. Loss per share also surged from Rs.0.14 in 2018 to Rs.3.85 in 2019.

In 2020, MERIT’s net sales plunged by 25 percent year-on-year as the eruption of COVID-19 resulted in lockdown of businesses resulting low orders from customers. Moreover, shifting of Lahore factory to a new site during the year, low performance of old machines at Karachi factory and slow development of value products on new machine also hampered company’s production during the year. Lower capacity utilization during the year also resulted in 17 percent lesser cost of sales in 2020, yet substantial hike in cost of raw materials, Pak Rupee depreciation and lesser absorption of fixed overhead cost culminated into gross loss of Rs.198.39 million in 2020. MERIT was able to cut down its administrative expense by 1 percent in 2020 mainly on account of curtailed rent, rates & taxes, software license fee and service fee paid to an associated company. Distribution expense rose by 7 percent year-on-year in 2020 mainly on account of mounted outward carriage charges due to restriction on the movement of people and goods on the back of COVID-19. Impairment loss and loss on the disposal of property, plant & equipment during the year drove other expense up by 865 percent in 2020. Operating loss multiplied by 229 percent in 2020 to clock in at Rs.416.43 million. Finance cost hiked by 58 percent in 2020 due to higher discount rate for the first three quarters of 2020 coupled with increased borrowing requirements. Net loss amplified by 123 percent year-on-year in 2020 to clock in at Rs.692.68 million with loss per share of Rs.8.59.

MERIT’s topline followed back its uphill journey in 2021 with 34 percent year-on-year rise in net sales. As businesses began to resume after the lockdown period, MERIT started receiving new orders resulting in a healthier topline. However, topline growth couldn’t trickle down to produce healthier bottomline amid high cost of raw materials, Pak Rupee depreciation, hike in energy prices and lesser productivity and efficiency of company’s old printing machines. While MERIT couldn’t register gross profit in 2021, it was able to significantly curtail its gross loss by 79 percent year-on-year in 2021 which clocked in at Rs.42.40 million. Administrative expense ticked down by 3 percent year-on-year in 2021 as the company trimmed down its workforce from 264 employees in 2020 to 206 employees in 2021. Conversely, distribution expense spiked by 15 percent on account of higher outward carriage charges incurred due to recovery of sales volume. Other income greatly propelled the operating performance of MERIT in 2021 as it grew by 387 percent on the back of insurance claim, capital grant income, exchange gain, impairment reversal and scrap sales. The company’s operating loss narrowed down by 48 percent year-on-year in 2021 to clock in at Rs.217.75 million. Lower discount rate helped MERIT cut down its finance cost by 7 percent in 2021. This translated into 18 percent lower net loss in 2021 to clock in at Rs.564.98 million. Loss per share also plummeted to Rs.6.84 in 2021.

In 2022, MERIT witnessed 44 percent year-on-year rise in its net sales backed by both upward price revision and increased volume. This enabled the company to register gross profit of Rs.252.92 million in 2022 with GP margin of 6.05 percent. Administrative expense surged by 15 percent year-on-year in 2022 due to higher payroll expense on account of inflation despite drop in number of employees to 188 in 2022. Higher sales volume and increase prices of POL products also drove up the distribution expense by 44 percent in 2022. MERIT posted operating profit of Rs.92.77 million in 2022 with OP margin of 2.22 percent. Despite hiking discount rate, the company was able to reduce its finance cost by 20 percent year-on-year in 2022 due to lesser external borrowings obtained during the year. MERIT’s debt-to-equity ratio considerably fell from 806 percent in 2021 to 200 percent in 2022. The company registered net loss of Rs.168.17 million, down 70 percent year-on-year. Loss per share also dropped to Rs.0.84 in 2022.

The company registered topline growth of 52 percent in 2023. The company was able to pass on the cost hike to its customers in 2022 which improved its margins. Moreover, the company has been undertaking massive CAPEX and installing new plant & machinery to increase its productivity and cut down its cost. This resulted in 94 percent rise in gross profit with GP margin jumping up to 7.75 percent in 2023. Administrative expense escalated by 10 percent year-on-year in 2023 as its number of employees grew to 194 in 2023. Distribution expense hiked by 22 percent in 2023 on the back of higher sales volume which pushed up the freight charges. Operating profit magnified by 200 percent in 2023 with OP margin of 4.4 percent. Finance cost surged by 31 percent year-on-year due to unparalleled level of discount rate, this was despite the fact that the company two long-term loans during the year which squeezed its debt-to-equity ratio to 144 percent in 2023. Net loss of Rs.136.60 million posted by MERIT in 2023 was 19 percent lower than that of 2022. Loss per share also slipped to Rs.0.68 in 2023, the lowest since 2019.

Recent Performance (1QFY24)

MERIT’s financial performance in 2024 tells no different tale than the previous years. While topline grew by 26 percent year-on-year in 1QFY24, it couldn’t cascade down to produce a positive bottomline. Topline growth was the result of upward price revisions during the period while sales volume plummeted as deteriorating macroeconomic fundamentals pushed the FMCG sales down owing to dwindling purchasing power of consumers. Cost of sales climbed up by 27 percent year-on-year mainly driven by higher utility charges. Gross profit grew by 15 percent year-on-year in 1QFY24, however, GP margin inched down from 9.8 percent in 1QFY23 to 8.92 percent in 1QFY24. Administrative expense surged by 23 percent year-on-year in 1QFY24 apparently on account of higher payroll expense due to soaring inflation. Distribution expense slid by 17 percent year-on-year in 1QFY24 on account of lower sales off-take. Operating profit improved by 7 percent year-on-year in 1QFY24, however there was a 100 bps decline in OP margin which clocked in at 5.72 percent. Finance cost gave no breather as it mounted by 45 percent year-on-year in 1QFY24 on account of high discount rate. As a consequence, MERIT registered net loss of Rs.16.75 million in 1QFY24 versus net profit of Rs.3.44 million during the same period last year. Loss per share stood at Rs.0.08 in 1QFY24 versus EPS of Rs.0.02 in 1QFY23.

Future Outlook

Due to consistent losses, the company’s accumulated loss stood at Rs.2.005 million as of September 30, 2023. While the company is trying to reduce its cost by installing modern machinery. While CAPEX is expected to yield improved gross margins, it is also driving up the finance cost of the company which is the main stumbling block in the way of positive bottomline. MERIT needs to streamline its capital structure and include more equity financing or low cost loans from directors/sponsors to rationalize its finance cost and produce a positive impact on its bottomline and margins.