Engro Foods Limited

Engro Foods Limited is a majority owned subsidiary engaged in the manufacturing, processing and marketing of dairy products, ice cream and frozen desserts and fruit juices. As an example of Engro's pursuit of excellence, the business has established several brands that have already become household names in Pakistan such as Olper's, Tarang, Dairy Omung, Omung Lassi, Olper's Lite and Omore, amongst others.
Overview CY12
The Company posted a strong revenue growth of 35 percent during CY12 and declared the highest ever profit of Rs 2.6 billion as opposed to a profit of Rs 891 million in 2011. Overall, Efoods achieved a volume growth of 25 percent in 2012. The volumetric growth resulted in securing a market share of 51 percent in 2012 as opposed to 44 percent in 2011 across the ambient UHT segment.
The growth in the ambient UHT milk segment in the meantime was driven largely by tea creamers where Engro's "Tarang" maintained its leadership. Olper's continued to show strong performance through the year. The ice cream market on the other hand showed a downward spiral due to the continued energy shortage that severely impacted the cold chain infrastructure across the country. As a result the ice cream segment registered volumetric decline of three percent.
Throughout the year, the firm actively engaged in portfolio expansion through two important product launches. Amongst the most heavily lauded was the innovative "Omung Lassi", which continued to enhance the firm's consumer outreach. Another important addition to the Omore family was Omore Buzz, which was launched in five new flavours - Tiramisu, Caramel Crunch, Strawberry Cheesecake, Chocolate Crispies and Strawberry Bliss (a yogurt-based stick).
Focused investment and growth, diversification of existing product portfolio and effective product mix management along with a strong emphasis on operational excellence through the various business segments remain the key elements in the achievement of improved result in 2012.
First Quarter Highlights During 1QCY13, heightened security issues in Karachi caused a number of operational roadblocks for the rapidly growing firm. A number of the firm's distributors resigned, which held up business, with the firm losing 18-20 selling days in the city.
Despite these issues, Efoods was able to make the best of the situation and only witnessed small erosions in the top line. For a larger part, this volumetric decline came on account of lower sales in the dairy and juices segment. With January-March generally considered a lean period for the juices segment (with fewer pickings on account of the cold spell across the country) the firm saw a volume decline of 11 percent in the segment. As a result of this, EFood's market share in the juices and dairy segment shed one percent, settling at around 50 percent.
On the other hand, Engro's ice-cream and frozen dessert segment showed stable progress, showing revenue growth of nearly 13 percent. While the volume declined by a relatively tame 0.5 percent year-on-year during the winter off-season, price increases and an improved cold chain infrastructure helped curtail losses and kept up margins.
On the whole, the quarter remained slightly subdued, with revenues remaining flat year-on-year and shedding 11 percent quarter-on-quarter (effect exacerbated by a high base). While operational efficiencies translated into a 32 percent growth in EPS compared to the same period last year, quarter-on quarter, earnings declined by 33 percent.
Financial Ratios Over the last five years, the firm's Gross Profit ratio has had quite a journey. Improving from 7.2 to 25.7 percent, Engro's operational efficiencies and careful and selective scaling have all helped in achieving this growth via improving volumes.
The negative margins of the earlier years of operations have been successfully converted into rapidly growing positives as a direct result of improvement in product profitability and fixed costs management across all segments of Engro's business. The firm's return on capital employed has consequently also improved as after having initially struggled under the build-up costs, the firm has been on a positive profit trajectory since 2012.
The share price of EFoods has also quadrupled from last year as a direct consequence of improvement in profitability. The only actively traded FMCG in Pakistan; Engro Foods has remained the first choice for investors that want to capitalise on Pakistan's vibrant consumer market during the last 12 months.
Outlook The outlook for Efoods remains positive off the back of a burgeoning consumer segment that is buying packaged food like never before. A point of concern might be the imposition of a consumption tax on the packaged dairy segment, an issue that has reared its head and will have a detrimental effect on the ability of a common man to purchase package milk.
However, while the industry awaits the new government's decision regarding the packaged milk tax, a general optimistic view is that the incoming government's policies are very likely to act as a boon to already flourishing sectors in the industry, including the food producing segment that has done better than the rest, even in times of duress.

======================================================

Operating Results @ 1Q

======================================================

Rs(mn)                      1QCY12    1QCY13       Chg

======================================================

Sales                        9,666     9,624    -0.43%

Operating profit               948     1,173    23.73%

OP as a % of sales             10%       12%         -

NPAT                           486       653    34.36%

EPS                           0.65      0.86    32.31%

======================================================

Source: Company records

================================================================

Engro Foods- Key indicators

================================================================

                              2009      2010      2011      2012

================================================================

Net sales                   14,665    20,945    29,859    40,169

Gross profit                 2,716     4,393     6,629    10,321

Operating profit              -141       930     2,412     4,823

PAT                           -433       176       891     2,595

----------------------------------------------------------------

Profitability Ratios

----------------------------------------------------------------

GP margin                      17%       21%       22%       26%

NP margin                      -3%        1%        3%        7%

Return on Capital              -7%        2%        8%       18%

ROE                           -13%        3%       12%       26%

----------------------------------------------------------------

Liquidity Ratios

----------------------------------------------------------------

Current ratio                 1.30      1.50      1.80       2.1

Quick ratio                   0.60      0.50      0.90       1.2

Cash to current liabilities   0.10      0.10      0.10       0.1

----------------------------------------------------------------

Gearing Ratios

----------------------------------------------------------------

Debt-Equity Ratio              50%       48%       44%       38%

----------------------------------------------------------------

Activity Ratios

----------------------------------------------------------------

Inventory Turnover           10.10     10.20      9.80       9.7

Total Assets Turnover         1.60      1.70      1.80       1.8

----------------------------------------------------------------

Investment Ratios

----------------------------------------------------------------

EPS                             -1       0.3       1.2       3.4

P/E ratio                        -         -      18.5      28.6

Market value of share

 @ year end                      -         -      22.6      98.1

================================================================