FMCG: COGS clip sales gains

Rising appetite for packaged food products and widespread advertising, marketing and distribution efforts seem to have pushed up FMCG sectors top line by double digits in 1Q CY14 compared to the paltry growth of 1.5 percent year on year in 1Q CY13. Here is a quick snapshot of FMCG sectors performance in the quarter ended March 2014, where Nestle, EFOODS and Unilever Pakistan Foods have been taken as a proxy.
Nestle enjoys huge product portfolio with an added advantage of market penetration and good brand positioning in dairy sector. During 1Q CY14, Nestle contributed around 67 percent to industry sales. Meanwhile, EFOODS seems to have left the bad patch behind it as its net sales rose by 4.3 percent year on year primarily due to the efforts made to increase Tarang sales on the back of its price discount policy.
However, in the midst of rising retail prices, a combination of soaring commodity prices, growing inflationary pressure and rising energy cost led to a surge in cost of sales, pruning the industrys gross profit margin considerably. This raises question marks over the pricing power of big FMCGs and the purchasing one of the consumers.
Due to lower core operating expenses and stable margins, the industrys bottom line increased to 26.7 percent year on year this quarter. This is due to significant hike in other operating income, which has gone up by more than half a billion rupees. But, thats a one-time gain due to rupee appreciation, according to Zeeshan Afzal of Top Line Securities.
Though EFOODS turnaround remained slow as its bottom line continues to recede unabated, down by 66.7 percent vis-à-vis the same period of last year. However, efficiency improvements and investments in its distribution network have helped EFOODS to streamline its supply chain as distribution costs as percentage of sales drop in the outgoing quarter to 10.5 percent from 14 percent in the same period of last year. But then again, inadequacies in the distribution network are assumed to be the chink in the armour for the ice cream division in the future, mostly due to law-and-order condition and persistent power crisis.
With the start of summer season, seasonal sales will likely increase, hence, the coming quarter of the year will plausibly see greater growth in these firms revenues. However, due to rising costs of utilities, packaging material and raw material, improvements in operational efficiency are a must if the firms plan to keep their profitability and margins stable.

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FMCG sector*

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Rs (mn)                     1QCY14        1QCY13         YoY

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Sales                       35,991        31,793       13.2%

Cost of sales               26,049        21,759       19.7%

Gross profit                 9,942        10,033       -0.9%

PAT                          3,545         2,799       26.7%

Gross profit margin          27.6%         31.6%

Operating profit margin      14.6%         13.9%

Net profit margin             9.8%          8.8%

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Company wise EPS comparison

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Company wise EPS comparison   1QCY14         YoY       Share

                                                 performance

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NESTLE                         45.83        9.9%      -17.2%

EFOODS                          0.29      -66.3%      -72.4%

UPFL                           47.66       15.1%       29.6%

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                       Gross margins             Net margins

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                  1QCY14      1QCY13      1QCY14      1QCY13

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NESTLE               29%         32%          9%          9%

EFOODS               20%         30%          2%          7%

UPFL                 42%         42%         15%         15%

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