High flying FMCG sector

It was clear from the first quarter results that 2015 will be an excellent year for Pakistan's fast-moving consumer goods manufacturers. After the result for the first six months of 2015, food companies came out as one of the highest performing sectors during the year so far. As the results of 1HCY15 are in, three major FMCG sector firms Nestle, EFOODS and Unilever Pakistan Foods have been taken as a sample for analysis.

The net turnover of the three consumer giants clocked in close to the Rs83 billion in the first half of 2015, which is an 11 percent increase year-on-year. The performance in the top line is quite phenomenal because these three companies reported a loss of 19 percent collectively in the first half of 2014. Overall volumetric growth is the major factor in the sale growth. Mainly, the urbanization gets the blame for the increasing demand for the packaged goods. However, recently there has been a spur in the rural demand for the packaged products and that has become an important factor behind the growth of FMCG sector.

Nestle Pakistan; the leader in the FMCG sector still holds a commanding position in the cumulative top line of consumer goods industry. It contributed 64 percent to industry's entire sales during the first half of 2015, while EFOODS, which is on the rise since 1QCY15 came second with 30 percent, and Unilever contributed 5 percent in the total tally.

The food sector is enjoying the decline in commodity prices globally mainly historic collapse in international powdered milk prices, lower local milk procurement costs, decreased fuel prices, stronger Pakistani rupee and low wheat prices. All these factors have brought down the core cost for the industry as the proportion to the industry top line by 7 percent during the period under discussion.

The food industry has kept its cost of distribution, advertising and other expenses quite stable, and it only increased by 700 bps in terms of industry's top line to 17 percent. From the start of 2015, the food industry is trying to reduce its financial leverage combined with lower interest rates; the industry has witnessed a decline in its financial cost. By the end of 1HCY15, finance costs as a percentage of the industry's top line decreased by 2300 bps to 2 percent.

However, the important question is that how sustainable this performance is? And how long the trend of low milk prices in the global market would continue? The global prices of milk have rebounded, up by 51 percent since the second week of August to $2260/MT at present. Combine it with the recent announcement of cutting the output by a significant player in the global market and that might pose a risk to future earnings' prospects.