National Foods is a reputable Pakistani food company with over 250 products in twelve broad categories, ranging from ketchup to spices. The company was founded in 1970 to cater to the needs of Pakistani families, with a strong emphasis on the ingredients of Pakistani dishes. However, with the passage of time, it ventured into other product categories such as ketchup and jams.
Today, its products are sold in more than thirty-five countries and it is expanding its network extensively by implementing proper distribution channels and technologies.
In local markets, National Foods bagged the top spot in the 2010 brand elections, in which more than ten thousand voters participated. It won in the following five categories:
1) Recipes
2) Jams, Jellies and Marmalades
3) Pickles
4) Spices
5) Ketchup
Recently, in line with the company's vision to target new product categories, it launched packaged rice. The product has already been a hit in the international market and is now brought in Pakistan to meet the growing demand of rice, though it has not been a success in the local market.
Since rice has not performed according to the expectations of the company - partly due to poor recognition in the domestic market; the company has decided to extend the reach of its distribution networks and spend heavily in advertising and sales promotion to create awareness about its products in the local market.
National Foods has also launched 'Instant Powder Drinks' under the brand name "Fruitily". The idea behind the launch of this product was to enter the beverage industry. This product could become an attractive segment in the international market. Both these products have huge potential as their respective industries are evaluated at multi-billions. Sales from new ventures for FY2010 came at Rs 139 million with a loss-after-tax of Rs 61 million.
Profitability Sales Domestic sales grew to Rs 5,395 million in 2010 from Rs 4,519 million in 2009, resulting in a 20 percent growth. This sales growth figure is in line with the overall sales growth. During FY10, sales were hit hard by inflation as consumer demand was reduced. To tackle this issue, price rises were implemented to counter rising inflation and falling consumer demand.
Exports, on the other hand, increased to Rs 597 million in 2010 from Rs 493 in 2009. This represents an increase of 21 percent, which is in line with the overall sales growth figure. The export avenues were USA/Canada, Africa, Middle East Asia and some other countries.
The biggest export growth was seen in the USA/Canada region where sales rose by a handsome 47 percent. In other countries too, sales grew by an impressive 20 percent for FY 2010. Overall, net sales for the year 2010 stood at Rs 4,489 million, as compared to Rs 3,758 million in 2009, after accounting for sales tax, special excise duty, discount, rebates & allowances and sales return. Sales shot up by 20 percent for the FY 2010.
Cost of Sales The firm's cost of sales increased to Rs 3,163 million in 2010 from Rs 2,632 million in 2009, which shows a change of 20 percent. The rise in the cost of sales mirrors the rise in the sales growth. Thus, price hikes became inevitable. The biggest rise in the cost of sales was seen in the prices of raw materials which grew by 33 percent. This is fairly obvious after the destructive floods of 2010 which affected agricultural commodities greatly.
Margins National Food's gross profit increased to Rs 1,326 million in 2010 from Rs 1,126 million in 2009.This depicts an increase of 17.78 percent. Gross margins have been sustained by frequent price increases and by improving efficiency through cost reduction measures to outdo the impacts of inflation and rising costs of agricultural commodities.
Operating profit has been hit despite increases in sales and gross profit. It fell to Rs 258 million in 2010 from Rs 307 million in 2009, which signifies a loss of 15.93 percent. This loss is mainly due to the increase in distribution costs, especially advertising and sales promotion, which grew by Rs 150 million in comparison with last year, affecting operational costs considerably.
Net margin dropped to Rs 86 million in 2010 from Rs 139 million in 2009. This translates into a drastic decline of nearly 38 percent. Despite increases in sales and gross margin, the increases in distribution and finance costs were much greater and it outpaced the increase in the sales and gross margin.
Operational efficiency Operating cycle extended to 136.5 days in 2010 from 114.4 days in 2009. The main factor responsible for this is the days' inventory turnover, an indicator of how quickly the company converts its raw materials into sales, which increased to 135 days in 2010 from 111 days in 2009. National Foods' historic six year operating cycle average comes at 104 days, which further shows the reduced operational efficiency of the company for the FY 2010.
Liquidity National Foods' current ratio came at 1.01 in 2010 while it was 1.65 for the industry during the same period. Though the current figure falls below the industry average but it has been pretty consistent with its six year historic average of 1.09.
The firm's quick ratio decreased to 0.18 in 2010 from 0.31 in 2009. The industry ratio for 2010 came at 0.33. Its six-year historic average is 0.3. The current figure shows that National Foods has a lot of its assets tied up in inventory as is evident from the fact that its stock-in-trade rose to Rs 1,502 million in 2010 from Rs 846 million in 2009. Hence, it should try to decrease the level of its reliance on inventory as assets.
Debt-to-equity ratio
Debt-to-equity ratio decreased to 14.23 percent in 2010 from 21.43 percent in 2009. The major reason for reduction in debt-to-equity ratio was the retirement of the long term loan of Rs 40 million. The current debt-to-equity ratio is at a six-year low, which shows the management's commitment to reduce debt levels. This had an impact on the assets and the company used cash and other assets to pay off its debts.
Future outlook
The future for National Foods is gloomy at worst and sustainable at best. The poor economic conditions, combined with the recent floods have reduced consumer demand. Therefore, the company has recently launched new products and delved into new avenues in search of increased sales revenue.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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