Punjab Oil Mills Limited

Punjab Oil Mills Limited (PSX: POML) was established in 1981 as a public limited company.The company manufactures and sells ghee, cooking oil, specialty fats, laundry soap, mushroom and coffee. Its manufacturing plant is located Industrial Triangle in Islamabad.

Some of its known brands are Canolive® and Zaiqa banaspati in addition to King cooking oil, King banaspati, Ella banaspati and Ella sunflower oil among others.

Shareholding pattern

With 26 percent of the total shares held under this category, the directors, CEO, their spouses and minor children are the key shareholders of Punjab Oil Mills. Within this, Mr. Usman Ilahi Malik, an executive director, is a major shareholder holding 8.5 percent of the total shares. This is followed by NIT & ICP that has a little over 10 percent shares held under it followed by the associated companies, undertaking and related parties that holds some 8 percent shares; the latter primarily includes M/s Teejay Corporation (Private) Limited. About 47 percent shares are with the local general public. The remaining around 9 percent shares are with the rest of the shareholder categories.

Historical operational performance

Profit margins have been relatively stable except for when they peaked in FY16, whereas revenue has been fluctuating.

There was a marginal decline in revenue during FY16 by 1 percent. This was more a factor of price than volumes since the latter actually increased by 2.3 percent while average selling price saw a 3.5 percent decrease. The cooking oil segment was primarily responsible for driving up volumes. Despite the decrease in revenue, gross margin improved to 19 percent due to high margin products. However, net margin remained nearly flat as distribution costs went up as a percentage of revenue to 7.5 percent along with a higher taxation; the former was attributed to higher promotional costs.

The company saw better performance by FY17 as revenue grew by 5.5 percent. This was driven by both, better prices and well as better volumes and again the latter mostly came from the cooking oil segment. However, this did not translate into higher margins as cost of production went up to claim more than 84 percent of revenue. The price of raw material increased that adversely affected the gross margins since the burden of higher cost could not entirely be passed on to the consumer without losing market share. Other factors remained more or less the same year on year, though due to a relatively lower tax expense the net margin did not fall drastically and locked in at 3 percent for the year.

At 11.5 percent, Punjab Oils saw double-digit growth in its revenue in FY18. This was primarily a result of volumes as prices saw only a slight upward change. However, gross margins reduced, although marginally due to higher raw material costs in addition to a high proportion of low-margin products in the total revenue pie. Distribution costs continued to rise as a result of an expansion in sales force along with increased marketing expenditure. With s higher taxation expense as well, net margin decreased to 1.4 percent- a level last seen in FY13.

Punjab Oils saw another year of double-digit growth at 11 percent in FY19 - roughly the same as last year. This was a result of both, a gain in selling price as well as a volumetric gain. The currency devaluation had caused a sudden escalation in cost of production in value terms in FY19, however it was also accompanied by a rise in revenue that kept gross margins from having any significant change. Given that the company is trying to expand its product portfolio, it led to an increase in salaries while distribution expense reduced as a percentage of revenue due to a conscious decision made by the company to reduce advertising expense. Thus, net margin increased marginally to near 2 percent.

After rising revenue for three consecutive years, revenue witnessed a decline in FY20 by a little over 4 percent. The first few months of FY20 saw lower sales as wholesalers and distributors were unwilling to come under the tax net. By the time revenue began to recover, the country was hit by a pandemic that resulted in entertainment and restaurant industry to shut down, leading to low demand and consumption from that end. With most other factors remaining the same, profit margins remained stable; net margin was at 1.6 percent, slightly down from last year’s 1.9 percent.

Recent results and future outlook

There was a near 28 percent year on year growth in sales during 1QFY21. This was due to an unusual decrease in sales volume during the same quarter last year. With a slight decrease in cost of production, gross margins improved to 17 percent. The advertising expense affected the operating margin while a lower tax expense allowed net margin to improve marginally.

While margins and turnover have somewhat stabilized, there is still a risk that could keep margins under pressure; these are the volatility in the international oil market along with a rising number of Coronavirus cases in addition to an uncertain domestic and international political environment.