Fauji Foods Limited

Fauji Foods Limited (PSX: FFL) was established in 2015 after Fauji Foundation along with Fauji Fertilizers took over Noon Pakistan Limited; the latter was established in 1966 as a public limited company. Fauji Foods is one of the companies in The Fauji Group; The Fauji Group was established in 1954. Under its umbrella are several companies that include Fauji Fertilizer Bin Qasim Limited, Fauji Cement Company Limited, Fauji Meat Limited, etc.

Fauji Foods Limited is in the business of processing and selling toned milk, milk powder, fruit juices, allied dairy, and food products.

Shareholding pattern

With around 68 percent of the shares under this category, associated companies, undertakings and related parties are the largest shareholders of Fauji Foods. The local general public holds close to 26 percent followed by joint stock companies holding about 4.5 percent. The remaining 1 percent is distributed with the rest of the shareholder categories.

Historical operational performance

The company previously called, Noon Pakistan Limited saw a declining trend of topline along with a growing negative bottomline. However, upon acquisition by Fauji Foundation along with Fauji Fertilizers, it was renamed to Fauji Foods in 2015. This decision was made to come out of the period of consecutive losses. The change in ownership also came with a change in year end, the switched from June-end to December-end.

Therefore, when FY15 is compared with CY16, there is a nearly 81 percent growth in topline. During CY16, three new products were launched in a different packaging: Dostea (liquid tea whitener), Nurpur Original (UHT), and Nurpur Fresh (pasteurized). Apart from a fresh packaging, there was also marketing and advertisement campaigns. This is also reflected in a higher distribution expense that grew from Rs 168 million in FY15, to over Rs 1.2 billion in CY16. With cost of production already consuming nearly 97 percent of revenue, there was little margin for absorption of other costs, which meant that loss increased to Rs 967 million for the year.

Topline more than doubled during CY17 for Fauji Foods. It undertook various BMR activities that helped in improving its production capacity; for instance, at the start of the year, it commissioned its Ultra Heat Treatment (UHT) plant. Alongside this, the company also added several products to its portfolio such as “MUST” fruit juices and low-fat UHT milk for the health conscious. However, cost of production continued to make up a large part of revenue - above 95 percent, which meant that other costs could not be covered. Thus, loss escalated to over Rs 2 billion.

Sales revenue continued to grow through CY18, although at a lower rate of 9 percent. This was due to an adverse impact seen in the UHT milk segment as a result of an order by the Supreme Court. Upon retesting the milk, the order was reversed, however, the impact on sales had been made. Moreover, availability of inexpensive loose milk through informal channels also posed a challenge for the company. Cost of production also continued to increase, eating away all the revenue, thereby incurring a gross loss. Fauji Foods, along with the industry as a whole could not pass on the higher input cost to consumers for certain products that also contributed to losses. Thus, net loss grew to Rs 2.8 billion for the year.

Since the acquisition in 2015, Fauji Foods witnessed negative growth in topline for the first time in CY19, at nearly 25 percent. During the year, several factors led input costs to increase further: custom duty on imported skim milk powder and imposition of 10 percent on tea whitener. Although the company made a price adjustment in the tea whitener segment in response to high costs, the industry remained undeterred to this change, which compelled Fauji Foods to withdraw it price adjustment. Thus, cost of production increased further, consuming more than the revenue. This worsened the bottomline to a loss of Rs 5.8 billion.

Recent results and future outlook

On a year-on-year basis, the company did better in the first quarter of CY20, while among the three quarters of CY20, it saw the highest cost of production as a percentage of revenue thereby incurring the highest loss of Rs 952 million. The impact of the pandemic was seen in the second quarter as net sales stood at Rs1.6 billion, although on a year-on-year basis it had performed better. Cost of production was controlled to some extent in comparison to the first quarter which reduced gross loss to Rs 9 million.

Third quarter of CY20 saw the effect of some economic recovery as the economy opened up after the strict lock down imposed at the end of the first quarter. The company also innovated with its products under the brand name “Nurpur”. Among the three quarters, cost of production was the lowest in the third quarter at almost 98 percent, whereas cumulatively 9MCY20 saw lower losses than 9MCY19.

In order to gain future profitability, the company is looking towards fixed cost optimization, in addition with entering into supply agreements with international food chains and restructuring debts.