National Foods Limited

National Foods Limited (PSX: NATF) as a private limited company in 1970 under the Companies Act, 1913. It was later converted into a public limited company under the repealed Companies Ordinance, 1984. The company manufactures and sells convenience-based food products, such as recipe mixes, salt, spices, ketchup, jam, etc.

Shareholding pattern

As at June 30, 2020, nearly 39 percent shares were held by the directors, CEO, their spouses and minor children. Within this category, majority of the shares are held by Mr. Khawar M. Butt. Over 33 percent shares are held under the associated companies, undertakings and related parties that solely includes ATC Holdings (Private) Limited. The local general public owns 15 percent shares while the remaining 13 percent shares are with the rest of the shareholder categories.

Historical operational performance

National Foods Limited has consecutively witnessed a growing topline, whereas profit margins have remained more or less stable throughout the decade.

In FY17, revenue of the company grew by 12 percent, crossing Rs 14 billion in value terms. This was attributed to a volumetric gain in the core business by nearly 11 percent. Given that the company operates in the FMCG sector, it is difficult to increase selling price. As a result, most of its revenue driving categories witnessed a subdued growth trend. Cost of production, on the other hand, reduced very marginally to 67 percent, keeping gross margin more or less stable at close to 33 percent. With most other factors remaining unchanged, the slightly higher margin also trickled down to the bottomline, with net margin recorded at 6.7 percent for the year, compared to nearly 6 percent in the previous year.

Revenue growth momentum continued in FY18, although it slowed down to single digits, at 9.5 percent, compared to the double-digit revenue growth seen for the last consecutive seven years. During the year, the company expanded its product portfolio, adding mayonnaise and snacks to its offering. Both products were received well in the market. Cost of production was down to a little over 65 percent, that helped raise gross margin to over 34 percent. However, this did not translate into a higher operating or net margin due to increases in administrative and distribution costs as a percentage of revenue, the former particularly. The increase was due to a combination of factors such as a growing salaries expense, depreciation, repairs and maintenance. Thus, net margin fell to 5.8 percent.

In FY19, the company saw its lowest growth in revenue at a marginal 2.6 percent. This was due to the challenging economic and business environment after the election of the new government. With high inflation, disposable incomes reduced, that had an adverse impact on domestic consumption. On the other hand, the company commenced production at its new facility in Nooriabad, and also furthered its product portfolio by adding National Garlic Mayo. Given the inflationary pressure, cost of production increased to nearly 68 percent of revenue, shrinking gross margin to 32 percent; however, operating and net margin increased on the back of increased other income that grew to Rs 255 million. This primarily came from a net exchange gain due to currency devaluation. Thus, net margin grew to 6.6 percent for the year.

Revenue growth bounced back in FY20 as it grew by 16 percent, crossing Rs 19 billion in value terms. While local sales were driven on the back of brand loyalty and promotions, export sales were driven by currency devaluation as it made exports more competitive in the global market. During the year, the company also launched Rozana Recipe range that catered to the making of daily meals; additionally, it recreated the image for Recipe Mixes- an already existing product range. With cost of production increasing negligibly, gross margin was fairly stable at 31.7 percent, while net margin reduced to 5.7 percent due to relatively higher taxation.

Quarterly results and future outlook

Revenue in the first quarter of FY21 was higher by 10.7 percent year on year, on the back of “consumer led initiatives in the local division and distributor and operational efficiencies yielding results in the international domain”. Due to the inflationary pressures, cost of production was higher in the current period, however, the reduction in expense related to on ground promotional and otherwise activities, that were halted due to the pandemic, allowed net margin to be slightly higher in 1QFY21 at 7.3 percent.

The second quarter of FY21 saw revenue higher by over 29 percent year on year. This was partly attributed to a volumetric gain, particularly in the international division. Cost of production in 2QFY21 was only marginally higher, keeping gross margin lower. But net margin was better year on year, due to reduction in administrative expense as a percentage of revenue.