Fauji Foods Limited

Fauji Foods Limited (PSX: FFL) when Fauji Foundation and Fauji Fertiliser took over Noon Pakistan Limited in 2015. The latter was set up in 1966 as a public limited company. Fauji Foods is part of the Fauji Group that was established in 1954. It has other companies in the group such as Fauji Cement, Fauji Fertiliser Bin Qasim Limited, Fauji Meat Limited, etc. Fauji Foods processes and sells toned milk, milk powder, fruit juices, and allied dairy and food products.

Shareholding pattern

As at December 31, 2021, over 75 percent shares are held under the associated companies, undertakings and related parties. The local general public owns close to 15 percent shares followed by almost 5 percent in joint stock companies. The directors, CEO, their spouses and minor children own less than 1 percent, while the remaining roughly 3 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline particularly after CY16, while profit margins remained stable except for a decline in CY19 after which they rose again.

Revenue in CY18 grew by over 9 percent to reach Rs 8 billion in value terms. However, this growth rate was relatively subdued to the over 100 percent growth seen in the last year. This was due to a Supreme Court order that created a negative impact on the UHT milk category. Although the order was reversed but the sales had already seen its effect. Moreover, the company also faced some level of competition from loose milk that was cheaper and distributed through informal channels. With cost of production reducing slightly to 95 percent, compared to over 97 percent in CY17, gross margin also increased somewhat to 4.7 percent. But with additional expenses incurred and the rise in finance expense increased the net loss to Rs 2.85 billion.

In CY19, topline contracted significantly by almost 25 percent to fall to Rs 5.7 billion. Overall, the dairy industry faced challenges as the availability of loose milk continued to be challenge while there was also no government support. In addition, the company could not arrive at a decision with a Chinese company to acquire Fauji Foods. With a drop in topline, the company was unable to cover costs, thus incurring a gross loss of Rs 679 million. With further expenses incurred, in addition to rising finance expense coupled with a significantly higher taxation, net loss was recorded at an all-time high of Rs 5.8 billion.

Revenue growth recovered in CY20 as the company focused on diversifying to include value-added products such as cheese, butter and unsalted butter, instead of growing volumes. Topline grew by over 28 percent to reach Rs 7.4 billion. The company also made changes to its distribution systems and maintained supply chains that reflected in the curtailed distribution expense. However, production cost consumed nearly the entire topline leaving little margin for absorption of other costs. Thus, the company incurred a loss of Rs 3 billion.

Growth momentum continued in CY21 as revenue registered a growth of over 16 percent to reach an all-time high of Rs 8.6 billion. The company introduced Nurpur cream in the market, while launching its butter in a butter tub. It also introduced an unsalted variant of butter considering consumption trends. With cost of production going down to over 89 percent of revenue, the company managed to earn an all-time high gross margin of 10.7 percent. With some curtailment in finance expense as a share in revenue, net loss for the year reduced to Rs 1.2 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was marginally higher by 1 percent year on year. While Nurpur UHT milk recorded a volumetric growth of 47 percent year on year, its tea creamer category was adversely affected as it lost 30 percent volume due to an industry-wide price increase. Due to inflationary pressures, cost of production consumed nearly 93 percent of revenue, compared to almost 89 percent in 1QCY21. This trickled to the bottomline that saw a net loss of Rs 499 million for the quarter versus Rs 347 million in the same period last year.

In the second quarter, topline was higher by 13 percent year on year while cost of production escalated to consume all of the revenue due to rising cost of inputs. As a result, net loss for the quarter increased to Rs 754 million compared to Rs 411 million in 2QCY21 while cumulatively loss grew to Rs 1.2 billion for 1HFY22 compared to Rs 758 million in 1HFY21. The company has been investing to increase and expand its value-added portfolio while the inelastic nature of demand of dairy products will also help the growth of the business. The company is also looking to reduce costs by making structural adjustments, as despite growth in the topline, costs consume more than 90 percent of revenue that hinders profitability.