Ecopack Limited

Ecopack Limited (PSX: ECOP) was established in 1991 was a private limited company. It was converted into a public limited company a year later and listed on the stock exchange two years later. The company manufactures and sells Polyethylene Terephthalate (PET) bottles and Preforms (an intermediate PET product). Some of the companies it caters to are Pepsi Cola, Murree Brewery, Coca Cola, Gourmet Cola, etc. Its plant is located in Khyber Pakhtunkhwa that has a production capacity of over 300 million bottles and 700 million preforms annually.

Shareholding pattern

As at June 30, 2021, the directors, CEO, their spouses and minor children own over 17 percent shares in the company. Of this, majority are owned by the CEO, Mr. Hussain Jamil. The local general public owns close to 75 percent shares while 7 percent are held under “others”. The remaining less than 1 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has seen a fluctuating topline over the years, while profit margins in the last six years have followed a declining trend between FY16 to FY20, before improving again in FY21.

Topline in FY18 registered an all-time high growth rate of over 50 percent to reach Rs 3.3 billion. This was primarily attributed to competitive pricing. Within the total revenue pie, majority of the revenue in contributed by preforms that witnessed a 114 percent growth. On the other hand, cost of production rose to 89 percent of revenue due to currency devaluation in the second half of the year that made imported raw materials like petro-chemical derived raw materials expensive. Thus, gross margin fell from 16 percent in FY17 to almost 11 percent. However, the fall in net margin was not as substantial, from 4.8 percent in the previous year to 3.7 percent in the current period due to a reduction in the tax figure.

Revenue in FY19 grew by 23 percent to cross Rs 4 billion in value terms. However, cost of production also grew to consume over 90 percent of revenue, reducing gross margin to 9.5 percent. This was due to a combination of currency devaluation and 35 percent rise in petroleum prices that increased truck freight. The resultant double-digit inflation led to a decrease in demand. Net margin was further lower at 1.8 percent as interest rates also increased raising the finance expense to consume 3 percent of revenue.

After rising for four consecutive years, revenue in FY20 fell by 25 percent due to the outbreak of the Covid-19 pandemic in the peak sales season. This had an adverse impact on cost of production that consumed 95 percent of revenue as inventory levels went up. Thus, gross margin fell to an all-time low of almost 5 percent that also trickled to the net margin. Due to high interest rates, finance expense escalated to make up 5 percent of revenue. Eventually, the company incurred the highest loss seen in more than a decade at Rs 104 million.

Topline recovered only slightly in FY21 as it grew marginally by 1.5 percent as the third wave of Covid-19 struck during the peak sales season again. While volumes for bottles sales decreased by 5 percent, volumes for preform sales registered a growth of 6 percent. Managing supply chain and some growth in revenue allowed cost of production to decrease to over 90 percent. Thus, gross margin also improved to 9.8 percent. On the other hand, as interest rates reduced, finance expense also shrunk to make up 3 percent of revenue. Thus, the company earned a net margin of 1.5 percent for the year.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 62 percent year on year as sales of bottles increased by 54 percent and that of preform increased by 9 percent. Therefore, gross margin was also better at 8.1 percent. This also trickled to the net margin that was higher at 2.4 percent relative to a net loss of Rs 11.4 million recorded in the same period last year. But it must be considered that during 1QFY21 business activities had started resuming gradually as lockdowns eased.

In the second quarter topline almost doubled year on year, however, it was half of that recorded in 1QFY22. This was due to increase in bottle sales by 49 percent in unit terms and 23 percent rise in preform sales. Production cost has been significantly high consuming nearly all of the revenue. With further expenses incurred, the company posted a loss for the period at Rs 41 million; however, it is lower than that in 2QFY21 when loss stood at Rs 72 million.

In the third quarter, revenue was again higher year on year, by 19 percent. This is attributed to an improvement in both, prices and volumes. However, profitability has been lower for the period due to rising cost of production owing to increasing prices of raw materials. Moreover, finance expense also rose on the back of rising interest rates. Thus, net margin was recorded at 4.8 percent compared to 9 percent in the same period last year. While demand is expected to exist and increase as the social events and travel has resumed, but the declining purchasing power, in addition to supply chain disturbances continue to be a challenge for the businesses.