Cherat Packaging Limited

Cherat Packaging Limited (PSX: CPPL) was incorporated as a public limited company in 1989. The company is engaged in the manufacturing, marketing and sale of paper sacks, polypropylene bags and flexible packaging material. CPPL has a production capacity of 265 million paper bags and 195 million polypropylene bags per year. It is the largest supplier of packaging material to cement industry of Pakistan including bags made from kraft paper and polypropylene granules. Moreover, CPPL has expanded its business horizons by supplying packaging material to sugar, chemicals and other allied industries.

Pattern of Shareholding

As of June 30, 2022, CPPL has n outstanding share capital of 42.5 million shares which are held by 1674 shareholders. Local general public has the largest stake in the company with a shareholding of 38.2 percent. This is followed by associated companies, undertakings and related parties which hold around 37 percent shares. Insurance companies own 10.17 shares of CPPL. Directors, CEO, their spouse and minor children have a shareholding of 4.7 percent. Banks, DFIs and NBFIs have a stake of 1.77 percent followed by Modarba and Mutual Funds holding 1.11 percent shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-2022)

While the topline of CPPL has been riding an upward journey since 2018, its bottomline couldn’t follow the same trajectory and dropped in 2019 and 2020 and then boasted a massive turnaround in 2021 and a marginal uptick in 2022.

In 2019, CPPL posted a reasonable14 percent year-on-year growth in revenues which came on the back of improved volumes coupled with price increase owing to an increase in the cost of production. GP margin greatly improved from 15.5 percent in 2018 to 17.3 percent in 2019. Operating expenses grew in line with inflation, yet the company was able to improve its OP margin from 12.6 percent in 2018 to 14.4 percent in 2019. The main culprit which contributed towards a drop in the bottomline was a massive rise in CPPL’s financial cost during the year. During 2019, the company obtained both short-term and long-term loans to fulfill its working capital requirements and to invest in long-term projects respectively. This coupled with increased markup rates escalated its financial cost by 295 percent. Profit after tax plunged by 21 percent year-on-year with NP margin clocking in at 7 percent in 2019 vis-à-vis 10 percent in the previous year.

2020 was characterized by the outbreak of global pandemic which halted the usual business activity. While the topline of CPPL grew by 17 percent year-on-year in 2020, it couldn’t trickle down resulting in a drop in gross profit by 16 percent year-on-year. The revenue growth mainly came on the back of increased prices and a marginal uptick in export sales while local sales remained lackluster. As the company uses 75 percent imported raw material, decline in the value of Pak Rupee resulted in a sharp increase in the cost of raw material, consequently, GP margin also dropped to 12.4 percent in 2020. Despite slow economic activity and muted sales, distribution expense grew on the back of client relationship and brand exposure in the newly instigated flexible packaging division of CPPL. OP margin dipped to 9.3 percent in 2020. Finance cost jumped due to increase in discount rate until 3QFY20 coupled with enhanced working capital requirement and investment in flexible packaging project. The bottomline dropped by 88 percent year-on-year with NP margin touching the lowest ebb of 0.7 percent in 2020.

2021 appears to be the most fortunate year for CPPL where it not only did its bottomline enlarged by over 11 times; it also regained its margins which terribly dropped in 2020. During 2021, the company registered an increase of 23 percent in its sales volume with local sales and export sales clocking in at 318.75 million bags 15.47 million bags respectively. Flexible packaging division also recoiled with sales volume of 4.65 million kilograms in 2021 versus 4.3 million kilograms in the previous year. The improved sales were the result of increase in construction activities during the year coupled with general economic activity gaining momentum post COVID-19. The GP margin stood at 17.2 percent in 2021. While distribution and admin expense grew in line with inflation, other expense magnified by 68 percent year-on-year on the heels of increase in workers’ profit participation fund and workers’ welfare fund due to improved profitability. Other income also posted an impressive growth of 65 percent year-on-year on account of government grant amortized, gain on disposal of property, plant and equipment and handsome dividend income from associated company – Cherat Cement Limited. Finance cost which had been on the rise until 2020 showed some respite in 2021 owing to drop in discount rate and low-cost wage financing facility availed by the company during the year. NP margin stood at 7.6 percent in 2021.

2022 was characterized by impressive performance in flexible packaging division boasting a 25 percent year-on-year rise in the sales volume. Conversely, paper and pp bags division posted a 9 percent year-on-year drop in sales volume owing to reduction in local cement demand coupled with use of bulk cement which reduces the demand of packaging material. The devaluation of Pak Rupee resulted in a surge in raw material prices; however, the company was able to pass it on to the customers which resulted in a stagnant GP margin despite lackluster sales volume. OP margin also marginally dropped to 13.9 percent in 2022 versus 14.1 percent in the previous year owing to a drop in other expense and an increase in other income while admin and distribution expense continued to grow. Increased utilization of running finance coupled with higher discount rate escalated the finance cost of CPPL. Moreover, changes in tax measures resulted in an increase in the tax expense for the year. The bottomline grew by 4 percent year-on-year in 2022, however, NP margin dropped to 6.6 percent.

Recent Performance (1HFY23)

During 1HFY23, CPPL posted a 20 percent year-on-year growth in its topline. While detailed financial statements have not been published by the company, we can safely assume that amidst subdued cement demand owing to muted private sector construction activity coupled with low PSDP spending, the topline growth was more of price-led than volume-led. High cost of production shadowed the revenue growth resulting in a 12 percent year-on-year drop in gross profit with GP margin clocking in at 13 percent during 1HFY23 versus 18 percent during the same period last year. Other expense and other income tend to provide breather to the bottomline amidst rising distribution and admin expense. Yet, operating profit posted a year-on-year plunge of 13 percent. Immense growth in finance cost owing to high discount rate coupled with increased borrowing requirements took its toll on the bottomline which nosedived by 63 percent year-on-year in 1HFY23 with NP margin clocking in at 2.6 percent versus 8.4 percent in 1HFY22.

Future Outlook

Going forward, as the cement sector continues to face pressure due to lack in public sector spending, import restriction impeding supply of steel rebar and construction material as well as low private sector construction activity, CPPL is expected to face dull demand growth. Moreover, the margins are also not expected to rebound as high cost of production owing to devaluation of Pak Rupee coupled with high finance cost owing to high discount rate will continue to squeeze the profits. All eyes are on the flood related spending, which if materializes would lower the demand contraction for the cement industry, generating demand for the packaging industry.