The Organic Meat Company Limited

The Organic Meat Company Limited (PSX: TOMCL) was incorporated in Pakistan as a private limited company in 2010. The company is engaged in the processing and sale of halal meat and allied products. It is also one of the leading exporters of red meat and meat by-products. Middle Eastern countries are the major export market of TOMCL. However, the company has recently added pet food raw material to its portfolio which enabled it to tap the USA and Europe markets. Besides, the company also has significant business from Far East, CIS and South Asian markets. The company offers Meat Master Online Qurbani service in Pakistan. The company has its production facilities in Korangi and Gadap Town in Karachi.

Pattern of Shareholding

As of June 30, 2022, TOMCL has a total of 122.99 million shares outstanding held by diverse categories of shareholders. Directors, CEO, their spouse and minor children have the highest shareholding of 55.55 percent in the company. This is followed by general public holding 20.57 percent shares of the company. Modarba and Mutual Funds have a stake of 9.58 percent in the company followed by Insurance companies with an ownership of around 9 percent shares. Commercial banks and Joint stock companies account for 2.6 percent and 2.4 percent shares of TOMCL respectively. The remaining shares are held by other categories of shareholders holding less than 1 percent shares.

Historical Performance (2018-22)

TOMCL’s topline has been growing by leaps and bounds since 2018 with bottomline following the similar trajectory. Other income” was a game-changer in 2019 and 2022 and resulted in an NP margin greater than OP margin in both the years. Let’s sneak into the financial statements to decipher the details of financial performance for each year.

In 2019, the topline grew by 26 percent year-on-year which culminated into a GP margin of 16 percent versus 17 percent in the previous. What hid the company hard during 2019 was a massive year-on-year rise of 120 percent in the distribution expense coupled with booking allowance for doubtful debt which took its toll on the operating profit which slid by 46 percent year-on-year with OP margin clocking in at 5 percent in 2019 versus 12 percent in 2018. The main culprits behind the humungous distribution expense were clearing and forwarding charges, export duties as well advertisement and promotion expense. Finance cost also grew on the back of high discount rate coupled with increased short-term borrowings during the year to meet the working capital requirements. While things looked gloomy for TOMCL, other income worth Rs. 203 million proved to be a silver lining. The stunning growth in other income came on the back of exchange gain and reversal of provision against trade debt. This resulted in a 52 percent year-on-year increase in the net profit with NP margin clocking in at 8.5 percent in 2019 versus 7 percent in the previous year.

In 2020, TOMCL achieved the highest topline growth of 31 percent year-on-year. The main growth propeller during the year was the export of fresh chilled meat products; however, the export of fresh chilled boneless vacuum products witnessed a complete halt due to COVID-19. To cater to the increased demand of fresh chilled meat products, TOMCL enhanced its capacity by 300 tons a month. Besides the growing sales of fresh chilled meat products, offal exports to far eastern countries also showed an exciting growth during the year. High sales volume coupled with better pricing and cost management resulted in an increase in GP margin from 16 percent in 2019 to 19 percent in 2020. This year around, the company could keep a check on its distribution expense which dropped by 12 percent year-on-year. Allowance for doubtful debt also ticked down which resulted in a year-on-year growth of 179 percent in the operating profit with OP margin clocking in at 11 percent in 2020. Finance cost increased as discount rate was high for the first three quarters of FY20 coupled with increased short-term borrowings during the year. Other income which did tremendously well in 2019 slid by 99 percent year-on-year in 2020 due to thin exchange gain. Net profit grew by 22 percent year-on-year with a marginal downtick in the NP margin to clock in at 7.9 percent in 2020. The bottomline growth would’ve been much higher had the other income remained favorable in 2020 too.

During 2021, the net export volume of meat dropped by 10 percent year-on-year. While frozen meat and frozen offal exports grew by 78 percent and 1016 percent respectively in 2021, the export of fresh chilled meat dropped by 36 percent year-on-year due to lackluster sale in the CIS market. Locally, the company received an overwhelming response from its Online Qurbani service as the signs of COVID-19 were still not over and people eagerly opted for online qurbani services. Export of fresh chilled meat accounts for 49 percent of TOMCL’s business. Poor performance in this category nullified the volumetric growth in other segments resulting in no volumetric growth during the year. However, due to favorable pricing and currency dynamics, the company was able to post a 16 percent year-on-year topline growth in 2021. Cost of sales increased from Rs. 437 per kg to Rs. 498 per kg in 2021 on the back of high procurement cost and depreciation charges due to increase in fixed assets. This pushed the GP margin down to 16.5 percent in 2021. While the company put a check on its advertisement and promotion charges, clearing and forwarding charges pushed the distribution expense up by 34 percent year-on-year in 2021. This could’ve put a dent on its OP margin, thanks to allowance for doubtful debt which gave some respite and dropped by 82 percent year-on-year in 2021. Consequently, OP margin largely remained intact in 2021. Finance cost dipped by 1 percent year-on-year on the back of low discount rate during the year. Other income also buttressed the bottomline on the back of exchange gain, profit on saving accounts as well as gain on biological assets. NP margin also remained at almost the same level as 2020 despite drop in GP margin.

In 2022, the company’s export sales grew by only 2 percent year-on-year. This time around, fresh chilled meat exports did a good job while frozen meat and frozen offal exports dipped by 78 percent and 37 percent respectively. Pricing power and devaluation kept the topline buoyant which grew by 19 percent year-on-year. However, high cost of sales which stood at Rs. 646 per kg in 2022 resulted in a shrunken GP margin of 13 percent. Administrative expense grew by 45 percent year-on-year in line with inflation and also because of induction of resources as the company initiated its animal fattening farm. Distribution charges also grew by 81 percent year-on-year on the back of high freight charges as there was a global container shortage as well as Pak Rupee devaluation. Operating profit dropped by 52 percent year-on-year with a thin OP margin on 4.3 percent. Finance cost would’ve been higher by 37 percent year-on-year, but was offset by lower provisioning on export rebate receivable in line with IFRS. Other income also came to rescue the bottomline by growing by over 24 times on the back of tremendous exchange gain and gain on biological assets. Consequently, bottomline grew by 36 percent year-on-year with the highest NP margin of 9 percent in 2022.

Recent Performance (1HFY23)

During 1HFY23, the topline of TOMCL grew by 12 percent year-on-year as volumetric export sales showed a rebound. Moreover, the new business line of pet chews also showed improved performance. The cost of sales grew in line with inflation with major effect seen in fuel and power charges as well as raw and packing material cost. As a result, GP margin ticked down to 15 percent in 1HFY23 as compared to 17 percent during the same period of last year. Operating expenses grew mainly on the back of high freight cost during the period. This reduced the operating profit by 22 percent year-on-year with OP margin clocking in at 6 percent in 1HFY23 versus 9 percent in 1HFY22. Finance cost also grew by 85 percent year-on-year on the back of multiple upward revisions in the discount rate. Increased inward remittances on account of export sales also pushed the tax expense up by 47 percent year-on-year. Other income provided the much needed support to the bottomline with a year-on-year growth of 28 percent mainly on the back of exchange gain. The bottomline shrank by 19 percent year-on-year in 1HFY23 with NP margin standing at 8 percent in 1HFY23 vis-à-vis 11 percent in 1HFY22.

Future Outlook

Diversification in terms of product categories as well as geographical markets will fuel TOMCL’s growth trajectory in the coming times. High sales volume coupled with favorable pricing strategy will keep the topline buoyant. High cost of production, freight cost and finance cost will continue to be the Achilles heel for the company. However, massive exchange gain on the back of Pak Rupee devaluation will buttress the bottomline.