Roshan Packages Limited

Roshan Packages Limited (PSX: RPL) was incorporated in Pakistan as a private limited company in 2002 and was converted into a public limited company in 2016. The principal activity of the company is the manufacturing and sale of corrugation and flexible packaging material.

Pattern of Shareholding

As of June 30, 2022, RPL has a total of 141.9 million shares outstanding which are held by 5270 shareholders. Directors, CEO, their spouse and minor children have a majority stake of 68.17 percent in the company. This category is followed general public holding 23.75 percent shares of RPL. Around 5.39 percent of the company’s shares are held by Modarabas and Mutual Funds while Banks, DFIs and NBFIs account for 2.25 percent of the outstanding shares of RPL. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

Except for a marginal 3 percent year-on-year decline, RPL’s net sales have been growing in all the years under consideration. Its bottomline, which was in the negative territory until 2019, posted net profit in 2020. The net profit grew in 2021 and then nosedived in 2022. RPL’s margins follow an irregular pattern. The gross margin of the company inched down in 2019 and then rose for the next two subsequent years to taper off in 2022. Conversely, operating margin rode an upward trajectory until 2021 and then dipped in 2022. Net margin, on the other hand, was negative in 2018 and 2019, rebounded for the next two years and then slumped in 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, RPL’s topline grew by a substantial 34 percent year-on-year which came on the back of a volumetric growth of 18.73 percent. In 2019, the company dispatches stood at 39,012 MT. As of June 2019, the company had an installed capacity of 60,000 MT of its corrugation plant and 12,240 MT of its flexible plant. The company operated its corrugation plant at 51.8 percent capacity in 2019 versus 44.4 percent in 2018. Flexible plant was operated at 69 percent capacity in 2019 versus 57 percent in the previous year. Cost of sales grew by 35 percent year-on-year in 2019 which pushed down RPL’s GP margin from 6.2 percent in 2018 to 5.7 percent in 2019 despite 23 percent year-on-year growth in gross profit. The company cut back on its administrative expenses by 7 percent year-on-year in 2019 despite high capacity utilization which required additional human resources. The company increased in employee head count to 483 in 2019 versus 467 in 2018. However, a check on travelling and conveyance, entertainment, repair and maintenance etc enable RPL to keep a check on its administrative expenses in 2019. Distribution expense grew by 29 percent year-on-year in 2019 primarily due to higher payroll expense and added advertisement and promotion budget. Higher distribution expense was largely offset by reversal of allowance on trade receivables in 2019. Higher exchange loss due to depreciation of Pak Rupee culminated into a 39 percent year-on-year growth in other expense. Other income also posted a handsome 36 percent year-on-year rise due to higher profit on bank deposits, higher markup on long-term loans and also because of gain on sale of fixed assets in 2019. Operating profit grew by 382 percent year-on-year in 2019 with OP margin growing staggeringly from 1.2 percent in 2018 to 4.2 percent in 2019. The stunning growth in operating profit was diluted by a 55 percent year-on-year growth in finance cost in 2019 due to higher discount rate despite keeping a check on borrowings. The company posted a profit before tax of Rs.41.22 million in 2019 as against the loss before tax of Rs.73.22 million in 2018. Upward revision in normal tax rate to 29 percent and turnover tax to 1.5 percent increased the current and deferred charge for the company which translated into a net loss of Rs.26.9 million in 2019, which is 70 percent less than the net loss posted by RPL in 2018. Loss per share stood at Rs.0.19 in 2019 versus Rs.0.64 in 2018.

The topline took a 3 percent year-on-year dive in 2020 due to nation-wide lockdowns and supply chain disruptions owing to COVID-19. The volumes of the company fell to 36,261 MT in 2020, signifying an 8.3 percent drop. This was due to lackluster performance of HORECA industry amidst lockdown which reduced the demand of packaging material. The capacity utilization of corrugation plant fell to 49 percent and flexible plant fell to 57.5 percent due to plant shutdown. The company was able to rationalize its cost by streamlining its product and customer portfolio and was able to reduce its cost by 8 percent year-on-year in 2020. This increased its gross profit by 79 percent year-on-year in 2020 and boosted its GP margin to 10.5 percent. The company reduced its number of employees to 434 in 2020 due to restrained operational capacity; however, administrative expense grew by 28 percent year-on-year due to higher payroll expense, legal and professional charges and higher depreciation due to idle capacity during the year. Distribution expense inched up by 9 percent year-on-year in 2020 due to higher freight and transportation charges. Other expense dropped by 86 percent year-on-year in 2020 due to lower exchange loss. While profit on bank deposits significantly dropped during 2020, higher profit on investment and interest income on loans to relate parties resulted in a trivial movement in other income in 2020. Operating profit grew by 75 percent year-on-year in 2020 with OP margin surging to 7.6 percent. Finance cost grew by 20 percent year-on-year in 2020 due to higher long-term financing secured under SBP’s refinance scheme for the payment of salaries and wages. The company was able to record a net profit of Rs.247.96 million in 2020 with an NP margin of 4.7 percent. EPS clocked in at Rs.1.75 in 2020.

In 2021, RPL’s topline boasted 34 percent year-on-year rise coming on the back of 7.9 percent increase in sales volume which clocked in at 38,369 MT. After the outbreak of COVID-19, the people became more aware about hygiene and the importance of proper packaging which buttressed the demand of RPL products. Moreover, the culture of online shopping and online food deliveries further propelled the demand of packaging material. Owing to demand growth, the company’s operated its corrugation plant at 53.5 percent and flexible plant at 65 percent capacity in 2021. The number of employees also grew from 434 in 2020 to 483 in 2021. Cost of sales grew by 30 percent year-on-year in 2021 resulting in a 61 percent growth in gross profit with GP margin climbing up to 12.6 percent. Administrative and selling expense grew by 20 percent and 19 percent respectively in 2021 on account of higher payroll expense, travelling and conveyance as well as freight charges. Other expense grew by 106 percent year-on-year in 2021 due to higher provisioning against WWF and WPPF on account of improved profitability. Other income sank by 32 percent year-on-year in 2021. While the company earned exchange gain due to improvement in the value of local currency in 2021, lower profit on bank deposits and short-term investments as well as lower interest income on loan to related parties on the back of lower discount rate pushed the other income down. Operating profit grew by 46 percent year-on-year in 2021 with OP margin growing up to 8.3 percent. Finance cost fell by 50 percent year-on-year in 2021 due to monetary easing and lesser borrowings. The net profit grew by 39 percent year-on-year in 2021 with NP margin of 4.9 percent. EPS surged to Rs.2.44 in 2021.

The demand remained robust in 2022 with 27 percent year-on-year growth in topline. The company dispatched 44,884 MT of packaging material in 2022. The capacity utilization of corrugation plant increased to 62.5 percent, however, flexible plant operated at a reduced capacity of 60 percent in 2022. Besides, higher dispatches in 2022, the company also rationalized its customer portfolio and focused on top-tier local and international corporate customers which resulted in improved prices. However, rise in the cost of imported raw materials coupled with Pak Rupee depreciation and higher utility charges pushed the cost of sales up by 30 percent year-on-year in 2022, suppressing the GP margin to 10.6 percent. The number of employees grew to 565 in 2022 owing to higher capacity utilization. This coupled with inflationary effect pushed up the payroll expense, resulting in an 18 percent year-on-year rise in administrative expense in 2022. Selling expense grew by 44 percent year-on-year in 2022 on the back of increased advertising and promotion budget and freight charges. Other expense multiplied by 208 percent in 2022 due to massive exchange loss on the back of depreciation in the value of Pak Rupee. Other income also slipped by 8 percent year-on-year in 2022 due to lesser profit on bank deposits and short-term investments. Operating profit plummeted by 26 percent year-on-year in 2022 with OP margin sliding down to 4.8 percent. 50 percent year-on-year increase in finance cost due to higher discount rate and increased short-term and long-term borrowings translated into a 23 percent year-on-year drop in net profit which clocked in at Rs.264.71 million in 2022 with an NP margin of 3 percent. EPS also plunged to Rs.1.87 in 2022.

Recent Performance (9MFY23)

RPL’s topline posted a 16 percent year-on-year growth in 9MFY23. High energy cost and Pak Rupee depreciation pushed the cost up by 16 percent year-on-year in 9MFY23. However, the company also revised its prices accordingly and was able to maintain its GP margin at 11.2 percent. Administrative and selling expense posted a year-on-year rise of 34 percent and 48 percent respectively on account of high inflation which drove up the payroll expense, utility expense, travelling and conveyance as well as freight and carriage charges. Other expense slid by 4 percent year-on-year in 9MFY23 which may be due t o lower WWF and WPPF. Conversely, other income grew by 44 percent year-on-year in 9MFY23 possibly due to high discount rate which pushed up the profit on deposits and investments as well as mark-up on loans to related parties. High operating expenses resulted in a 1 percent year-on-year decline in operating profit with OP margin plunging to 4.9 percent in 9MFY23 from 5.7 percent in 9MFY22. High finance cost further diluted the impact of topline growth. Finance cost surged by 120 percent year-on-year in 9MFY23. While borrowings considerably reduced in 9MFY23, high finance cost was the result of excessive monetary tightening over the year. Net profit slashed by 57 percent year-on-year in 9MFY23 to clock in at Rs.123.27 million with NP margin slipping to 1.7 percent versus 4.6 percent in 9MFY22. EPS shrank to Rs.0.87 in 9MFY23 from Rs.2.04 during the same period last year.

Future Outlook

The company has significantly streamlined its customer portfolio to include FMCG and essential commodities segment where demand is expected to remain robust despite high inflation and dwindling purchasing power of end consumers. Increasing population and urbanization will keep the demand of FMCG and essential commodities buoyant in the coming times and so will be the demand of packaging material.

With the finalization of IMF agreement and the initiation of foreign inflows, Pak Rupee has shown positive improvement in the recent weeks. Moreover, as import restrictions have been eased, RPL is in a better position to stock up on its inventory at low cost as global recession has put downward pressure on the prices of essential commodities and raw materials. In this way, it can guard its margins and bottomline from further decline. Let’s see how prudently RPL plays around to take optimum benefit of the improving macros.