National Foods Limited

National Foods Limited (PSX: NATF) was incorporated in Pakistan as a private limited company in 1971 and was subsequently converted into a public limited company. The principal activity of the company is the manufacturing and sale of convenience based food products. The company has a diverse portfolio of 250 products pertaining to 12 broad categories. It has a global footprint in 40 countries across 5 continents. ATC Holdings (Private) limited is the ultimate holding company of NATF.

Pattern of Shareholding

As of June 30, 2022, NATF had a total of 233.115 million shares outstanding, held by a diverse array of shareholders. The largest shareholding group consisted of Directors, the CEO, their spouses, and minor children, collectively owning over 35 percent of the company’s shares, followed by associated companies, undertakings, and related parties with approximately 33.8 percent ownership. Foreign companies held a 15.26 percent stake while local general public accounted for 12.09 percent of shares. Banks, DFIs, NBFIs, and other financial institutions collectively held around 2.06 percent of the company’s shares, while the remaining shares were distributed among other categories of shareholders, highlighting the multifaceted ownership structure of NATF.

Financial Performance (2018-23)

Despite adverse economic conditions, NATF has consistently improved its financial performance since 2018 as evident by the constant uphill journey of its topline and bottomline. Notably, the company’s margins have followed a cyclical pattern (see graph of profitability ratios). After a three-year decline, the gross margin rebounded in 2022, reaching its peak in 2023. Conversely, operating and net margins initially increased in 2019, declined in 2020 and 2021, and have since shown signs of recovery. This performance review highlights NATF’s ability to navigate challenging economic landscapes while achieving positive results. The detailed performance review of each of the years under consideration is given below.

In 2019, NATF’s topline posted a marginal 3 percent year-on-year rise. Spike in inflation and depreciation of Pak Rupee resulted in shrunken pockets of consumers leading to tamed local demand. Due to sluggish demand, the company produced 6 percent lesser products in 2019 (refer to the graph of actual production). The topline growth was primarily the result of changes in sales mix as well as upward price revisions as the economic challenges haunting the economy in 2019 not only suppressed the demand but also drove up the cost of sales by 6 percent year-on-year. This translated into a 4 percent smaller gross profit in 2019 with GP margin falling from 34.4 percent in 2018 to 32 percent in 2019. 13 percent lesser distribution expense incurred in 2019 was the effect of curtailed advertising and promotion expense when compared to the previous year. Administrative expense grew by 31 percent year-on-year in 2019 mainly on account of higher payroll expense as the number of employees grew from 694 in 2018 to 753 in 2019. This was the consequence of capacity enhancements at various plants of the company including recipe line extension as well as addition to the product portfolio in the paste section. Furthermore, there was an increase in the packaging capacity during the year which also required more human resources. The company earned tremendous exchange gain from export sales which culminated into a 372 percent improvement in its other income during 2019. Operating profit augmented by 30 percent year-on-year in 2019 with OP margin climbing up from 7.2 percent in 2018 to 9.2 percent in 2019. 45 percent year-on-year escalation in finance cost was the result of high discount rate coupled with increased borrowings particularly long-term financing to undertake capacity enhancements during the year. This diluted the bottomline growth to 15 percent in 2019. Net profit stood at Rs.1090.86 million in 2019 with an EPS of Rs.7.31. NP margin improved from 5.9 percent in 2018 to 6.6 percent in 2019.

In 2020, when many other industries were grappling against the economic meltdown owing to COVID-19, NATF, being categorized as essentials services business, continued to sustain and posted a reasonable 16 percent year-on-year growth in its net sales. NATF production volume stood at 100,414 MT which was 6 percent higher than the previous year. The depreciation of local currency fared well for the company and translated into significant exchange gain. The company also increased its ketchup manufacturing capacity from 10,000 MT in 2019 to 20,000 MT in 2020. Besides, the installation and commissioning of universal multilane machine, cold room and online salt brine cleaning and charging mechanism greatly improved the productivity. Hike in the cost of raw and packaging materials, elevated prices of fuel as well as local currency depreciation pushed the cost of sales up by 17 percent year-on-year in 2020. Gross profit grew by 15 percent year-on-year in 2020, however, GP margin posted a downtick to clock in at 31.7 percent. Distribution expense posted a 16 percent year-on-year hike in 2020 which was the effect of rigorous advertising and sales promotion drives launched during the year coupled with elevated freight and handling charges not only because of robust sales volume but also because of a hike in the prices of POL products. Administrative expense grew by 8 percent year-on-year in 2020 because of higher payroll expense despite a drop in the HR count to 722 in 2020. Despite 14 percent year-on-year dip in other income and 13 percent year-on-year hike in other expense, NATF posted a net other income of Rs.95.32 million in 2020. Operating profit improved by 15 percent year-on-year in 2020 with OP margin slightly ticking down to 9.1 percent. Finance cost registered a marginal 4 percent year-on-year hike in 2020 despite significant reduction in financing. This was because the discount rate was high for the most part of the year in 2020. This coupled with higher effective tax rate on account of tax effect of permanent differences resulted in a skimpy 1 percent year-on-year growth in bottomline. NATF’s net profit for 2020 stood at Rs.1104.50 million with an NP margin of 5.7 percent. EPS slid to Rs.5.92 on account of issuance of bonus shares during the year.

2021 fetched 20 percent year-on-year improvement in the topline of NATF. As the economy started recovering after COVID-19 and with the resumption of HORECA industry, educational institutions, offices and businesses, the demand of NATF products started picking up. With 5 percent year-on-year increase, the company production volume stood at 105,071 MT in 2021. Both local and export sales performed well during the year. Cost of sales grew by 22 percent year-on-year in 2021 resulting in a 15 percent year-on-year growth in gross profit; however, GP margin marched down to 30.4 percent. Distribution expense expanded by 16 percent year-on-year in 2021 which was the effect of focused sales promotion drives to boost market share and also because of increased freight and handling charges on account of high sales volume. Administrative expense also ticked up by 12 percent year-on-year as the number of employees grew to 788 in 2021 which drove the payroll expense up. NATF posted a net other expense of Rs.32.88 million in 2021 on account of 51 percent year-on-year drop in other income and 14 percent year-on-year hike in other expense. This was mainly due to exchange loss incurred during the year. Operating profit could post a meager 6 percent year-on-year rise in 2021 with OP margin slipping to 8 percent. Finance cost eased by 17 percent year-on-year in 2021 due to lower discount rate despite increased short-term borrowings. This translated into a 15 percent year-on-year progress in net profit which stood at Rs.1265.19 million in 2021 with an NP margin of 5.5 percent. EPS slid to Rs.5.43 due to issuance of bonus shares during the year.

Despite myriad economic challenges including high inflation and discount rate, Pak Rupee depreciation, hike in electricity tariff etc., NATF’s topline continued to post a 16 percent year-on-year escalation in 2022. The production grew by a mere 3 percent in 2022 to clock in at 108,104 MT which gives a clear indication that the growth in net sales was primarily driven by portfolio rationalization, price revisions and also because of translation gain on export sales. Export volume remained depressed during the year owing to shipping constraints. The company undertook cost transformation measures and took strategic buying decisions. This kept a check on its cost of sales which grew by 11 percent year-on-year and trickled down into a 27 percent year-on-year rise in gross profit. GP margin which was going downhill until 2021 also recoiled to 33.4 percent in 2022. Distribution expense registered a massive 32 percent year-on-year spike which was on account of aggressive marketing campaigns launched during the year. In 2022, NATF revamped the packaging of its complete range of recipe mixes, launched a new variant in the ketchup category coupled with several other digital, BTL and PR campaigns. Administrative expense grew by 14 percent year-on-year on account of inflation and also because of increased employee tally to 850 on account of capacity enhancement particularly ketchup line which added 27.5 million ketchup pouches to the annual capacity of the plant. As against the net other expense in the previous year, NATF recorded a tremendous net other income of Rs.378.69 million in 2022. This was due to a staggering 526 percent year-on-year growth in other income on the back of massive exchange gain. Operating profit posted a splendid 49 percent year-on-year growth in 2022 with OP margin jumping up to 10.3 percent. Finance cost magnified by 33 percent year-on-year in 2022 on account of successive rounds of monetary tightening coupled with huge short-term borrowings particularly running finance to meet working capital requirements. The bottomline posted 55 percent year-on-year growth to clock in at Rs. 1965.08 million with an NP margin of 7.3 percent and an EPS of Rs.8.43.

Recent Performance (FY23)

NATF registered a 10 percent year-on-year growth in its net sales in 2023. While the detailed financial reports for FY23 are still awaited to decipher the trend, a glance at the 9MFY23 report shows that the growth was mainly led by price revisions in order to counter high inflation, elevated cost of borrowings, Pak Rupee depreciation and steep hike in electricity prices. Export sales remained under pressure due to ongoing downtick in global demand and consumption. As the company passed the onus of cost spike to its consumers, its gross profit rose by 14 percent year-on-year in 2023 with GP margin touching its peak level of 34.6 percent. Distribution and administrative expense escalated by 9 percent and 35 percent respectively, signifying high inflation and soaring freight charges due to an uptick in the prices of POL products. NATF posted a net other income of Rs.606.50 million in 2023, boasting a 60 percent year-on-year rebound. This was primarily the consequence of translation of foreign currency balances in 2023. Operating profit picked up by 20 percent year-on-year with OP margin climbing up to 11.2 percent in 2023. Finance cost posted a huge jump of 245 percent year-on-year in 2023 due to elevated discount rate and enormous borrowings obtained from financial institutions. Net profit looked up by 11 percent year-on-year to clock in at Rs.2188.04 million in 2023 with an NP margin of 7.4 percent and an EPS of Rs.9.39.

Future Outlook

With the downward trend in local and foreign consumption, the sales volume may not see any significant recovery in the coming times. Moreover, as per the corporate briefing session conducted by the company in 2022, 40 percent of its raw materials are imported which amid Pak Rupee depreciation, is becoming a serious cause of concern for the company.

The company plans to commence its Faisalabad plant in November, 2023 which aims to attain operational efficiency, automation and process simplification. Moreover, the company has been working to source its materials from local stakeholders. These two factors may ease cost pressure and can place NATF in a better position to price its products competitively which then might attract sales.