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.

Pattern of Shareholding

As of June 30, 2023, CPPL has an outstanding share capital of 49.095 million shares which are held by 1693 shareholders. Local general public has the largest stake of 39.12 percent in the company followed by associated companies, undertakings and related parties holding 36.79 percent shares. Insurance companies own 10.27 shares of CPPL while Directors, CEO, their spouse and minor children have a shareholding of 4.7 percent. Around 1.77 percent of the company’s shares are held by Banks, DFIs and NBFIs and 1.45 percent by foreign general public. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-2023)

While the topline of CPPL has been riding an upward journey since 2018, its bottomline couldn’t follow the suit and dropped twice during the period under consideration i.e. in 2019 and 2020. Its margins have been oscillating over the period under consideration. In 2019, gross and operating margins rebounded while net margin considerably plunged. This was followed by a drastic fall of margins in 2020. In 2021, the margins considerably recovered followed by a paltry downtick in the subsequent year. In 2023, gross and operating margins boasted their optimum high value while net margin continued to erode. The detailed performance review of the period under consideration is given below.

In 2019, CPPL posted a reasonable 14 percent year-on-year growth in its net revenue which came on the back of improved volumes coupled with price increase. During the year, the company commenced the operations of its flexible packaging and received tremendous response from the market. Gross profit improved by 27.53 percent in 2019 as the company passed on the impact of cost hike to its customers. The spike in cost came on the back of Pak Rupee depreciation, hike in commodity prices and fixed cost incurred due to the commencement of new production line. GP margin greatly improved from 15.5 percent in 2018 to 17.3 percent in 2019. Distribution expense grew by 31.9 percent year-on-year in 2019 mainly on account of increased payroll expense as well as freight & cartage. Due to the commencement of flexible packaging line, the company hired additional resources which took its headcount to 229 employees in 2019, up from 173 employees in the previous. This drove up administrative expense by 24.49 percent in 2019. Lower profit related provisioning and no trade debts written off in 2019 unlike 2018 resulted in 32.84 percent decline in other expense. Other income also posted marginal growth of 3.48 percent in 2019 on account of higher scrap sales and gain on sale of fixed assets. The company was able to improve its operating profit by 30.62 percent in 2019. OP margin climbed up 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. CPPL’s gearing ratio spiked from 45.83 percent in 2018 to 57.4 percent in 2019. This coupled with increased markup rates escalated its financial cost by 295 percent. Profit after tax plunged by 20.84 percent year-on-year to clock in at Rs. 562.87 million with EPS of Rs.13.24 versus EPS of Rs.18.87 in 2018. NP margin clocked in at 6.95 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 16.59 percent year-on-year in 2020, it couldn’t trickle down resulting in a drop in gross profit by 16.20 percent year-on-year. The revenue growth mainly came on the back of increased prices and improved sales of flexible packaging. As the company uses 75 percent imported raw material, depreciation of Pak Rupee against the greenback 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 by 27.45 percent year-on-year in 2020 on the back of client relationship and brand exposure in the newly instigated flexible packaging division of CPPL. The number of employees grew to 254 in 2020 which meant increased salaries, yet, lower rent, rates and taxes, depreciation expense, repairs & maintenance charges as well as curtailed travelling cost on account of COVID-19 resulted in a meager 1.12 percent uptick in administrative expense in 2020. Allowance for ECL and realized exchange loss drove up other expense by 31 percent in 2020. Other income shrank by 27.84 percent in 2020 due to significantly lower dividend income earned from a related party – Cherat Cement Company Limited. Operating profit eroded by 24.38 percent in 2020 with OP slipping to 9.35 percent. Finance cost jumped up by 54.67 percent in 2020 due to increase in discount rate until 3QFY20 coupled with enhanced working capital requirement and investment in flexible packaging project. The bottomline dropped by 87.52 percent year-on-year in 2020 to clock in at Rs.70.23 million with EPS of Rs. 1.65 and NP margin touching the lowest level of 0.7 percent.

2021 appears to be the most fortunate year for CPPL where it not only did its topline and bottomline enlarged; it also regained its margins which terribly dropped in 2020. During 2021, the company registered an increase of 23 percent in its overall 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. This resulted in topline growth of 19.28 percent in 2019. With improved volume and pricing, gross profit spiraled by 65 percent in 2021 with GP margin rising up to 17.2 percent. Distribution and administrative expense grew in line with inflation and increased operations. Other expense magnified by 68 percent year-on-year on the heels of increased provisioning for 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. Operating profit expanded by 79.47 percent in 2021 with OP margin climbing up to 14.07 percent. 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. Net profit multiplied by 1117.47 percent in 2021 to clock in at Rs. 855.09 million with EPS of Rs. 20.12 and NP margin of 7.6 percent.

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 reduced the demand of packaging material. Topline multiplied by 19.97 percent in 2022. Depreciation of Pak Rupee and unprecedented increase in the prices of raw materials such as kraft paper, PP granules, oil and energy resulted in a surge in cost of sales; however, the company was able to pass it on to the customers which resulted in almost stagnant GP margin despite cost hike. Gross profit enhanced by 19.46 percent in 2022. Distribution expense escalated by 30.92 percent year-on-year in 2022 due to elevated freight & cartage charges. Administrative expense also multiplied by 35 percent in 2022 due to higher payroll expense as number of employees grew from 251 in 2021 to 304 in 2022. Reduced profit related provisioning resulted in 15 percent decline in other expense in 2022. Other income spiraled by 11.21 percent in 2022 due to increased amortization of government grant. Operating profit improved by 18.78 percent in 2022 with OP margin clocking in at 13.93 percent – almost at par with the last year’s level. Increased utilization of running finance coupled with higher discount rate escalated the finance cost of CPPL by 26 percent in 2022. Moreover, changes in tax measures resulted in an increase in the tax expense for the year. The bottomline grew by 3.56 percent year-on-year in 2022 to clock in at Rs.885.51 million with EPS of Rs.18.04. NP margin dropped to 6.6 percent in 2022.

In 2023, CPPL’s net sales grew by 22.6 percent year-on-year. This came on the back of improved sales volume of flexible packaging during the year. Due to uncertain political and economic conditions of the country, cement demand considerably declined during the years resulting in lower demand of cement bags. The sale of CPPL’s packaging bags dropped to 247.64 million bags in 2023, down 18.46 percent year-on-year. However, sales volume of flexible packaging stood at 6.89 million kgs, up 17.58 percent year-on-year. Strict cost control measures and the ability to pass on the onus of cost hike to its customers resulted in 41.57 percent improvement in CPPL’s gross profit in 2023 with GP margin reaching its highest level of 19.8 percent. Distribution expense dropped by 3.92 percent in 2023 due to lower sales volume. Conversely, administrative expense mounted by 26.42 percent in 2023 on the back of higher payroll expense as number of employees grew to 327 during the year. Other income magnified by 141.97 percent in 2023 on the back of hefty dividend income earned from Cherat Cement Company Limited, greater government grant amortized, bigger gain on sale of fixed assets and higher scrap sales made during the year. Superior other income greatly buttressed CPPL’s operating profit which rose by 52.62 percent in 2023 with OP margin reaching 17.34 percent. Finance cost registered a momentous rise of 147.66 percent in 2023 on account of unprecedented level of discount rate and increased borrowings. Imposition of super tax also took its toll on CPPL’s bottomline which grew by 2.57 percent year-on-year in 2023 to clock in at Rs.908.25 million with EPS of Rs.18.50 and a reduced NP margin of 5.49 percent.

Recent Performance (1HFY24)

During 1HFY24, CPPL’s topline slid by 4.94 percent due to reduced demand of cement and increased competition in the polypropylene bag division. Flexible packaging performed well during the period, however, couldn’t offset the lackluster performance in the other segment. Cost of sales declined by 5.44 percent during the period on account of cost control measures and stability in the value of Pak Rupee during the 2QFY24. Gross profit dropped by 1.71 percent in 1HFY24, however, GP margin inched up from 13.36 percent in 1HFY23 to 13.81 percent in 1HFY24. Distribution expense mounted due to spike in petroleum prices. Administrative expense nosedived by 0.66 percent during 1HFY24 as the company sold of its paper sack lines during the period which might have resulted in lower number of employees. Due to gain on the sale of its paper sack lines, other income grew by 113.31 percent in 1HFY24 while other expense narrowed by 21.28 percent during the period due to reduced provisioning for WWF and WPPF. Operating profit augmented by 4 percent year-on-year in 1HFY24 with OP margin clocking in at 11.83 percent versus 10.81 percent during the same period last year. Finance cost sank by 2.44 percent in 1HFY24. Net profit multiplied by 2.71 percent year-on-year in 1HFY24 to clock in at Rs.210.01 million with EPS of Rs.4.28 versus EPS of Rs.4.16 in 1HFY23. NP margin clocked in at 2.82 percent in 1HFY24, up from 2.61 percent during the same period last year.

Future Outlook

As the cement sector is expected to face pressure owing to political and economic upheaval in the country, the company is increasingly focusing on flexible packaging division to offset the negative impact of weak polypropylene bags demand. The company has already started working on expanding its flexible packaging capacity which will be completed by March 2024. It already sold its paper sack lines to avoid redundancies and unnecessary fixed cost. While enhancement in flexible packaging capacity will improve CPPL’s sales, increased long-term loans amid high discount rate will squeeze its margins.