Bunny’s Limited

Bunny’s Limited (PSX: BNL) was incorporated in Pakistan as a private limited company in 1980 and was later converted into a public limited company. The principal activity of the company is the manufacturing and sale of bakery and other food products. BNL has its factory located in Lahore, Pakistan. Its products are sold across the country as well as internationally. The company co-manufactures with some of the leading national and multinational companies including Pepsi Co., Unilever, Engro, etc.

Pattern of Shareholding

As of June 30, 2023, BNL has a total of 66.805 million shares outstanding which are held by 2792 shareholders. Directors, their spouses, and minor children have the majority stake of 46.99 percent in the company followed by the general public holding 24.27 percent shares of BNL. Joint stock companies have a stake of 11.97 percent in BNL followed by Banks, DFIs, and NBFIs holding 9.65 percent shares. Modarbas and Mutual funds account for 4.51 percent of shares of BNL. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

BNL’s topline has been showing steady growth in all the years under consideration. However, its bottom line could only ascend in 2020 and 2021. BNL margins tumbled in 2019 followed by a rebound in 2020. In the subsequent two years, gross and operating margins followed a downward trajectory, while net margins ticked up in 2021 and then plunged in 2022. In 2023, gross and operating margins considerably recovered; however, net margin fell to its lowest level (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below:

In 2019, BNL’s topline grew by 11 percent year-on-year on the back of increased demand combined with an upward pricing strategy. As the eating pattern of the people is evolving, people are increasingly focusing towards convenience food which is creating demand for bakery items, particularly buns and bread. Buns and bread are the star products of BNL and contribute profoundly to its overall sales mix.BNL has an installed capacity of 13,500 metric tons in the bakery division and 1800 in the snacks division. In 2019, the company produced 11,150 metric tons of bakery products as against 10,965 metric tons produced in 2018. Snacks division produced 550 metric tons in 2019 up from 455 metric tons in 2018. Capacity utilization in the snacks division is less due to low demand. High cost of utility, raw materials which mainly included sugar, flour, eggs, milk, cooking oil/ghee, etc as well as costly packaging material culminated in a 14.64 percent year-on-year rise in the cost of sales. Gross profit marginally grew by 2.16 percent year-on-year in 2019, however, GP margin slumped to 26.8 percent in 2019 from 29.12 percent in 2018. The company made a significant reduction of 58 percent year-on-year in directors’ remuneration coupled with curtailed entertainment expenses, charity, and donations as well as legal and professional fees. This trimmed down the administrative expense by 4.8 percent year-on-year in 2019. Selling and distribution expenses mounted by 10.18 percent year-on-year owing to high salesman commission and discounts as well as vehicle running and maintenance charges due to increased deliveries to meet the demand. Other expenses slid by 9.59 percent year-on-year due to lesser provisioning for WWF and WPPF. Despite a check on expenses, operating profit shrank by 2.6 percent year-on-year in 2019 with OP margin inching down to 8.3 percent from 9.5 percent in 2018. Finance costs grew by 2 percent year-on-year mainly on account of the high discount rate. Net profit contracted by 18.664 percent year-on-year in 2019 to clock in at Rs.112.38 million with an NP margin of 4.37 percent as against 5.97 percent in 2018. EPS also slipped to Rs.2.19 in 2019 from Rs.2.69 in 2018.

In 2020, net revenue of BNL posted an 8.68 percent year-on-year rise. While the closure of restaurants, educational institutions, and offices due to COVID-19-related lockdowns produced a dent in the demand for bakery items, particularly buns and bread, increased household consumption of the same came to the rescue. Moreover, higher sales made in the initial quarters offset the effect of tamed demand during the COVID-19 quarter. Overall, BNL produced 11,400 metric tons of bakery items and 565 metric tons of snacks in 2020. High flour costs, energy charges as well as other input costs resulted in the cost of sales going up by 7.7 percent year-on-year in 2020. Yet, gross profit increased by 11.37 percent year-on-year in 2020 with GP margin clocking in at 27.5 percent. This was on account of stable sales volume and upward price revision. BNL hired additional employees during the year to meet the demand. This took the total employee count to 682 employees in 2020 from 669 in 2019. This pushed the salaries expense up which combined with an uptick in directors’ remuneration pushed the administrative expense up by 3 percent year-on-year in 2020. Selling expenses also surged by 5.76 percent year-on-year primarily due to vehicle running and maintenance charges coupled with commission and other sales incentives. High provisioning for WWF and WPPF resulted in a 21.66 percent hike in other expenses. BNL also made Rs.6.6 million worth of other income in 2020 which was around 15 times higher than that of 2019. This was on account of gain on the sale of fixed assets as well as amortization of deferred income during the year. Operating profit boasted a considerable 27.91 percent year-on-year growth in 2020 with an OP margin of 97.8 percent – the highest among all the years under consideration. Finance costs rose by a huge 44.32 percent year-on-year in 2020 due to higher discount rates for most of the year except for the COVID-19 quarter. Moreover, long-term borrowings of BNL also rose during the year as it availed the SBP Refinance scheme for the payment of salaries and wages. Moreover, the company also installed a gas-based power plant during the year to cut back on its power costs. Besides, the company also started working on a fully automated production line for buns and bread for which the basic infrastructure was installed in 2020. Higher finance costs diluted the bottom line growth which posted a 13.73 percent year-on-year rise to clock in at Rs.127.80 million in 2020 with an NP margin of 4.6 percent. EPS also climbed up to Rs.2.49 in 2020.

Among all the years under consideration, BNL posted the highest topline growth of 27.87 percent year-on-year in 2021. The gradual resumption of economic activity led to an upsurge in demand. BNL produced 12000 metric tons of bakery items and 765 metric tons of snacks in 2021 to meet the demand. During the year, the company completed the installation of its fully automated bun line and started working on a fully automated cake line and continuous fryers for its snack division. The cost of sales grew by 29.75 percent year-on-year in 2021. While gross profit climbed up by 22.91 percent year-on-year in 2021, GP margin inched down to 26.4 percent. This was because the company didn’t fully utilize its newly installed production lines which added to fixed costs. Administrative and selling expenses grew immensely by 31.55 percent and 21.66 percent respectively in 2021. As of December 2021, the company had a total of 751 employees which greatly drove the salaries expense up. BNL also upped its advertising and sales promotion during the year to achieve higher market penetration besides providing commission and other sales incentives to pitch sales of BNL products. Other expenses grew by 32 percent year-on-year due to higher provisioning for WWF and WPPF on account of increased profitability. Other income posted a massive 268.84 percent year-on-year growth on the back of gain on the sale of fixed assets coupled with the amortization of deferred grants. Operating profit magnified by 24.913 percent year-on-year in 2021, however, OP margin fell to 9.6 percent. Finance cost provided some breather as it slid by 10.16 percent year-on-year in 2021 due to monetary easing. This was despite the fact that BNL’s short-term and long-term borrowings considerably increased during the year to meet its working capital requirements and support its expansion plans respectively. Net profit registered a stunning 39.24 percent year-on-year growth in 2021 to clock in at Rs.177.95 million with an NP margin of 4.98 percent. EPS clocked in at Rs.2.66 in 2021 which signifies growth of 6.83 percent as the company issued 30 percent bonus shares during the year which increased its share capital. The company didn’t pay a cash dividend in 2021 keeping in view its investment plans and the associated funds requirements.

2022 brought in another 25.18 percent year-on-year growth in BNL’s topline. However, during 2022, the topline growth was driven by an upward revision in prices to counterbalance the effect of rising input costs due to domestic floods as well as the Russia-Ukraine crisis. The production slightly inched up to 12400 metric tons in the bakery division and 925 metric tons in the snacks division in 2022. Cost of sales spiked by 32.37 percent year-on-year in 2022. Gross profit grew by 5.12 percent year-on-year in 2022, however, GP margin drastically fell to 22.17 percent – the lowest among all the years under consideration. The company kept a check on its administrative expenses which grew by a mere 5.15 percent year-on-year in 2022 despite unprecedented inflation. While salaries expenses grew substantially, the company contained directors’ remuneration during 2022 resulting in a small uptick in administrative expenses. Distribution expenses grew by 23.65 percent year-on-year in 2022 due to a sharp increase in fuel prices while other expenses slumped by 34 percent year-on-year in 2022 due to lesser provisioning for WWF and WPPF. Other income also declined by 55 percent year-on-year in 2022. Gain on sale of fixed assets was the main component of BNL’s other income in the past years; however, the company didn’t sell any of its fixed assets during 2022. Operating profit contracted by 19 percent year-on-year in 2022 and OP margin also stood at its five-year low of 6.18 percent. Finance costs escalated by 32 percent year-on-year in 2022 due to multiple rounds of monetary tightening during 2022. The bottom line plunged by 21.91 percent year-on-year in 2022 to clock in at Rs.138.96 million with an NP margin of 3.1 percent. EPS also plummeted to Rs.2.08 in 2022.

During 2023, BNL’s topline grew by 27.25 percent year-on-year due to an increase in demand as well as prices. Cost of sales grew by 24.4 percent year-on-year in 2023 due to rising food inflation. Upward revision in the prices of its products helped BNL achieve a GP margin of 23.91 percent in 2023. Gross profit also rose by 37.26 percent in 2023. While the company was able to trim down its payroll expense during the year while keeping its workforce size constant at 758 employees, exorbitant vehicle running, maintenance and insurance charges took its toll on the administrative expense which surged by 12.35 percent in 2023. A steep 42.48 percent year-on-year escalation in distribution expense in 2023 was the effect of higher payroll expense, commission & other incentives to sales staff, and also hefty vehicle running & maintenance expenses incurred during the year. Other expenses contracted by 2.8 percent in 2023 due to lower provisioning for WWF. Other income also plummeted by 17.72 percent in 2023 due to lower amortization of deferred grants recorded in 2023. BNL recorded 47.17 percent stronger operating profit in 2023 with OP margin climbing up to 7.15 percent. Finance cost severely rose by 87.58 percent year-on-year in 2023 due to a record high discount rate. While BNL put brakes on its long-term borrowings, short-term borrowings showed no breather owing to increased working capital requirements. Due to high finance costs, the bottom line slid by 5.37 percent year-on-year in 2023 to clock in at Rs.131.505 million with an NP margin of 2.3 percent. EPS also plunged to Rs.1.97 in 2023.

Recent Performance (9MFY24)

While the company’s bottom line had been shrinking late due to surging distribution expenses and financial charges, it was able to record net profit. However, during 9MFY24, BNL’s financial performance succumbed to soaring inflation and finance costs and the company ended up making a net loss despite a reasonable 24.63 percent year-on-year improvement in its net revenues. 32.4 percent escalation in cost of sales due to inflationary pressure and high energy cost resulted in a 1.52 percent drop in BNL’s gross profit in 9MFY24 with GP margin falling down to 18.11 percent from 22.92 percent during the same period last year. Shrunken pockets of consumers translated into affordability concerns which didn’t allow the company to increase its prices proportionately. This shoved off its margins. Administrative and distribution expenses increased by 48.22 percent and 17.22 percent respectively during the period. The main drivers of high operating expenses were payroll expenses, sales commission as well as vehicle running, maintenance, and insurance charges. BNL cut down its profit-related provisioning, resulting in 75.35 percent lower other expenses incurred during 9MFY24. The company also recorded other income of Rs.7.41 million during the period which conveniently offset its other expense. Operating profit dwindled by 57.52 percent during 9MFY24 with OP margin drastically falling down to 2.27 percent from 6.67 percent during the same period last year. Finance cost gave no breather and expanded by 42.98 percent during the period owing to a high discount rate and increased short-term borrowings. This resulted in net loss of Rs.106.33 million in 9MFY24 with a loss per share of Rs.1.59 versus EPS of Rs.1.45 recorded in 9MFY23.

Future Outlook

With steady demand growth and periodic price revisions, the company can, to some extent, pass on the onus to the final consumers and keep its bottom line afloat amid economic and political headwinds. Upgrading its plant & equipment to cutting-edge technology may also result in lower conversion costs and strong margins. However, finance costs will continue to haunt and necessitate an overhaul of the capital mix. Besides, tapping new products and geographical markets will also provide an added advantage to the company.