FrieslandCampina Engro Pakistan Limited

FrieslandCampina Engro Pakistan Limited (PSX: FCEPL) is a subsidiary of FrieslandCampina Pakistan Holding B.V (holding company) which in turn is a subsidiary of a Dutch multinational corporation Royal FrieslandCampina which is the ultimate parent company of FCEPL. The company was launched as Engro Foods in 2005. FCEPL is a public limited company. It has two production facilities in Sukkur and Sahiwal and a dairy farm in Nara with over 1300 milk collection centers. The company is engaged in the manufacturing, processing, and sale of dairy products and frozen desserts.

Pattern of Shareholding

As of December 31, 2023, FCEPL has a total of 766.596 million shares outstanding which are held by 7791 shareholders. Associated companies, undertakings, and related parties which include FrieslandCampina Pakistan Holding B.V and Engro Corporation Pakistan hold 90.93 percent shares of FCEPL followed by the general public holding 6.06 percent shares of FCEPL. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

The top line of FCEPL has been riding an upward trajectory over the period under consideration. In 2018 and 2019, the company recorded loss-before-tax but received group tax relief which translated into net profit in 2018. However, in 2019, the bottom line stayed in the red zone despite accounting for the tax relief. In the subsequent years, the bottom line, as well as margins, show an uphill pattern followed by a plunge in 2023. The detailed performance review of the period under consideration is given below.

In 2019, FCEPL’s topline ticked up by 18.89 percent year-on-year which came on the volumetric growth in both dairy and frozen dessert segments. However, sharp increases in commodity prices and Pak Rupee depreciation pushed the cost of sales up by 23.46 percent in 2019 which trimmed down gross profit by 5.32 percent. GP margin also fell from 15.89 percent in 2018 to 12.65 percent in 2019. Distribution expense plunged by 12.52 percent despite higher sales volume on account of a lesser advertising budget. Administrative expenses multiplied by 30.17 percent year-on-year in 2019. Other expenses registered a steep rise of 127.59 percent due to massive provisioning done for culling of biological assets and a sharp increase in the loss on death/disposal of biological assets. Other income didn’t turn out to be favorable either and dropped by 33.64 percent in 2019 due to high-base effect as the company booked reversals of WWF in 2018. FCEPL’s operating profit slumped by 76 percent year-on-year in 2019 with OP margin clocking in at 0.31 percent as against OP margin of 1.6 percent recorded in 2018. To add to the ado, finance costs soared by 80.88 percent in 2019 on account of the higher discount rate. This pushed FCEPL’s bottom line into a net loss worth Rs.954.86 million in 2019, against a net profit of Rs.63.78 million in 2018. Loss per share of Rs.1.25 was recorded in 2019 as against EPS of Rs.0.08 in 2018.

In 2020, the topline grew by 14.49 percent year-on-year despite the shutting of retail and leisure outlets due to COVID-19-related lockdown. Despite high food inflation, supply chain bottlenecks, and Pak Rupee depreciation, the company’s cost optimization and prudent sales mix enabled its gross profit to grow by 21.99 percent year-on-year with a GP margin of 13.48 percent in 2020. The company kept a check on its distribution expense and administrative expenses which inched down by 0.48 percent and 7.35 percent respectively in 2020. Other expenses also plummeted by 28.21 percent year-on-year as the company didn’t book any provision for the culling of biological assets and didn’t incur any loss on the death/disposal of its biological assets in 2020. The operating performance was further buttressed by other income which enlarged by 32.32 percent year-on-year in 2020 on the back of gain on the disposal of biological assets and operating assets as well as amortization of government grants on long-term finances. All these factors contributed to boosting the operating profit by 1142.81 percent in 2020 with an OP margin of 3.41 percent. Finance cost posted a marginal 1.41 percent rise in 2020. Monetary easing during the year owing to COVID-19 resulted in reduced financial obligations. FCEPL recorded a net profit of Rs.176.93 million in 2020 with an NP margin of 0.4 percent. The company posted EPS of Rs.0.23 in 2020.

2021 proved to be an incredible year for FCEPL as its topline surpassed the strategic target of Rs.50 billion to clock in at Rs.52.094 billion reflecting a year-on-year rise of 17.98 percent. The sales growth was the result of record-breaking sales volume attained by the company in both the dairy and frozen dessert segments despite cutthroat competition from the existing and fresh entrants in the industry. Despite high inflation, the company managed to register a 48.46 percent year-on-year rise in its gross profit which pushed GP margin to an unprecedented level of 16.96 percent in 2021. Operating expenses abridged for some time took a high jump in 2021. Distribution expenses grew by 24.38 percent on the back of high advertising and promotion budget, outward freight charges, traveling and communication charges as well as salaries and wages to account for rapidly growing inflation. Administrative expenses also posted a year-on-year rise of 14.57 percent in 2021. Huge provisioning against WWF and WPPF pushed other expenses up by 77.68 percent in 2021 while other income also magnified by 45.62 percent. The main growth propellers for other income were changes in fair value of biological assets, gain on disposal of operating assets, scrap sales as well as a considerable increase in interest on bank deposits. Operating profit climbed up by 128.46 percent in 2021 with OP margin mounting to 6.61 percent. Finance costs declined by 30.47 percent in 2021 due to a downward revision in the discount rate. The bottom line posted a stunning growth of 919.68 percent year-on-year in 2021 to clock in at Rs.1804.08 million with an NP margin of 3.46 percent. EPS stood at Rs.2.35 in 2021.

The growth trajectory continued in 2022 whereby FCEPL delivered 41 percent year-on-year growth in topline backed by robust volumes, improved sales mix, and expansion in retail footprint. Devastating floods in the southern region of the country, Pak Rupee depreciation, dwindling foreign exchange reserves, commodity super cycle as well as record high inflation and political instability built up the prices of raw materials resulting in a 41.86 percent year-on-year rise in the cost of sales in 2022. Despite that, gross profit grew by 37 percent year-on-year, however, GP margin slightly tumbled to clock in at 16.48 percent in 2022.

Operating expenses climbed up by 30 percent year-on-year in 2022. Higher profitability resulted in higher WPPF in 2022. Moreover, FCEPL booked provisions on the culling of biological assets. This drove the other expenses up by 41.85 percent in 2022. Other income also enlarged by 66 percent due to changes in the fair value of biological assets and profit on saving account deposits. Operating profits enlarged by 54.89 percent in 2022 with an OP margin of 7.26 percent. Finance magnified by 60.18 percent on the back of multiple rounds of monetary tightening during the year. This diluted the growth momentum of the bottom line which nonetheless rose by 36.67 percent in 2022 to clock in at Rs.2465.67 million with an NP margin of 3.36 percent. EPS clocked in at Rs.3.22 in 2022.

In 2023, FCEPL’s posted a 36.42 percent year-on-year rise in its topline. This was on account of improved sales volume, better pricing, and enhanced retail presence across the nation. High inflation, supply chain disruptions, and weaker local currency pushed down GP margin to 14.37 percent in 2023. This was despite 19 percent year-on-year growth in gross profit during the year. Distribution expense mounted by 31.12 percent in 2023 mainly on account of elevated freight charges and the hefty advertising & promotion budget allocated for the year. Administrative expenses inched up by 8.75 percent in 2023 on account of higher payroll expenses. This was despite workforce rationalization during the year to bring down the headcount to 1262 employees in 2023 from 1271 employees in 2022. Other expenses slid by 20.96 percent in 2023 due to lesser profit-related provisioning, reduced provisioning done for the culling of biological assets, and no exchange loss incurred during the year. Other income strengthened by 29.48 percent in 2023 mainly due to gains arising from changes in the fair value of biological assets. Operating profit improved by 14.76 percent in 2023 with OP margin sliding down to 6.10 percent. Finance costs surged by 126.63 percent in 2023 due to monetary tightening. Net profit shrank by 38.81 percent to clock in at Rs.1508.786 million in 2023 with EPS of Rs.1.97 and NP margin of 1.51 percent.

Recent Performance (1QCY24)

FCEPL’s topline touted a year-on-year rise of 21.25 percent in 1QCY24 mainly driven by the dairy-based products segment which reflected 23 percent revenue growth in 1QCY24 over a similar period last year. The frozen dessert segment posted a 5.55 percent decline in its net revenues in 1QCY24 due to the delayed onset of the summer season and unexpected rain in the country. Cost of sales mounted by 26 percent during 1QCY24 due to high prices of commodities, heightened energy tariff, and Pak Rupee depreciation. Gross profit inched up by a paltry 1.12 percent during 1QCY24 with GP margin sliding down to 16 percent from GP margin of 19.2 percent recorded during the same period last year.

Distribution expense multiplied by 10.81 percent during 1QCY24 driven by brand building and trade activities conducted during the period to boost sales. Increased dairy volumes also led to higher freight charges incurred during 1QCY24. Administrative expense inched down by 0.41 percent during the period maybe on account of the rightsizing of the workforce (as was the case in 2023). Lower profit-related provisioning and provisioning made for the culling of biological assets pushed down other expenses by 60.65 percent in 1QCY24.

Other income went down by 4.21 percent in 1QCY24. FCEPL posted a 0.58 percent thinner operating profit in 1QCY24 with an OP margin of 7.2 percent versus an OP margin of 8.8 percent recorded during the same period last year. Finance costs escalated by 76.33 percent during 1QCY24 due to the high discount rate and increased short-term borrowings. Net profit contracted by 32.88 percent during 1QCY24 to clock in at Rs.664.77 million in 1QCY24 with EPS of Rs.0.87 versus EPS of Rs.1.29 recorded during the same period last year. NP margin fell from 4.4 percent in 1QCY23 to 2.4 percent in 1QCY24.

Future Outlook

Record high inflation, foreign reserve constraints, import restrictions, high finance costs, and currency depreciation will continue to pose serious challenges to FCEPL. However, with a better sales mix, retail expansion, and price revisions to match the hike in the prices of raw materials as well as cost efficiencies across the value chain, the company is expected to sail through the storms.