Ecopack Limited (PSX: ECOP) is incorporated in Pakistan as a limited liability company. The company is engaged in the manufacturing and sale of polyethylene terephthalate (PET) bottles and preforms for beverages and other liquids packing industries. Coca-Cola, PepsiCo, Murree Brewery, Qarshi Industries, and Punjab Oil Mills are a few of the renowned customers of ECOP.
Pattern of Shareholding
As of June 30, 2023, ECOP has a total of 48.258 million shares outstanding which are held by 2228 shareholders. The local general public is the largest shareholder of ECOP with 45.025 percent shares followed by Directors, the CEO, their spouse, and minor children holding 23.606 percent shares of the company. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-23)
Barring 2020, ECOP’s topline has been ascending since 2019. Conversely, its bottom line grew only in 2021 and 2022. In 2020, ECOP posted a net loss. The margins of the company, which had been shrinking until 2020 posted a rebound in 2021. In the subsequent year, while operating and net margins continued to look up, gross margins plunged. In 2023, gross and operating margins gained momentum while net margins slid. The detailed performance review of the period under consideration is given below.
In 2019, ECOP’s topline posted a 23 percent year-on-year rise. Despite sluggish economic activity on account of high inflation, hike in discount rate, elevated electricity tariffs and Pak Rupee depreciation, the company was able to keep its sales volume almost intact at the previous year’s levels. ECOP increased the capacity utilization of its blowing segment from 57 percent in 2018 to 58 percent in 2019. It also completed its new investment in large-sized bottles and containers to enhance its customer base. This drove up the annual capacity of its injection segment from 510.983 million bottles in 2018 to 796.733 million bottles in 2019. The company utilized 59 percent of its injection segment’s annual capacity in 2019 to meet the demand. ECOP couldn’t pass on the impact of a spike in the cost of production to its customers (beverage manufacturers) as they themselves were bearing the brunt of inflationary headwinds. The demand for beverages is inversely proportional to an increase in its sales price which made beverage manufacturers incapable of increasing the prices proportionately. This pushed the GP margin down to 9.47 percent in 2019 from 10.96 percent in 2018 despite a 6.23 percent year-on-year rise in gross profit for the year. Selling and administrative expenses grew by 15.25 percent and 20.23 percent respectively mainly on account of higher payroll expenses as the number of employees grew from 266 in 2018 to 280 in 2019 and also because of a 35 percent hike in petroleum prices which inflated the truck freight rates by 12 percent. Operating profit registered an 18.47 percent year-on-year improvement, however, OP margin tumbled to 5.8 percent in 2019 from 6 percent in 2018. Finance cost grew by 90.19 percent year-on-year due to a hike in discount rate coupled with financing obtained for the plant expansion undertaken during the year. Additional financing drove ECOP’s debt-to-equity ratio to 33 percent in 2019 from 24 percent in 2018. Net profit plunged by 39.40 percent year-on-year in 2019 to clock in at Rs.74.81 million with an NP margin of 1.8 percent which was significantly lower than the NP margin of 3.73 percent posted by the company in 2018. EPS also marched down from Rs.3.56 in 2018 to Rs.1.96 in 2019.
In 2020, ECOP’s topline dwindled by 25 year-on-year as COVID-19 hit at the time of seasonal peak in the demand for beverages. Due to depressed demand, the capacity utilization was downward adjusted at 41 percent and 52 percent for the blowing and injection segments respectively (see the graph of yearly production versus capacity utilization). The company increased the annual capacity of its blowing plant from 304.2 million bottles in 2019 to 327.14 million bottles in 2020. The enhanced capacity was meant to cater to large bottles of edible oil and drinking water. However, that couldn’t bring in additional sales as the key customers for this segment couldn’t operationalize their production lines on account of quarantine protocols. Cost of sales dipped by a lesser magnitude of 21.23 percent year-on-year in 2020, translating into 61.65 percent thinner gross profit with GP margin sliding down to 4.8 percent. Another key factor that contributed to a weaker gross margin was the decline in PET resin price due to the Russia-OPEC crude oil war which not only alleviated the topline but resulted in an unforeseen inventory loss for the company. Selling expenses grew by 1.76 percent year-on-year in 2020 despite petite volumes due to a 14 percent spike in freight charges during the year. Administrative expenses, however, shrank by 4.83 percent year-on-year as the number of employees significantly reduced from 280 in 2019 to 247 in 2020. Operating profit posted a 94.77 percent decline in 2020 with the lowest ever OP margin of 0.4 percent. Finance costs grew by 23.70 percent year-on-year due to a high discount rate for the most part of the year. ECOP posted a net loss of Rs.103.70 million in 2020 with a loss per share of Rs.2.72.
With the second wave of COVID-19 hitting during 1QFY21 and the Delta variant in the 4QFY21, ECOP’s sales couldn’t really pick up as its peak season again came under pressure with the closure of educational institutions, markets, and wedding halls coupled with an intermittent ban on inter-city travel. The topline could only post a marginal 1.53 percent uptick in 2021 which came on account of large container and bottle sales which was added to ECOP’s portfolio last year. Perform sales also grew by 9 percent year-on-year in 2021, however, the sales volume of bottles dropped by 5 percent year-on-year, largely swallowing the impact of an increase in the other off-take of the other two categories. Cost of sales dipped by 3.68 percent year-on-year in 2021 which resulted in a 103.82 percent boost in the gross profit. GP margin also jumped up to 9.73 percent in 2021. Selling expenses dipped by 4.76 percent year-on-year in 2021 due to lower crude oil prices resulting in rationalized freight, traveling, and conveyance charges. Administrative expenses grew by 4.45 percent year-on-year in 2021 due to higher payroll expenses. Operating profit multiplied by 1190.64 percent in 2021 with OP margin rebounding to 5.13 percent. Finance costs shrank by 41 percent year-on-year in 2021 due to a significant reduction in the discount rate. As a consequence, ECOP was able to post a net profit of Rs.46.11 million in 2021 with an NP margin of 1.5 percent and an EPS of Rs.1.10.
In 2022, Pakistan’s economy saw recovery from the global pandemic which spurred economic growth, however, the economic activity was crippled towards the end of the year on account of current account and fiscal slippages and immense political turmoil that began to circle the economy. During 2022, ECOP’s topline posted a staggering 62 percent year-on-year growth which was on account of an 84 percent year-on-year rise in bottle sales and a 42 percent year-on-year rise in preform sales. Furthermore, the spike in PET Resin prices also resulted in an upward revision in the prices of the company’s products. Cost of sales grew by an immense 64.89 percent year-on-year due to historic high crude oil prices, hike in electricity tariff, overall inflation, and Pak Rupee depreciation. Gross profit grew by 35.85 percent year-on-year in 2022, however, GP margin deteriorated to clock in at 8.15 percent in 2022. Selling expenses grew by 4.43 percent year-on-year in 2022 due to higher sales volume as well as increased freight charges on account of higher petroleum prices. Administrative expenses also elevated by 12.40 percent year-on-year in 2022 as the number of contractual employees grew from 368 in 2021 to 591 in 2022, however, permanent employees dropped to 224 in 2022 from 246 in 2021. Operating profit registered a 68.45 percent year-on-year rise in 2022 with OP slightly improving to stand at 5.34 percent. Finance costs grew by 32 percent year-on-year in 2022 due to multiple rounds of monetary tightening during the year. Net profit managed to post 117.24 percent year-on-year growth to clock in at Rs.100.18 million with an NP margin of 2 percent and EPS of Rs.2.39.
During 2023, ECOP’s net sales posted a 13.22 percent year-on-year rise on account of 32 percent higher prices of PET Resin (essential raw material) 3 percent higher sales volume of bottles. Conversely, the sale of preforms couldn’t pick up due to floods and the dislocation of a large population in the 1QFY23. The cost of sales grew by 10.66 percent year-on-year due to a spike in the prices of basic raw materials, Pak Rupee depreciation, and elevated electricity tariff during the year. Gross profit grew by 42 percent year-on-year in 2023 with GP margin rising up to 10.23 percent as the company partially passed on the cost hike to its customers. Selling & distribution expenses grew by 393.98 percent in 2023 due to exorbitant freight charges on account of improved sales volume and higher fuel prices. The administrative expense also posted an 18.52 percent surge in 2023 mainly on account of higher payroll expenses as well as vehicle running & maintenance charges. ECOP streamlined its workforce from 815 employees in 2022 to 668 employees in 2023. Operating profit strengthened by 13.71 percent in 2023 with OP margin slightly inching up to clock in at 5.36 percent. Higher discount rates as well as increased working capital requirements pushed the finance cost up by 82.92 percent in 2023. ECOP closed the year with a 59.93 percent reduction in its net profit which clocked in at Rs.40.143 million with EPS of Rs.0.83 and NP margin of 0.71 percent.
Recent Performance (9MFY24)
During 9MFY24, ECOP net sales improved by 5.91 percent. This came on the back of a 6 percent higher sales volume of bottles as well as price rationalization undertaken by the company. Perform sales couldn’t gain momentum in 2024 and stayed intact at 2023 level. Enormous surges in electricity prices, high crude oil prices, as well as spikes in the prices of raw and packaging materials, drove the cost of sales up 3.37 percent in 9MFY24, however, with improved sales volume of bottles and upward price revision, ECOP was able to record 40.62 percent higher gross profit in 9MFY24 with GP margin clocking in at 9.06 percent versus GP margin of 6.83 percent registered during the same period last year. Selling expenses magnified by 346.93 percent in 9MFY24 due to higher sales volume of bottles as well as the implementation of axle load regime which inflated the transportation cost by 30 percent year-on-year during 9MFY24. Administrative expense ticked up by 5.58 percent during 9MFY24 on account of inflation which drove up the payroll expense. ECOP recorded a 5.75 percent year-on-year enhancement in its operating profit in 9MFY24. OP margin clocked in at almost similar level of 3.8 percent recorded during the same period last year. Finance cost escalated by 16.34 percent during 9MFY24 primarily due to a higher discount rate while the outstanding borrowings took a dip during the period. The company recorded a net loss of Rs.30.068 million with a loss per share of Rs.0.62 during 9MFY24 versus a net loss of Rs.22.976 and a loss per share of Rs.0.48 posted during 9MFY23. Net loss grew by 30.87 percent year-on-year in 9MFY24.
Future Outlook
With deteriorating purchasing power amid high inflation, consumers barely afford the essentials – let alone beverages and drinks. Upward price revisions may not be a sustainable solution to boost net sales. The demand may not make greater strides in the times to come except for the seasonal peak during summers and Ramadan. However, ECOP’s diversification into the packaging of cooking oil, bottled water, chemicals, juices, and red syrup may save the day for the company and bring home the volumes lost in the beverages industry. Single-serve packaging of beverages and bottled water is also well received by consumers owing to increasing cost consciousness.
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