Fauji Foods Limited (PSX: FFL) was incorporated in Pakistan as a public limited company in 1966. The company is a subsidiary of Fauji Fertilizer Bin Qasim Limited. The principal activity of the company is the processing and sale of toned milk, milk powder, fruit juices, allied dairy and food products.
Pattern of Shareholding
As of December 31, 2023, FFL has a total of 2519.963 million shares outstanding which are held by 12077 shareholders. Fauji Fertilizer Bin Qasim Limited (the parent company) has the majority shareholding of 84.84 percent in the company followed by local general public holding 12.29 percent shares of FFL. Joint stock companies account for 2.3 percent shares of FFL. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-23)
Except for a year-on-year decline in 2019, FFL’s topline rode an upward trajectory over the period under consideration. Despite that, it was unable to register a positive bottomline until 2022. In 2023, the company registered net profit. This was the first time that the company posted a positive bottomline after 2012. FFL’s gross margin touted a positive figure in 2020 which further enlarged in 2021. This was followed by a dip in 2022. In 2023, FFL’s gross margin posted its highest ever value. The company’s operating and net margins stayed in the negative zone until 2022 (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
In 2019, FFL’s topline slid by 24.9 percent year-on-year. This was on account of 10 percent sales tax on tea whitener and imposition of 5 percent additional custom duty on skim milk powder import. The international price of skim milk also touched an unprecedented level during the year causing the company to adjust its prices accordingly which had an adverse effect on the company’s sales volume. Cost of sales declined by 19.13 percent in 2019, resulting in gross loss of Rs.678.827 million, up 131.18 percent year-on-year. Distribution expense slumped by 27.1 percent in 2019 on the back of reduced sales volume which resulted in lower freight & forwarding charges. Besides, FFL also allocated lesser advertising & sales promotion budget in 2019. Administrative expense also slumped by 5.88 percent in 2019 primarily due to lower payroll expense as the company significantly streamlined its workforce from 1451 employees in 2018 to 842 employees in 2019 due to reduced capacity utilization. Other income strengthened by 451.94 percent in 2019 on account of higher profit on bank deposits coupled with increased gain recorded on the sale of property, plant & equipment. The positive effect of other income was completely offset by 118.32 percent higher other expense incurred in 2019 which was the effect of hefty exchange loss, consultancy fee and provision booked for obsolete stocks and stores. FFL recorded operating loss of Rs.2554.86 million in 2019, down 3.14 percent year-on-year. Finance cost multiplied by 151.66 percent in 2019 due to higher discount rate and increased short-term borrowings as well as loan of Rs.2630 million obtained from the parent company to meet working capital requirements. The company recorded net loss of Rs.5788.94 million in 2019, up 103.17 percent year-on-year. This translated into loss per share of Rs.10.74 in 2019 versus loss per share of Rs.5.39 recorded in 2018.
In 2020, FFL recorded 28.34 percent rebound in its net sales on account of higher sales volume, effective pricing, product and channel mix improvement, product innovation and expansion in sales network. While the overall macroeconomic environment greatly suffered due to outbreak of COVID-19 which halted the business activities, FFL, being in the business of essential items continued to operate throughout the year. This resulted in increased production in both liquid and non-liquid categories. Cost of sales increased by 13.81 percent in 2020, much lesser than the topline increase, due to cost optimization. Consequently, the company recorded gross profit of Rs.62.26 million in 2020 which translated into GP margin of 0.84 percent. Distribution expense dwindled by 34.78 percent in 2020 due to considerably lower advertising & promotion expense as well as lower salaries in the distribution network on account of COVID-19 related protocols which restricted travelling and social interaction to a great extent. Administrative expense also tumbled by 18.9 percent in 2020 due to lower payroll expense as workforce was further squeezed to 730 employees. Other income stayed constant during the year; however, other expense grew by 11 percent in 2020 due to stocks written off during the year. FFL’s operating profit lowered by 49.45 percent to clock in at Rs.1291.53 million in 2020. Finance cost inched up by 3.19 percent in 2020. The company obtained greater long-term loans and loans from parent company in 2020; however, short-term external financing was greatly reduced during the year. FFL recorded net loss of Rs.3058.11 million in 2020, down 47.17 percent year-on-year. Loss per share stood at Rs.3.92 in 2020.
FFL’s topline expanded by 16.45 percent year-on-year in 2021 on the back of improved sales volume as well as price revision in line with input and conversion cost. The company was able to record gross profit of Rs.922.74 million in 2021, up by a staggering 1382 percent. This translated into GP margin of 10.75 percent. Distribution expense surged by 19.31 percent in 2021 due to increased advertising & promotion budget and higher salaries pertaining to distribution network. Administrative expense ticked up by 1.52 percent due to higher payroll expense. This was despite the fact that the company was still in the process of right-sizing its workforce which stood at 617 employees in 2021. Other income weakened by 22.77 percent in 2021 due to lower profit on saving accounts on the back of monetary easing. Other expense also registered massive decline of 99.78 percent in 2021 due to high-base effect as the company wrote off stocks and provided for obsolete stocks & stores in the previous year. FFL’s operating loss thinned down by 70.47 percent to clock in at Rs.381.44 million in 2021. Finance cost also tamed by 34.1 percent in 2021 due to monetary easing and also because the loan of Rs.5925 million obtained from the parent company was converted as paid-up capital against right issue during the year. This greatly improved the company’s equity and liquidity. FFL recorded net loss of Rs.1252.94 million in 2021 with loss per share of Rs.0.79.
In 2022, FFL’s net sales enhanced by 43.84 percent. This was largely the result of aggressive pricing strategy adopted during the year to mitigate the effect of inflationary pressure, Pak Rupee depreciation, soaring commodity prices due to Russia-Ukraine crisis and unprecedented floods during the year which resulted in loss of 1.5 million animals during the year and created 20 percent loss in milk production. Cost of sales heightened by 48.52 percent on account of aforementioned reasons. As a result, gross profit ticked up by a paltry 4.98 percent in 2022 with GP margin inching down to 7.84 percent. Distribution expense escalated by 31.33 percent in 2022 due to augmented advertising & promotion drives launched during the year coupled with increased freight & forwarding and higher salaries paid across the distribution network. Administrative expense also spiraled by 23.65 percent in 2022 due to inflation which drove up the salaries despite a plunge in employee headcount to 583. Other income improved by 161.57 percent in 2022 due to higher profit on bank accounts. Other expense multiplied by 25344.71 percent to clock in at Rs.133.33 million due to allowance for ECL booked during the year coupled with contractual deductions. FFL’s operating loss after declining for three consecutive years until 2021 raised its head by 96.54 percent in 2022 to clock in at Rs.749.692 million. Finance cost grew by just 9.1 percent in 2022 despite unprecedented level of discount rate. This was because of downtick in both long-term and short-term loans in 2022. FFL’s net loss worsened by 73.1 percent in 2022 to clock in at Rs.2168.51 million with loss per share of Rs.1.37.
In 2023, FFL recorded its highest topline growth of 60.39 percent. This was on account of robust sales volume mainly driven by its flagship brand “Nurpur”. Vigorous sales volume coupled with upward price revision and cost control measures resulted in a staggering gross profit of Rs.2982.32 million in 2023 which translated into the highest ever GP margin of 15.1 percent. Distribution expense fell by 1.11 percent in 2023 due to controlled advertising & promotion budget allocated for the year. Lesser advertisement & promotion budget offset the impact of elevated freight charges and salaries expense incurred during the year. Administrative expense mounted by 61.89 percent in 2023 due to massive spike in payroll expense as well as legal & professional charges incurred during the year. Until last year, FFL was downsizing, however, in 2023, the company inducted additional resources to take the tally to 603 employees. Other income grew by 19.6 percent in 2023 due to higher profit on bank accounts. However, this was conveniently offset by 333.47 percent higher other expense incurred during the year mainly on account of provision for sales tax on tea whitener. The company also booked provision for ECL, doubtful advances, WWF and WPPF in 2023. FFL recorded operating profit of Rs.597.04 million in 2023 – the first ever operating profit after 2012. OP margin was recorded at 3.01 percent in 2023. Finance cost plummeted by 74.3 percent in 2023 as the company completely paid off its short-term and long-term loans during the year. This resulted in gearing ratio of 5 percent in 2023 versus gearing ratio of 69 percent recorded in 2022. FFL recorded green bottomline worth Rs.605.112 million in 2023 with EPS of Rs.0.26 and NP margin of 3.05 percent.
Recent Performance (1HCY24)
FFL registered year-on-year growth of 14.61 percent in its topline in 1HCY24. During the period, the government imposed 18 percent GST coupled with various other taxes on packaged milk which resulted in increased prices and reduced sales volumes. Cost of sales grew by 6.2 percent during 1HCY24. With improved cost efficiency, price revision and consolidation of high margin cereal business, FFL was able to drive its gross profit up by 68.22 percent in 1HCY24 with GP margin clocking in at 19.91 percent versus GP margin of 13.57 percent recorded during the same period last year. Distribution expense spiked by 17.91 percent during the period maybe on account of higher advertising budget, higher salaries and elevated freight charges. Administrative expense also surged by 22.28 percent in 1HCY24 due to inflationary pressure. It is also possible that the company expanded its workforce during the period like it did in the previous year. Other income grew by 51.99 percent in 1HCY24. According to past reports, the main component of other income was profit on bank accounts. Other income was completely wiped off by 324.33 percent higher other expense incurred during 1HCY24 which might be the result of higher profit related provisioning made during the period. FFL recorded 123.29 percent higher operating profit in 1HCY24 with OP margin of 6.16 percent versus OP margin of 3.16 percent recorded during the same period last year. Finance cost shrank by 95.61 percent in 1HCY24 as the company didn’t have any external borrowings on its books as of June 30, 2024. During the period, FFL took loan of Rs.5860 million from its parent company for the acquisition of Fauji Cereals project into the company. FFL also acquired 100 percent shareholding of Fauji Infraavest Foods Limited from Fauji Foundation. The company recorded net profit of Rs.365.117 million in 1HCY24 versus net loss of Rs.147.311 million recorded during the same period last year. Loss per share of Rs.0.07 recorded in 1HCY23 turned into EPS of Rs.0.14 in 1HCY24. NP margin stood at 3.2 percent in 1HCY24.
Future Outlook
Investment in new brands and focusing on distribution infrastructure will drive growth in the coming times. With the removal of legacy debt, FFL’s finance cost has significantly reduced which is aiding its bottomline and margins. High margin businesses like cereals business will also play a great role in buttressing FFL’s finance performance.
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