The Organic Meat Company Limited

The Organic Meat Company Limited (PSX: TOMCL) was incorporated in Pakistan as a private limited company in 2010. The company is engaged in the processing and sale of halal meat and allied products. It is also one of the leading exporters of red meat and meat by-products. Middle Eastern countries are the major export markets of TOMCL. However, the company has recently added pet food raw material to its portfolio which enabled it to tap the USA and Europe markets. Besides, the company also has significant business from the Far East, CIS, and South Asian markets.

Pattern of Shareholding

As of June 30, 2024, TOMCL has a total of 148.491 million shares outstanding held by 3773 shareholders. Directors, CEO, their spouses, and minor children have the majority stake of 54.95 percent in the company followed by the local general public holding 31.59 percent shares. Other local companies account for 10.22 percent shares of TOMCL while insurance companies hold 1.8 percent shares. Around 1.1 percent of TOMCL’s shares are held by Modarabas & Mutual Funds and the remaining 0.35 percent by Banks, DFIs, and NBFIs.

Financial Performance (2019-24)

TOMCL’s topline has been growing staggeringly over the period under consideration with its bottom line following a similar trajectory except for a drop in 2024 where the company posted the highest-ever topline growth. Its margins have been oscillating since 2019 (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, TOMCL’s topline grew by 25.55 percent year-on-year which came on the back of a considerable improvement in both export and local sales. Cost of sales grew by 27.71 percent year-on-year in 2019 which culminated in a GP margin of 15.8 percent in 2019 versus a GP margin of 17.2 percent recorded in the previous year. What hit the company hard during 2019 was a massive year-on-year rise of 119.79 percent in the distribution expense coupled with an allowance for the doubtful debt of Rs. 84.56 million booked during the year. This took a heavy toll on the operating profit which slid by 46.14 percent year-on-year with OP margin clocking in at 5.2 percent in 2019 versus OP margin of 12.1 percent posted in 2018. The main culprits behind the humungous distribution expense were clearing and forwarding charges, export duties as well advertisement and promotion expenses incurred during the year. Administrative expenses also hiked by 20.97 percent year-on-year in 2019 on the back of elevated payroll expenses as the number of employees grew from 83 in 2018 to 133 in 2019. Finance cost grew by 24.25 percent year-on-year on the back of a high discount rate coupled with increased short-term borrowings during the year to meet the working capital requirements. In 2019, TOMCL recorded an income of Rs. 203 million versus other expenses of Rs.33.71 million recorded in the previous year. The stunning growth in other income came on the back of exchange gain and reversal of provisions against trade debt. This resulted in a 52.13 percent year-on-year increase in net profit which clocked in at Rs.217.97 million in 2019. NP margin also rose to 8.5 percent in 2019 versus the NP margin of 7 percent registered in the previous year. EPS plunged from Rs.7.09 in 2018 to Rs.4.46 in 2019 due to additional shares issued during the year taking the tally to 71.818 million shares in 2019 versus the outstanding share volume of 10 million shares in 2018.

In 2020, TOMCL registered topline growth of 31.29 percent year-on-year. The main growth propeller during the year was the export of fresh chilled meat products; however, the export of fresh chilled boneless vacuum products witnessed a complete halt due to COVID-19. To cater to the increased demand for fresh chilled meat products, TOMCL enhanced its capacity by 300 tons a month. Offal exports to far eastern countries also showed an exciting growth during the year. To meet the rising demand, TOMCL achieved 50 percent capacity utilization in 2020 versus capacity utilization of 35 percent recorded in 2019 (see the graph of actual versus utilized capacity). High sales volume coupled with better pricing and cost management resulted in an improved GP margin of 18.4 percent in 2020. Administrative expenses escalated by 10.63 percent year-on-year in 2020 mainly on account of higher payroll expenses despite the fact that TOMCL’s workforce shrank to 123 employees in 2020. The company kept a check on its distribution expense which dropped by 11.53 percent year-on-year in 2020 on the back of lower clearing & forwarding charges and export duties. Allowance for doubtful debt also ticked down by 17.52 percent year-on-year in 2020. All these factors resulted in year-on-year growth of 179.29 percent in TOMCL’s operating profit in 2020 with OP margin clocking in at 11 percent. Finance costs increased by 26.74 percent year-on-year in 2020 as the discount rate was high for the first three quarters of the year. Other income slid by 99.49 percent year-on-year in 2020 due to thin exchange gain on account of stability in the value of local currency. Net profit grew by 22.20 percent year-on-year to clock in at Rs. 266.36 million in 2020 with NP margin standing at 7.9 percent. EPS clocked in at Rs.3.71 in 2020.

During 2021, the net export volume of meat dropped by 10 percent year-on-year. While frozen meat and frozen offal exports grew by 78 percent and 1016 percent respectively in 2021, the export of fresh chilled meat dropped by 36 percent year-on-year due to lackluster sales in the CIS market. The export of fresh chilled meat constituted 49 percent of TOMCL’s business. Poor performance in this category nullified the volumetric growth in other segments. However, due to favorable pricing and currency dynamics as well as impressive offal sales, the company was able to post 16 percent year-on-year topline growth in 2021. The cost of sales increased from Rs. 437 per kg to Rs. 498 per kg in 2021 on the back of high procurement costs and depreciation charges due to an increase in fixed assets. This pushed the GP margin down to 16.5 percent in 2021 with a marginal 4.44 percent rise in gross profit in absolute terms. While the company put a check on its advertisement and promotion charges in 2021, higher clearing and forwarding charges pushed the distribution expense up by 34.10 percent year-on-year in 2021. Allowance for doubtful debt gave some respite and dropped by 81.83 percent year-on-year in 2021. As a consequence, operating profit improved by 11.74 percent year-on-year in 2021, however, OP margin slightly inched down to 10.6 percent. Finance cost dipped by 0.78 percent year-on-year in 2021 on the back of low discount rate although short-term borrowings slightly increased during the year. Other income also buttressed the bottom line as it grew by 1216.83 percent year-on-year in 2021 on the back of exchange gain, profit on saving accounts as well as gain on biological assets. Net profit multiplied by 13.94 percent year-on-year in 2021 to clock in at Rs.303.48 million with an NP margin of 7.7 percent and EPS of Rs.2.47.

In 2022, the company’s export sales grew by only 2 percent year-on-year. This time around, fresh chilled meat exports did a commendable job and grew by 55 percent year-on-year while frozen meat and frozen offal exports dipped by 78 percent and 37 percent respectively. Pricing power and Pak Rupee depreciation kept the topline buoyant which grew by 18.58 percent year-on-year in 2022. However, the high cost of sales which stood at Rs. 646 per kg in 2022 resulted in a shrunken GP margin of 13.1 percent with gross profit plummeting by 6.17 percent in absolute terms. Administrative expenses grew by 45.36 percent year-on-year in line with inflation and also because of the induction of new resources as the company initiated its animal fattening farm. TOMCL’s workforce stood at 176 employees in 2022 versus 161 employees in the previous year. Distribution charges grew by 81.23 percent year-on-year in 2022 on the back of higher freight charges as there was a global container shortage as well as Pak Rupee depreciation. Operating profit dropped by 52.19 percent year-on-year in 2022 with a thinner OP margin of 4.3 percent. Finance cost would’ve been higher by 37 percent year-on-year in 2022, however, it was offset by lower provisioning on export rebate receivable in line with IFRS. Other income grew by 2431.96 percent in 2022 on the back of tremendous exchange gain as well as gain on biological assets. Consequently, the bottom line grew by 35.57 percent year-on-year to clock in at Rs.411.42 million in 2022 with EPS of Rs.3.05 and NP margin of 8.8 percent.

In 2023, TOMCL’s topline growth was recorded at 36.66 percent year-on-year. Export volume stood at 6163 MT, down 2 percent year-on-year. This was the consequence of a 6 percent decline in the volume of fresh chilled meat, a 66 percent increase in frozen meat, and an 18 percent plunge in frozen offal exports. In 2023, TOMCL registered a robust 502 percent rise in the revenue proceeds from pet chews as the company tapped the North & South American markets. The cost of sales climbed up to Rs.894.56 per kg due to higher procurement and depreciation charges. While average prices of the company’s products dropped by 2.78 percent in 2023, Pak Rupee depreciation saved the day for TOMCL and culminated in a GP margin of 13.4 percent. Administrative expenses surged by 42.71 percent year-on-year in 2023 as a result of a bigger workforce comprising 225 employees. Higher fees and subscription charges also contributed to driving up the administrative expenses in 2023. Distribution expense also spiked by 40.56 percent year-on-year in 2023 primarily due to higher clearing and forwarding charges. Allowance for doubtful debt dropped by 83.21 percent in 2023. All these factors culminated in a 57.43 percent bigger operating profit posted by TOMCL in 2023 with OP margin slightly inching up to clock in at 4.9 percent. Finance cost magnified by 104.73 percent in 2023 which was on account of higher discount rates and increased short-term borrowings. It is to be noted that TOMCL’s gearing ratio has considerably dropped from 41 percent in 2018 to 16 percent in 2023 despite an enlarged borrowing profile. This is because of increased equity of the company not only because of reserves and revaluation surplus but also because of increased share capital which stood at 134.992 million shares as of June 30, 2023. This also justified erosion in its EPS despite sound growth in its net profit over the years. 90.45 percent higher other income recorded in 2023 was the result of exchange gain, gain on biological assets, reversals, and interest income. This gave great impetus to TOMCL’s net profit which posted a stupendous 75.54 percent year-on-year growth to clock in at Rs.722.19 million in 2023 with an NP margin of 11.3 percent and EPS of Rs.4.86.

In 2024, TOMCL registered a staggering 85.35 percent year-on-year growth in its topline. This was on account of a 62 percent rise in export volumes. This came on the back of improved demand from key international markets such as China, UAE, and other Gulf countries. Besides, the company also entered new geographical markets. A key milestone unlocked during the year was receiving approval from the General Administration of Customs China (GACC) to export heat-treated frozen beef. In order to meet the growing demand in both local and international markets, the company increased its production capacity by 40 percent during the year. In order to mitigate the effect of hiking energy and raw material prices, the company adopted several cost optimization measures such as waste minimization, supply-chain optimization, and negotiation with suppliers to secure more favorable pricing. All these measures enabled TOMCL to maintain its gross margin at 13.4 percent in 2024. In absolute terms, gross profit enhanced by 85.14 percent in 2024. Administrative expenses surged by 39 percent in 2024, particularly on the back of higher payroll expenses. This was the result of inflation as well as workforce expansion from 225 employees in 2023 to 380 employees in 2024. Distribution expense mounted by 41.32 percent in 2024 due to higher clearing & forwarding charges as export volumes significantly rose during the year. Allowance for doubtful debt also increased by 559.54 percent in 2024 to clock in at Rs.35.18 million. TOMCL recorded 152.65 percent higher operating profit in 2024 with OP margin climbing up to 6.71 percent. Finance costs escalated by 27.87 percent in 2024 due to a higher discount rate. This was despite the fact that the company paid off a large portion of its outstanding liabilities during the year which drove down the gearing ratio from 16 percent in 2023 to 11 percent in 2024. Net other income also fell by 87.15 percent in 2024 on account of exchange loss incurred during the year due to stability in the value of local currency. This put a dent in TOMCL’s financial performance in 2024. Its net profit slumped by 31.13 percent in 2024 to clock in at Rs.497.37 million with EPS of Rs.3.35 and NP margin of 4.22 percent.

Recent Performance (1QFY25)

TOMCL kicked off FY25 with a 45.74 percent year-on-year rise in its topline in 1QFY25. During the period under consideration, the company secured a huge order of USD 12 million to export frozen cooked beef to China. Exports to the Far East also greatly improved during the year. Controlled inflation and stable prices of raw and packing materials enabled the company to maintain its gross margin at 11.8 percent in 1QFY25. In absolute terms, gross profit enhanced by 46 percent in 1QFY25. Administrative expense multiplied by 82.63 percent in 1QFY25 due to a considerable rise in payroll expense. It appears that the company has further expanded its workforce to meet the rising demand. Distribution expense dipped by 14 percent in 1QFY25 due to a downtick in clearing & forwarding charges incurred during the year. The company booked a 10.98 percent higher allowance for doubtful debt in 1QFY25. Operating profit improved by 95.81 percent in 1QFY25 with OP margin rising from 5.21 percent in 1QFY24 to 7 percent in 1QFY25. Finance cost nosedived by 26.48 percent in 1QFY25 as the company continued to reduce its reliance on external borrowings. Other income also enhanced by 88 percent in 1QFY25. Consequently, TOMCL registered a 228.56 percent rise in its net profit which clocked in at Rs.170.61 million in 1QFY25. This translated into EPS of Rs.1.15 in 1QFY25 versus EPS of Rs.0.35 recorded during the same period last year. NP margin also grew from 2.27 percent in 1QFY24 to 5.11 percent in 1QFY25.

Future Outlook

TOMCL’s cutthroat expansion in varied geographical markets will ensure growth in the coming times. The company is in the process of acquisition of Mohammad Saeed Mohammad Hussain Limited (MSMHL), a licensed processer and exporter of sheep casing and offals to EU. This is a step in the right direction and will further strengthen the company’s geographical outreach besides adding depth to its product portfolio.