Cherat Packaging Limited (PSX: CPPL) was incorporated as a public limited company in 1989. The company is engaged in the manufacturing, marketing, and sale of paper sacks, polypropylene bags, and flexible packaging material.
Pattern of Shareholding
As of June 30, 2024, CPPL has an outstanding share capital of 49.095 million shares which are held by 1532 shareholders. The local general public has the majority stake of 37.78 percent in the company followed by associated companies, undertakings, and related parties holding 37.69 percent shares. Insurance companies own 10.26 shares of CPPL while Directors, CEOs, their spouses, and minor children have a shareholding of 4.7 percent. Around 2.76 percent of the company’s shares are held by Banks, DFIs, and NBFIs, and 1.33 percent by foreign general public. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-2024)
The top line of CPPL posted year-on-year growth until 2023 followed by a dip in 2024. Its bottomline dipped in 2019 and 2020 followed by a rebound for the subsequent three years. In 2024, CPPL’s bottom line plunged again. Its margins have been oscillating over the period under consideration. In 2019, gross and operating margins rebounded while net margins considerably plunged. This was followed by a drastic fall in margins in 2020. In 2021, the margins considerably recovered followed by a downtick in margins in the subsequent year. In 2023, gross and operating margins boasted their optimum high value while net margins continued to erode. In 2024, gross and operating margins eroded while net margins ticked up. The detailed performance review of the period under consideration is given below.
In 2019, CPPL posted a reasonable 14.13 percent year-on-year growth in its net revenue which clocked in at Rs.8093.41 million. This came on the back of improved volumes coupled with price increases. During the year, the company commenced the operations of its flexible packaging and received a tremendous response from the market. Gross profit improved by 27.53 percent in 2019 as the company passed on the impact of cost hikes to its customers. The spike in cost came on the back of Pak Rupee depreciation, a hike in commodity prices, and fixed costs incurred due to the commencement of a new production line. GP margin greatly improved from 15.5 percent in 2018 to 17.3 percent in 2019. Distribution expense grew by 31.9 percent year-on-year in 2019 mainly on account of increased payroll expenses as well as freight & cartage. Due to the commencement of the flexible packaging line, the company hired additional resources which took its headcount to 229 employees in 2019, up from 173 employees in the previous. This drove up administrative expenses by 24.49 percent in 2019. Lower profit-related provisioning and no trade debts written off in 2019 unlike in 2018 resulted in a 32.84 percent decline in other expenses. Other income also posted a marginal growth of 3.48 percent in 2019 on account of higher scrap sales and gains on the sale of fixed assets. The company was able to improve its operating profit by 30.62 percent in 2019. OP margin climbed up from 12.6 percent in 2018 to 14.4 percent in 2019. The main culprit that contributed to a drop in the bottom line was a massive rise in CPPL’s financial cost during the year. During 2019, the company obtained both short-term and long-term loans to fulfill its working capital requirements and to invest in long-term projects respectively. CPPL’s gearing ratio spiked from 45.83 percent in 2018 to 57.4 percent in 2019. This coupled with increased markup rates escalated its financial cost by 294.94 percent. Profit after tax plunged by 20.84 percent year-on-year to clock in at Rs. 562.87 million with EPS of Rs.13.24 versus EPS of Rs.18.87 in 2018. NP margin clocked in at 6.95 percent in 2019 vis-à-vis NP margin of 10 percent in the previous year.
2020 was characterized by the outbreak of a global pandemic which halted the usual business activity. The top line of CPPL grew by 16.59 percent year-on-year in 2020 to clock in at Rs.9436.19 million. However, the topline growth couldn’t trickle down to produce growth in the bottom line. The revenue growth mainly came on the back of increased prices and improved sales of flexible packaging. As the company uses 75 percent of imported raw materials, the depreciation of the Pak Rupee against the greenback resulted in a sharp increase in the cost of raw materials. Consequently, gross profit registered a drop of 16.20 percent year-on-year in 2020.GP margin also dropped to 12.4 percent in 2020. Despite slow economic activity and muted sales, distribution expenses grew by 27.45 percent year-on-year in 2020 on the back of client relationships and brand exposure in the newly instigated flexible packaging division of CPPL. The number of employees grew to 254 in 2020 which meant increased salaries, yet, lower rent, rates and taxes, depreciation expense, repairs & maintenance charges as well as curtailed traveling costs on account of COVID-19 resulted in a meager 1.12 percent uptick in administrative expense in 2020. Allowance for ECL and realized exchange loss drove up other expenses by 31 percent in 2020. Other income shrank by 27.84 percent in 2020 due to significantly lower dividend income earned from a related party – Cherat Cement Company Limited. Operating profit eroded by 24.38 percent in 2020 with OP slipping to 9.35 percent. Finance cost jumped up by 54.67 percent in 2020 due to an increase in discount rate until 3QFY20 coupled with enhanced working capital requirement and investment in a flexible packaging project. The bottomline dropped by 87.52 percent year-on-year in 2020 to clock in at Rs.70.23 million with EPS of Rs. 1.65 and NP margin hitting its lowest level of 0.74 percent.
2021 appears to be the most fortunate year for CPPL where it not only did its topline and bottomline enlarged; it also regained its margins which terribly dropped in 2020. During 2021, the company registered an increase of 23 percent in its overall sales volume with local sales and export sales clocking in at 318.75 million bags and 15.47 million bags respectively. The flexible packaging division also recoiled with a sales volume of 4.65 million kilograms in 2021 versus a sales volume of 4.3 million kilograms registered in the previous year. The improved sales were the result of an increase in construction activities during the year coupled with general economic activity gaining momentum post-COVID-19. This resulted in topline growth of 19.28 percent in 2019. With improved volume and pricing, gross profit spiraled by 65 percent in 2021 with GP margin rising up to 17.2 percent. Distribution and administrative expenses grew in line with inflation and increased operations. Other expenses magnified by 67.53 percent year-on-year in 2021 on the heels of increased provisioning for workers’ profit participation fund and workers’ welfare fund due to improved profitability. Other income also posted an impressive growth of 64.90 percent year-on-year on account of government grant amortized, gain on disposal of property, plant, and equipment, and handsome dividend income from the associated company – Cherat Cement Limited. Operating profit expanded by 79.47 percent in 2021 with OP margin climbing up to 14.07 percent. Finance costs which had been on the rise until 2020 showed some respite in 2021 owing to a drop in discount rate and low-cost wage financing facility availed by the company during the year. Net profit multiplied by 1117.47 percent in 2021 to clock in at Rs. 855.09 million with EPS of Rs. 20.12 and NP margin of 7.6 percent.
2022 was characterized by impressive performance in the flexible packaging division boasting a 25 percent year-on-year rise in the sales volume. Conversely, the paper and pp bags division posted a 9 percent year-on-year drop in sales volume owing to a reduction in local cement demand coupled with the use of bulk cement which reduced the demand for packaging material. Topline multiplied by 19.97 percent in 2022 to clock in at Rs.13,502.52 million. The depreciation of the Pak Rupee and unprecedented increase in the prices of raw materials such as kraft paper, PP granules, oil, and energy resulted in a surge in the cost of sales; however, the company was able to pass it on to the customers which resulted in almost stagnant GP margin despite cost hike. Gross profit enhanced by 19.46 percent in 2022. Distribution expense escalated by 30.92 percent year-on-year in 2022 due to elevated freight & cartage charges. The administrative expense also multiplied by 35 percent in 2022 due to higher payroll expenses as a number of employees grew from 251 in 2021 to 304 in 2022. Reduced profit-related provisioning resulted in a 15.16 percent decline in other expenses in 2022. Other income spiraled by 11.21 percent in 2022 due to increased amortization of government grants. Operating profit improved by 18.78 percent in 2022 with OP margin clocking in at 13.93 percent – almost at par with the last year’s level. Increased utilization of running finance coupled with higher discount rates escalated the finance cost of CPPL by 26.13 percent in 2022. Moreover, changes in tax measures resulted in an increase in tax expenses for the year. The bottom line grew by 3.56 percent year-on-year in 2022 to clock in at Rs.885.51 million with EPS of Rs.18.04. NP margin dropped to 6.56 percent in 2022.
In 2023, CPPL’s net sales grew by 22.6 percent year-on-year to clock in at Rs.16,554.26 million. This came on the back of improved sales volume of flexible packaging during the year. Due to uncertain political and economic conditions of the country, cement demand considerably declined during the year resulting in lower demand for cement bags. The sale of CPPL’s packaging bags dropped to 247.64 million bags in 2023, down 18.46 percent year-on-year. However, the sales volume of flexible packaging stood at 6.89 million kgs, up 17.58 percent year-on-year. Strict cost control measures and the ability to pass on the onus of cost hikes to its customers resulted in a 41.57 percent improvement in CPPL’s gross profit in 2023 with GP margin reaching its highest level of 19.80 percent. Distribution expenses dropped by 3.92 percent in 2023 due to lower sales volume. Conversely, administrative expenses mounted by 26.42 percent in 2023 on the back of higher payroll expenses as a number of employees grew to 327 during the year. Other incomes magnified by 141.97 percent in 2023 on the back of hefty dividend income earned from Cherat Cement Company Limited, greater government grant amortized, bigger gain on sale of fixed assets, and higher scrap sales made during the year. Superior other income greatly buttressed CPPL’s operating profit which rose by 52.62 percent in 2023 with OP margin reaching 17.34 percent. Finance cost registered a momentous rise of 147.66 percent in 2023 on account of unprecedented level of discount rate and increased borrowings. Imposition of super tax also took its toll on CPPL’s bottom line which grew by 2.57 percent year-on-year in 2023 to clock in at Rs.908.25 million with EPS of Rs.18.50 and a reduced NP margin of 5.49 percent.
During 2024, CPPL’s topline slid by 16.52 percent to clock in at Rs.13820.15 million. This was due to reduced demand for cement and increased competition in the polypropylene bag division. Flexible packaging performed well during the period, however, couldn’t offset the lackluster performance in the other segment. During the year, the company also sold in three paper sack lines as over the years, the cement industry has made a shift from paper bags to polypropylene bags. Cost of sales declined by only 6.92 percent in 2024 mainly because of an increase in energy tariffs. Gross profit dropped by 55.41 percent in 2024 with GP margin falling down to its lowest level of 10.57 percent. Distribution expense inched up by 4.63 percent in 2024 due to increased salaries of the sales force. Administrative expenses inched up by 2.55 percent in 2024. While payroll expenses slid during the year as the number of employees was reduced to 303 owing to the sale of paper sack lines during the year, higher legal & professional charges, insurance expenses, vehicle running & maintenance charges as well as traveling & conveyance charges pushed the administrative expense up in 2024. Other expenses mounted by 72.35 percent in 2024 owing to the commission paid on the disposal of assets classified as “held-for-sale” and realized exchange loss incurred during the year. However, another expense was offset by 936.47 percent bigger than other income recorded in 2024 which was the result of a gain on the sale of fixed assets classified as “held-for-sale”. Operating profit plummeted by 34.44 percent in 2024 with OP margin dropping to 13.61 percent. Finance cost contracted by 30.30 percent in 2024 due to a massive decline in the outstanding borrowings as the company utilized the sale proceeds of its paper sack line to pay back its liabilities and squeeze its finance cost amidst a mounting discount rate. This resulted in a gearing ratio of 25.66 percent in 2024 versus a gearing ratio of 45.91 percent recorded in 2023. Net profit tumbled by 2.46 percent to clock in at Rs.885.89 million in 2024. This translated into EPS of Rs.18.04 and NP margin of 6.41 percent.
Recent Performance (1HFY25)
During the first half of the ongoing fiscal year, CPPL’s topline posted a year-on-year slide of 12.61 percent to clock in at Rs.6516.02 million. This was on account of reduced demand from the cement and FMCG sectors on account of lackluster sales and increased competition. The cost of sales dwindled by 7.58 percent in 1HFY25 on account of the high energy tariff. This resulted in a 43.95 percent diminution in gross profit in 1HFY25. GP margin clocked in at 8.86 percent versus GP margin of 13.81 percent recorded during the same period last year. Distribution cost escalated by 17.55 percent in 1HFY25 as the company is making concerted efforts to increase its market share and geographical presence in order to perform well in the face of cutthroat competition in the industry. Administrative expense slumped by 6.35 percent in 1HFY25 probably on account of lower payroll expenses as the company sold off two more paper sack lines during the period which might have resulted in a more streamlined workforce. Other expenses surged by 71.52 percent apparently due to the commission paid on the sale of fixed assets (paper sack line). However, it was offset by 258.41 percent higher other income recorded during the period which was the consequence of gain recorded on the sale of fixed assets. CPPL recorded a 26 percent thinner operating profit in 1HFY25 with an OP margin of 10 percent versus an OP margin of 11.83 percent recorded during the same period last year. Finance costs tumbled by 51 percent during 1HFY25 due to lower discount rates, lower utilization of working capital lines, and early payment of long-term loans from the sale proceeds of paper sack lines. The company also recorded a tax credit of 10 percent during the period for the purchase and installation of plant & machinery before June 30, 2019. CPPL’s bottom line grew by 48.73 percent to clock in at Rs.312.348 million in 1HFY25. This translated into EPS of Rs.6.36 in 1HFY25 versus EPS of Rs.4.28 recorded in 1HFY24. NP margin improved from 2.82 percent in 1HFY24 to 4.79 percent in 1HFY25.
Future Outlook
CPPL sold all its paper sack lines to avoid redundancies and unnecessary fixed costs and to improve its cash flow position. The company is now focusing on the polypropylene and flexible packaging division with full vigor and is making efforts to grab a greater share of the market in these two areas. Improvement in macroeconomic indicators also hints at demand recovery which will enable the company to achieve greater sales volume and higher profitability.
Comments