Tri-Pack Films Limited

Tri-Pack Films Limited (Tri-Pack) is the leading manufacturer of packaging films used in fast moving consumer goods and other products. Tri-Pack was incorporated in 1993, after a joint venture between Mitsubishi Corporation of Japan and Packages Limited of Pakistan. The company commenced commercial production in 1995, and is now listed on all the three bourses of the country, with a paid up capital of Rs 300 million.
The company produces two types of packaging films used in packaging for consumer goods. First is the moisture-resistant 'biaxially oriented polypropylene' (BOPP) film. BOPP films are produced in four different grades - plain, composite, pearliest and metalised - and their thickness ranges from 12 to 50 microns. Total installed capacity for BOPP films stands at 30,000 tons per annum. The company claims to cater to almost 70 percent of the BOPP market in Pakistan.
The second type of packaging film under production is the high-gloss and low-haze 'cast polypropylene' (CPP) film. CPP films are also available in different grades and their thickness ranges from 20 to 150 micron. This film is particularly well-suited for coating, lamination, form fill seal and side weld bag manufacture. Tri-Pack currently has CPP film manufacturing capacity of 7,200 tons per annum.
Packages Limited, an integrated packaging company, is a major buyer of the packaging films produced by Tri-Pack. The former also holds 33.3 percent equity in the latter. The penetration and consumption of packaged fast-moving consumer goods are increasing in the country, which is benefiting the packaging industry, one of the FMCG companies' major suppliers. Tri-Pack is a fairly leveraged company, and enjoys long-term rating of "A+" and a short-term rating of "A1" (as of February 12, 2013).
FINANCIAL PERFORMANCE SALES Tri-Pack's gross sales slightly declined during CY12 over previous year, by an amount of Rs 153 million. However, lower sales tax payments during the year led to a 2.3 percent increase in net sales on a year-on-year basis. Company revenues continue to remain heavily tilted towards domestic market, as overseas revenues summed up to just 1.21 percent of the gross revenues in CY12. During the period under review, Tri-Pack's production of finished BOPP and CPP films (and other packaging materials) stood at 40,145 tons, which shows 4.8 percent increase over CY11.
The management has attributed revenue stagnation to lower average selling prices compared to previous year despite a rise in sales volumes. Smuggled BOPP films, which are available at cheaper rates, pose a threat to the company's top line.
COST OF SALES Despite a slight dip in gross revenues, the cost of sales recorded a 6.16 percent increase during CY12, thanks to greater expenditures on raw materials, fuel and power. Crude oil and polypropylene granules are two major raw materials in the packaging films' production, which are both sourced from the international markets. The management has attributed this rise in cost to the increase in raw materials' international prices, shortage of natural gas and rising fuel costs. Though cost of sales haven't shown major growth during the period, but due to revenue slowdown, they exhausted a greater portion of net sales in CY12 (85.5 percent) compared to CY11 (82.4 percent).
OPERATING EXPENDITURES Tri-Pack's operating performance last calendar year was further subdued by double-digit growth in its distribution and administrative expenses, which grew by 15 percent and 21 percent, respectively, over CY11. That is why the two expenditure heads together consumed roughly 4.57 percent of net sales in CY12, compared to 3.97 percent of net sales in CY11.
The distribution costs had increased owing to rising outward freight charges and rising expenses on salaries and wages. Whereas the administrative expenses rose on account of increased expenditures on salaries, wages and benefits, staff retirement benefits, and depreciation and amortization.
OTHER INCOME & EXPENSES No good news came from the non-operating performance either. The 'other income' showed a 37.2 percent drop during the year, mainly due to lower income from financial assets, besides recording zero exchange gains during the year. Finance costs jumped nearly 40 percent in CY12, thanks to larger mark-up on short-term loans and exchange losses due to rupee depreciation against the dollar. The head of 'other expenses', however, declined by 37.5 percent, due to limited company contributions to the workers' profit participation and welfare funds during the year.
PROFITABILITY & MARGINS Profitability suffered blows from nearly all heads of the income statement during CY12, which makes the financial performance look abysmal when compared to the margins scored the previous calendar year. Lackluster top line growth, coupled with rising costs and haemorrhaging non-operating performance, led to declines in all three profit margins in CY12. The gross profit declined by 16 percent, operating profit by 26 percent, and net profit by 32 percent on a year-on-year basis. Consequently, Tri-Pack's earnings per share came down to Rs 17.8 in CY12, from Rs 26.09 in CY11, and Rs 16.49 in CY10.
LIQUIDITY Tri-Pack's cash generation capacity significantly deteriorated during CY12, as there was a net cash outflow of Rs 284 million from operating activities in CY12, compared to inflow of Rs 1 billion in CY11. The company resorted to heavy short-term borrowings to make up for that, which led to current ratio drop to 1.0 in CY12, compared to a current ratio of 1.1 in CY11. The firm's operational efficiency was also down in CY12 as the inventory was turned over 3.19 times in CY12, compared to 4.43 times in CY11.
LEVERAGE To improve the liquidity position and to pay for Rs 3.95 billion worth of fixed capital expenditure, Tri-Pack's short-term borrowings more than doubled to Rs 2.56 billion, and there was an increase of Rs 3.85 billion in its long-term finances. That turned Tri-Pack into a heavily leveraged company, with 65 percent debt accumulation in its capital structure at the end of CY12, compared to only 10 percent of debt it was carrying at the end of CY11. Higher interest payments in the wake of lower operating profits led to a deterioration in the company's interest paying ability during the year, which is shown by almost halving of the 'interest coverage ratio' over previous year.
FUTURE OUTLOOK Tri-Pack management estimates the current demand of BOPP film in Pakistan at around 45,000 tons per annum and that of CPP film at around 15,000 tons per annum. The company is currently catering to only 70 percent of this market, and to cater the rest, capacity expansion is required. The management seems cognisant of that, and has undertaken projects to meet that unmet. It has already started production from its new BOPP plant which has 40,000 tons per annum capacity, since March this year. A CPP plant with 9,000 tons per annum capacity has been ordered by the company, which is expected to go online by the end of this calendar year. Both these expansions are set to yield healthy top-line growth in the future. However, cost control and debt management will remain crucial in attaining and maintaining higher profit margins in the future.