Engro Foods Limited

Engro Foods (EFOODS) is one of the top FMCG companies in Pakistan. The company was created under the umbrella of Engro Corporation in 2005. It is a publicly traded company and listed at KSE. The company is engaged in the manufacturing, processing and marketing of dairy products, ice cream, frozen desserts and fruit juices. It has established several brands that have already become household names in Pakistan such as Olper's, Tarang, Dairy Omung, Omung Lassi, Olper's Lite and Omore, amongst others.
Recent financial performance:
CY12: Over the last five years, EFOODS has given a set of mixed annual results. Nevertheless, the company started showing its presence from CY12 when it posted a 35 percent revenue growth. The profit for the company fattened, and it reported the highest ever profit of Rs 2.6 billion since CY10. In 2011 the company's profit was standing at Rs 891 million. This significant increase largely came from selling 1.8 billion packs of their milk, milk-related items, and juices during the period. The volumetric growth resulted in securing a market share of 51 percent in 2012 in contrast to 44 percent in 2011 across the ambient UHT milk segment.
During this period, the flagship product of Engro Olper's milk stands tall and the tea-whitening brand Tarang continued to show strong position in the market. All dairy and juice products counted for 97 percent of the total revenue company had achieved. However, the ice cream market, on the other hand, showed a decline which the company blamed on energy shortages that had impacted the cold storage infrastructure across the country.
In terms of margins, the company saw for the first time an increase of 400 basis points improvement in its gross profit margins - a kind of growth which EFOODS had never seen before.
CY13: Engro Food started the 1QCY13 in a toned-down manner. In the first quarter, the company performed below expectations and lost 4 percent in top line even though earnings climbed a healthy 34 percent year-on-year. However, during the midway of CY13, EFOODS dairy volume slipped by nearly 13 percent, and the company saw a whopping 79 percent year-on-year decline in net profits. The company was in the process of rapid expansion, but the existing distribution networks had not been designed effectively to cater the high-season demand. That's why the process of rapid and inefficient expansion plagued the firm with distribution difficulties during the CY13, and EFOODS posted a hefty year-on-year fall of 92 percent in its bottom line during CY13.
CY14: In CY14 Engro Foods announced that it would be the year of recovery for the company, and EFOODS will give a surprise. And the annual result of CY14 was exactly a surprise. Towards the end of the third quarter of CY14 the market pundits were giving a 'sell call' to EFOODS because the company had posted a decline in its profits due to the loss incurred on the sale of its North American business. However, after the result the 'sell call' became a 'buy call', and EFOODS became a top pick for market analysts.
The company reported an earning of Rs 890 million for the year 2014 as compared to Rs 211 million in 2013. Additionally, the top line grew to Rs 43 billion from Rs 37.9 billion in 2013, a 14 percent growth in year-on-year comparison.
EFOODS saw a sort of revival in its dairy segment, which witnessed a 22 percent year-on-year volumetric growth, where the Olpers and Tarang posted a major growth in sales. EFOODS market share in the segment stands well over 50 percent and growing. However, the margin for the company had declined on account of higher milk prices during the year. The gross margin decreased to 19 percent from the high of 22 percent in CY13. In any case, margins have always been a major issue for the company due to the competitive nature of the business.
In CY14, EFOODS was able to resolve the distribution issues which had been creating major hurdles for the firm's top line growth in the year before. The resolution of the distribution issues was the major step company took to get back its mojo.
1QCY15: Enter the first three months of CY15, and EFOODS has marked the highest ever quarterly profit in its history. Once again, the company beat all the market expectations with revenues and clocked-in Rs 12.6 billion, which is a growth of 25 percent year-on-year.
The excellent performance in top line has helped to improve the bottom line to Rs 1.1 billion, a growth of 396 percent in year-on-year comparison. The company saw its gross profit margin improved by 700 basis points in a year-on-year comparison, on account of the historic collapse in international powdered milk prices, lower local milk procurement costs and decreased in fuel prices. Aside from these external factors, the internal factor that helped the company tremendously was the streamlining of its distribution network.
The FMCG sector overall has performed very well in the first quarter of 2015. The top three companies Nestle Pakistan, Engro Foods and Unilever Pakistan clocked a collective turnover of Rs 40 billion in 1QCY15. The average gross margin for the sector has improved by 700 basis points from 1QCY14, to 35 percent in 1QCY15. Among the top three companies, EFOODS has performed much better and gave an excellent profit to its shareholders.
Outlook: The future seems very bright for EFOODS since the demand of packaged food products is high due to the rising disposable income of the consumer. Moreover, now that the company has gotten rid of its North American operations and fixed its distribution issues it can focus more on its domestic market. However, the budget is on the way, and the news is that International Monetary Fund wants SRO's gone. If that happen, it will raise taxes on the formal sector dairy players and certainly create hurdles for firms like EFOODS. But the company is much stronger now than it was in 2010.

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Engro Foods LTD

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Rs (mn)                               1QCY14    1QCY15          chg

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Net sales                             10,037     12576          25%

Cost of sales                          7,998      9142          14%

Gross Profit                           2,039      3435          68%

Distribution and marketing expenses    1,064      1250          18%

Administrative expenses                  379       326         -12%

Other operating expenses                  40       125         112%

Other income                              11        92         727%

Operating profit                         568      1827         222%

Finance costs                            253       267           5%

Profit before taxation                   315      1560         396%

Taxation                                  95       491         416%

Profit for the year                      219      1069         387%

Earnings per share                      0.29      1.39

Gross profit margin                      20%       27%   up 700 BPS

Operating profit margin                   6%       15%   up 700 BPS

Net profit margin                         2%        8%

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