Cherat Packaging (PSX: CPPL) is a manufacturer of Paper-sack (PS) and Poly-Propylene (PP) in Pakistan. The company was established in 1991 and is part of the Ghulam Faruque Group (GFG). The group has more than ten companies. Others listed in this group include Cherat Cement and Mirpurkhas Sugar Mills.
Cherat Packaging is the largest supplier of packaging material to the cement sector of Pakistan. The company currently has an installed capacity of 460 million bags, fifty million of which was recently added. The manufacturing unit of the company is located near Swabi, Khyber Pakhtunkhwa. The head office of the company is located in Karachi.
Historical performance
Over the last five years, the growth of Cherat Packaging has been remarkable. The company has taken full advantage of the boom in cement sector.
In 2012, the company installed its first line of PP bags at 65 million bags per annum. The capacity was further increased to 105 million bags in 2013. The company again undertook expansion in 2014 and stretched its products to 145 million bags. PP bags have played a pivotal role in changing the fortunes of the company.
The turnover of the company has increased from Rs 2.4 billion in 2011 to Rs 6.8 billion in 2016, registering CAGR of 23 percent. Similarly, the bottom line of the company has also shown outstanding numbers. During the past five years, the margins of the company have significantly improved. The gross margins, which were around 11-12 percent during 2011 and 2014, have shot up to 23 percent in 2016. The up tick in gross margin has been achieved due to the continuous expansion over the years, management of fixed costs and efficient use of resources.
Share price performance:
Investors in the stock market have been very positive on Cherat Packaging over the years and this has reflected in the performance of the stock as well. During the last year, the stock has outperformed the benchmark index KSE-100 by a considerable margin. The 52-week low of the stock was Rs 251 while the 52-week high was Rs 415. A surge of over 60 percent in the stock price of Cherat Packaging was witnessed this year.
The company has also increased its dividend over the years. This has attracted those investors who like to have cash payout. In FY16, the total dividend paid by the company was Rs 10. The packaging industry, because of its cash generating nature, has been re-rated by most of the market participants and shares within this industry trade higher than the average price to earnings to multiple of the benchmark index.
Recently, after the announcement of the first quarter result, the stock price came down due to an unexpected result. The stock has recovered but it is still 15 percent down from its highs.
Shareholding pattern
More than a quarter of the shares in Cherat Packaging are held by the group companies. Faruque (Pvt) Ltd, Cherat Cement Company, Mirpurkhas Sugar and Greaves Pakistan combined have a 26 percent holding in the company. Atlas Insurance holds 9.2 percent shares, while mutual funds collectively have around five percent holding. The general public and the financial institutions have about 32 and 22 percent holding respectively.
Latest quarterly snapshot
The company recently posted its result for the first quarter of FY2017. It was below market expectations. The sales dropped by 5 percent and earnings declined by 22 percent. There was a downtick in both gross and net margins which declined by 4 and 3 percent respectively.
The directors in their report mentioned that selling price had to be reduced due to market conditions. The sales volume had increased but profitability took a hit. However, there was some positive news as the third line of Poly-propylene plant was commissioned during the quarter. The new line is very efficient and is acquired from one of the best companies in the world. After the inclusion of the third line, the installed capacity of PP bags has been increased to 195 million bags.
The company also updated its investors on the progress of expansion related to the Paper-sack plant. Initial paperwork for the project has started and the company expects the expansion to be completed at the end of next year. This expansion would take the Paper-sack capacity to 400 million bags per annum.
Future outlook
The future prospects of Cherat Packaging look bright. After delivering stellar performance during the past five years, there is no reason for the growth to stop. The company is constantly exploring new avenues, especially in the export segment. Domestically, the demand for cement, fertiliser, sugar and wheat is expected to grow. The company, with its current capacity and upcoming expansion, would be able to easily accommodate growth in various sectors. With capital expenditures currently in play, the company would also be able to get tax credit which would augment the earnings this year as well as next year.
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