Cherat Packaging Limited (PSX: CPPL) is part of the Ghulam Faruque Group (GFG), along with Mirpurkhas Sugar Mills and Cherat Cement Company. Established in 1989, it is one of the largest manufacturers of cement sacks in the country through its dual lines of business for Kraft paper and polypropylene (PP) products. Along with cement sacks, CPPL also supplies bags to sugar, wheat, chemical and other sectors.
Last year, its production capacity was enhanced from 460 million bags to 595 million bags. In FY17, CPPL anticipated demand of flexible packaging in the growing packaging sector and thus decided to enter into flexible packaging business. The flexible packaging plant will be installed in Gadoon Amazair, Khyber Pakhtunkhwa.
Historical performance
Increased cement demand has a positive impact on CPPL's business, something which the company has capitalized on through a series of expansions. Last five years have seen almost a continuous rise in turnover with each year setting a new benchmark of highest production in company's history. However, the rate of increase in sales has relatively diminished in recent years.
In FY14, CPPL installed a second line of PP unit which increased production capacity to 145 million and started supplying bags to the sugar industry. Margins were under pressure due to inflated costs of inputs such as Kraft paper, PP granules and electricity tariff hike. However, concentration of export of PP bags helped the company make inroads into new markets.
Increase in volume of both paper and PP bags sold enabled the company to increase top-line by 16 percent in FY15. Revenue was also supported by enhanced exports of PP bags to Middle East, Africa, and Afghanistan. Since the company was operating near capacity, a decision was made to install a third polypropylene plant.
Sales continue to rise in FY16 with profits at their highest levels in recent history. The third line of the PP plant was installed and commissioned which increased capacity to 195 PP bags per annum. This expansion helped the company achieve higher economic of scale which contributed in controlling costs.
Improving macroeconomic environment coupled with initiation of CPEC projects resulted in higher demand for cement which increased sales volume in FY17. However, downward adjustment of prices in the second half of the year in line with market conditions resulted in a decline in sales revenue. Introduction of low grammage high quality PPL bags which are cheaper in price as compared to conventional bags generally used by the cement sector also drove down the top-line.
While new varieties of packaging solution were introduced such as BOPP bags, overall the lower sales revenue resulted in lower profits.
FY18 overview
While sales continued on an upward trajectory, profits and profit margins dived down further with profit before tax lower by 21 percent YoY.
Increase in competition with entrance of new players has caused selling prices being adjusted downwards. Higher sales of the cheaper low grammage high quality PP has also led to pressure on total revenue. Despite this, sales continued to climb higher but lower selling prices resulted in lower margins.
Margins were also affected by a significant increase in cost of raw materials on account of international prices of Kraft paper and PP granules. Depreciation of the rupee vis-à-vis the dollar also contributed towards a higher cost of goods sold. While the company tried to rationalize production costs through inventory management, gross profit margin slid down by 2,100 bps.
Finance costs have increased as well due to arrangements being made to finance operations and the expansion projects. Decline in net profit was stemmed since the company claimed tax credit against the recently commissioned Universal Papersack Line.
The Universal Papersack will enhance the production capacity of the company from 265 to 400 million paper sacks per annum. Other than being able to produce conventional cement bags, it will also make smaller sized bags for related products.
As regards the flexible packaging project, the company placed an order for the main equipment with an international leading machine supplier of this industry. Some of the ordered equipment has arrived at the factory and installation is in process. This arm of CPPL is being financed through a combination of debt and equity which includes that issuance of right shares.
Future outlook
CPEC has driven construction and infrastructure project, leading to enhanced demand of cement. Within enhancement in production capacities of both papersack and PP plants, the company will be able to continue meeting rising requirements of cement bags. Since the demand for fertiliser, sugar and wheat is expected to grow, so will its sales.
As CPPL is striving to diversify into new market segments such as flexible packaging division, it has significant potential to grow. Its drive for diversification which helps generate the company new revenue streams, locally as well as in the export sector.
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Cherat Packaging Limited
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Rs. (mn) FY18 FY17 YoY
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Turnover 7,092 6,444 10%
Cost of sales (5,993) (5,187) 16%
Gross profit 1,098 1,256 -13%
Distribution costs (98) (117) -16%
Administration costs (75) (62) 21%
Other expenses (61) (61) 0%
Other income 29 21 38%
Operating profit 893 1,037 -14%
Finance costs (128) (64) 100%
Profit before tax 765 973 -21%
Tax (53) (271) -80%
Profit for the year 711 702 1%
EPS 21.79 22.81 -4%
Gross profit margin 15% 19% -21%
Net profit margin 10% 11% -8%
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Source: PSX
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Pattern of shareholding (as at June 30, 2017)
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No. of shares %
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Directors, their spouses and minor children 1,734,611 6%
Associated companies,
undertaking and related parties 8,083,868 27%
Executives 58,700 0%
Public sector companies and corporations 900,637 3%
Banks, development finance
institutions, non-banking
finance companies,
insurance companies,
takaful, modarabas,
and pension funds 6,159,158 21%
Mututal funds 2,208,117 7%
General public 9,664,548 33%
Others 1,210,861 4%
Shareholders holding 5% or more
Faruque (Pvt) Limited 2,952,101 9.97
Atlas Insurance Limited 2,724,763 9.2
Cherat Cement Company Limited 2,055,308 6.94
Greaves Pakistan (Pvt) Limited 1,487,026 5.02
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