What’s in a name? A lot, going by the popular local tradition of name-changing, often done to inspire luck in lives riddled with misfortune. It seems the Dutch have also caught the fever, with Engro Foods slated to be rebranded as “FrieslandCampina Engro Pakistan Limited”, according to a notice on PSX. If performance of last three years is any guide, the erstwhile dairy giant could very well use some good luck charm.
As per 1QCY19 results announced over weekend, fortunes haven’t entirely turnaround. But those of weak faith may ascribe it to a delay in christening. For others, a closer look at P&L may indicate that it will be long before the prodigal son starts living up to its potential.
Nineteen-twenty has opened with EFOOD’s top line finally changing gears from the three-year long slide that saw loss of nearly one-third of its market share. Recall that in CY18, annual sales had come down to seven year low of Rs32 billion.
So, is the worst over? There is reason to be cautious. While the 22 percent top line growth has come on the back of volume surge across dairy segment, the company has struggled to take a price increase (as have its peers). A price-increase taken mid-quarter was quickly reversed when volumes started falling fast.
Thus, margins have trimmed, as effects of currency depreciation began to sink in. Not only does the company import skimmed milk as raw material for tea whitener, once its mainstay, FX risk from royalty and technical assistance fee to Dutch parent also magnified the costs at gross level.
Three-fourths of the remainder profit went towards servicing higher expense on distribution and marketing expenses, largely blamed on inflation. Granted, but what of the 76 percent year-on-year increase in debt servicing?
Sure, the discount rate has seen steep rise, but the onus for higher interest expense lays with the management, which in CY17 reprofiled the balance sheet by paying out a special dividend of Rs7.5 billion (close to 45 percent of equity) and taking on net debt of Rs3.5 billion. Lessons from elementary finance to not increase financial leverage at a time of revenue slowdown seemed not so relevant for the firm.
What does the future hold? With summers and religious festivity season coinciding this year, expect no increase in prices and margins to continue to narrow. The sponsors also look sold on the idea, as management bides time to regain market share. For those insisting on optimism, some respite may come from the ice cream segment. Channel checks suggest the business has finally turned green on operating level. Nevertheless, profitability will continue to remain under pressure for the dairy industry, as there is little indication of sector getting a break on its perennial sale tax woes.
What of the name-change? Receiving parental name is a symbol of honour, at least in this society. For investors, it’s a signal that majority sponsor is here to stay despite the rough rides it has faced since takeover. What’s in a name, indeed!
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