Punjab Oil Mills Limited

Punjab Oil Mills (PSX: POML) was incorporated as a public limited company in February 1981. The company is listed in the Vanaspati & Allied Industries segment on the stock exchange and is the second largest listed entity in the sector after Unity Foods.

Its registered office and production facilities are located in Industrial Triangle, Kahuta Islamabad; whereas the head offices are located in Lahore, Punjab.

The company is engaged in the manufacturing and sale of Ghee, cooking oil, specialty fats, laundry soaps, mushroom and coffee.

Its flagship brand includes Canolive(r) and Zaiqa banaspati. Other brands under various product ranges include Ella sunflower oil, Oliva olive oil, and King cooking oil; Ella banaspati, and King banaspati under Vanaspati range; bakery, biscuit, crème, and dairy fat under Zaiqa-Royal specialty fats range; Raja brand soaps; among others.

Pattern of shareholding

The sponsor group directly owns close to 42 percent shareholding through directors, associate undertakings, and other sponsor family members. Any beneficial ownership held by non-directorial sponsor group members that is less than five percent is not disclosed as is not required under SECP and PSX regulations.

The single largest minority shareholding is held by NIT at 9.60 percent, followed by additional ten percent shareholding by other mutual funds and NBFIs. Shares held by members of general public stood at 39 percent as at latest financials reporting date; however, it may also include shareholding by members of sponsor family which is less than five percent. No shares are held company executives; foreign entities or public, and/or commercial banks.

Past business performance

Over the past decade, Punjab Oil Mills has recorded a stunted growth trajectory, with a 10-year top-line CAGR of close to seven percent. Between FY09-FY14, top-line grew at a 5-year CAGR of 11 percent, which slowed down to just 3 percent in the latter half of the decade between FY14-FY19.

Growth for the better part of the decade had come on the back of aggressive marketing of its flagship brand Canolive, which has managed to become a formidable competitor in the premium canola-olive blend cooking oil category in relatively short period. However, the company had to push brakes on its aggressive growth strategy circa FY14-FY15, with the introduction of Price Control Act for edible oils and banaspati in its primary market, Punjab.

As edible oil industry has traditionally been a low margin business with category leadership enjoyed mainly on the back of brand differentiation and price competitiveness, the company has managed to maintain volumes despite constrained improvement in selling prices.

As a result, its ability to make investments in capacity increase and modernization has been grossly curtailed, reflected in negligible investment in long term assets (plant and machinery) between FY14-FY17. A positive outcome of these dynamics is that the company has taken no long-term loan during the decade, utilizing internally generated capital for BMR activities undertaken. On the other hand, the company missed out entirely on the chance to modernize/enhance capacity during the low-interest rate spell of FY15 to FY18.

As a result of no long-term liabilities (other than deferred staff retirement benefits and negligible tax), its debt servicing liabilities has remained impressively low, with lowest debt servicing coverage coming in at 27 times for FY13-FY19. Interestingly, DSCR levels were over 130times for FY15 and FY16, when the top-line had slumped upon introduction of price controls in Punjab.

On the marketing side, company's pivot towards cooking oil category - led by increased health risk awareness of Vanaspati and changing consumer demand trends - has shown itself in rating capacity being shifted from banspati to cooking oil blending. During the five-year period leading up to FY17, while total rated capacity remained restricted at 28,000 tons, the company in fact shifted 4,000 tons from Vanaspati to cooking oil.

Recent performance

By FY19, cooking oil blending capacity has reached 19,000 tons annually, with Vanaspati rated capacity reduced to 14,000 tons. Capacity utilization for cooking oil during this period has averaged at over hundred percent, whereas banaspati utilization has climbed up from 80 percent to 90 percent after reduction in rated capacity.

Nevertheless, on absolute basis, total volume produced averaged at 27,000 tons for the better part of decade, finally increasing to 29,500 tons and 31,500 tons during the last two years, after limited capacity enhancement.

While this has logically reflected itself with restoration of growth to top-line - 5 and 11 percent year-on-year during the last two financial periods - high raw material cost has kept contribution margins from climbing.

As a consumer-goods business with highly price-sensitive demand and precarious brand loyalty, the company has to perform a balancing act between maintaining profitability and volumes at the same time. In fact, during the last seven years, contribution margin (ex- of depreciation) was highest at 19.7 percent only in FY16, on the back of matching aggressive pricing by competitors and regulatory efforts at price control, resulting in sales taking a hit in value terms, driven primarily by high volumes (highest till that time prior to capacity enhancement in the last two years).

Thus, enhanced capacity during the last two years has allowed the company to push volumes on the market, however, has been unable to maintain its price advantage. This has resulted in contribution margin continuing on its downward trend, which to date has declined by 4.3 percentage points since its FY16 peak level.

Aggressive marketing to maintain market share eroded whatever limited profitability is achieved on the gross level, with operating expenses (inclusive of administrative, distribution and all other charges) taking away close to 11 percentage points from contribution margin of 15 percent on average. Note that this estimate is excluding depreciation at all level, meaning the EBITDA left - at average 4 percent - after netting routine business expenses leaves little room for extreme variations in interest and tax expenses.

The company's strategy has thus been to limit leverage to lowest possible levels, which has reflected itself in interest coverage staying in double-digit territory throughout the period under review.

Low capex investments coupled with negligible interest expense means that PBT remains close to EBITDA level, reflective of a healthy financial position despite variability of selling prices and selling margins.

Outlook

High dividend payout levels during past years denote that the company has no plans of expansion in the immediate future; this is further compounded by overall winds of macro-stabilization which has curtailed consumer demand during the past year. Growth in volume - in spite of dwindling consuming demand - during the just ended financial year - is emblematic of company's strong brand position, which has allowed it to inch up sales by double-digit in value during troubled times for the economy.

The company will thus have to rely on a strategy of maintaining its market share in the short- to medium- term, even if that means curtailing prices in line with regulatory efforts at price control and stiff competition. In the long term, the regulatory plans to phase out Vanaspati altogether poses a business challenge to the sector, which compounds the need to ramp up brand activities around premium and mid-income cooking oil variants so that over all volume is maintained.