Pakistan Paper Products Limited

Pakistan Paper Products (PSX: PPP) was established in 1951. At the time, Pakistan had to import its paper products which caused a drain on the country’s foreign exchange reserves. Thus, originated the idea to have its own paper converting unit. In 1962, PPP became a private limited company and two years subsequent to that, it became a public limited company making it one of the oldest companies to be listed on the stock exchange.

One of its first products was the production of exercise books, journals, registers, writing pads, college notebooks etc. It is the first and so far the only company in the industry to be manufacturing these. Some of its private sector clients include The City School while government organisations like the Pakistan Navy, Ministry of Defense, and Pakistan Ordnance Factories also purchase books from PPP Limited.

In 1957, PPP Limited was the first company to produce ammonia sensitized paper in Pakistan. This kind of paper is essentially used in architect and engineering drawings. Some of its clients in this category include Water and Power Development Authority (WAPDA), Pakistan Army and Navy and Pakistan Steel among many others.

In 1997, it introduced Pro Labels- self-adhesive labels inroll form in the market. These are applied using automatic labeling machinery. The introduction of these kinds of labels allowed for quick and accurate labeling. Some of their renowned clients are, but not limited to, Caltex, Shell Pakistan, Atlas Honda, Reckitt Benckiser, Unilever, Engro Foods, and Getz Pharma.

Shareholding pattern

Individuals own about 35 percent of the company while directors, CEO, their spouses and minor children own 34 percent. About 11 percent of the company is owned by the associated companies such as Management and Enterprises (Pvt.) Limited. NIT and ICP hold 7 percent while a similar percentage is held in banks, DFIs, NBFIs, insurance and joint stock companies, etc. the remainder is owned by public sector companies and corporations.

Historical performance

Through the second half of the latest decade, Pakistan Paper Products Limited has seen continuous growth in its topline at varying rates ,with the exception of FY14, where topline grew by a mere 0.6 percent year on year. This was because in FY13 they had an abnormally large seasonal sale to a major client; in FY14 the number returned to its norm.

In FY15, topline grew by 14 percent year on year of which a major contribution was by sensitised paper and photocopy paper, recording growth of 34.69 percent and 127.32 percent respectively. Pro labels category also experienced considerable growth in volumes. However, this could not be reflected in margins due to competition in the sector which resulted in pressure on prices; the company had to lower its prices to compete with other manufacturers.

The topline of PPP Limited continued to grow in FY16 albeit at a lower rate. While sales of exercise books and pro labels increased, sales of sensitised paper and photocopy paper declined significantly by almost 35 percent and 50 percent respectively. The reason for this was a high institutional demand in the previous which was absent in FY16. In FY15, the governmenthad decided to conduct a census; hence PPP Limited received a huge demand from the census department.

Similar case occurred with photocopy paper; a large institutional order was received by PPP Limited which did not happen in FY16. On the other hand, sensitized paper has been facing a challenge from the fact that people have switched to computers. Thus, the company decided to reduce its exposure to these items due to large fluctuation in prices.

The year FY17 recorded growth in topline by approximately 8 percent year on year. Exercise books and Pro Labels continued their upward trend while sales of sensitised paper and photocopy paper fell. The falling trend of sensitised and photocopy paper was seen worldwide as per the company’s observation, due to the adoption of technology. Moreover, with these changing trends, manufacturing photocopy paper no longer seemed like a viable business option thus the company shifted its focus towards the Pro Label category.

Pro Label category grew in both value and volumetric terms since the self-adhesive label industry, although in its infancy when compared to peer countries such as India and Bangladesh, is growing with the FMCGs focusing on quality packaging.

In FY17, FBR gave exercise books an exemption status which meant that the company had to absorb the entire 17 percent sales tax instead of it being paid by customers. This led to an increase in cost of production, and a corresponding decrease in gross margins which they dealt with by utilizing lower grade paper and maintaining sales through intense marketing.

In FY18, Pakistan Paper Products Limited performed remarkably well by recording topline growth of near 20 percent year on year. However, similar trend was not seen in profitability for the year. Several reasons are quoted for this. Firstly, the finance costs increased. In FY17, it was 0.9 percent of the revenues and grew to 1.9 percent of the topline during FY18. The increase came due to credit payments for investment in Flexographic press purchased on credit in 2016.

Secondly, higher sales required working capital, the need for which was fulfilled through bank borrowing, hence higher interest payments. Lastly, the rupee devaluation of more than 20 percent in the year adversely impacted profitability because PPP Limited was unable to pass the effect to the consumers in the form of higher prices due to competition in the market.

In FY19, PPP Limited recorded a topline growth of 11 percent, lower than the preceding year. Profit margins, on the other hand, were the lowest in the decade. Several explanations were seen for this. Firstly, the economic slowdown evidenced by high inflation, rupee depreciation and high interest rates negatively impacted the overall manufacturing sector of the country.

While Pro Label sales continued to increase as per expectation according to the company’s annual report, sale of exercise books was negatively affected due to change in starting term of school from April to July. This caused the company to hold the inventory for much longer than planned. It also caused financial burden.

In addition, the rise in sales of Pro Label was accompanied by an increase in working capital requirement, with the latter being fulfilled through bank borrowing. This resulted in a further increase in finance cost. The fall in profitability in FY19 is also seen in EPS declining from Rs 8.34 in FY18 to Rs 2.25 in FY19.

The fact that PPP Limited shifted its focus from sensitised paper to Pro Label is seen by the change in their capacity utilization. While Pro Label category is operating at optimum, there has been a fall in utilization of sensitized paper division.

Quarterly performance and future

The sales which PPP Limited expected to earn in the last quarter of FY19 were earned in the first quarter of FY20 due to change in the starting school year from April to July, thereby contributing to higher topline for the period. Pro Labels also increased by almost 12 percent. An improved topline was also attributable to the decreased competition owing to the elimination of players from the undocumented sector because of the government’s taxation drive. The company although has reported loss for the period, has improved from that of similar period last year. The company foresees improved profitability on the back of economic stability and continued customer confidence as is evidenced by a continuous rise in topline through the years.