Fauji Foods Limited

Fauji Foods Limited (PSX: FFL) was formed in 2015 after acquiring Noon Pakistan Limited. The latter was established in 1966 as a public limited company. Fauji Foods Limited operates under the Fauji Group of Companies with the latter having several other companies under its umbrella such as Fauji Fertilizer Bin Qasim Limited and Fauji Cement Company Limited, among others.

FFL's product portfolio includes flavoured milk, cheese, butter and UHT milk under the brand name 'Nurpur' while other products include fruit drinks and tea whitener.

Shareholding pattern

About 70 percent of the company is held by associated companies, undertakings and related parties while the local general public holds about 21 percent. Directors, CEO, their spouses and minor children hold nearly 4 percent and the remaining 5 percent is distributed between the rest of the categories.

Historical operational performance

The company has been incurring losses since FY13 which have continuously been on a rise in value terms. During FY15, Fauji Fertilizer along with Fauji Foundation acquired Noon Pakistan Limited to form Fauji Foods Limited. Noon Pakistan Limited took this decision in the hope of coming out of the continuous period of losses and become profitable.

As a result of this acquisition their accounting period changed from June-end to December-end. Thus comparing FY15 with CY16, their top-line has improved significantly growing at about 80 percent year on year.The change in company ownership brought with a change in strategy. The company launched Dostea (liquid tea whitener), Nurpur (original) and Nurpur (pasteurized) in a novel packaging. Along with a fresh packaging, the company also undertook intensive marketing campaigns which are evident by the escalation in advertising/selling/distribution expenses as a percentage of top-line, from Rs168 million in FY15 to Rs1216 million in FY16.

FFL also attempted to expand its production capacity apart from undertaking other Balancing, Modernizing and Replacement (BMR) activities which increased its fixed cost. Thus FFL recorded a loss of Rs967 million hoping that in the future their current expenses will allow for future profitability.

The expense on investments and development continued in CY17, which resulted in an increase in fixed cost. Moreover, the company apart from rebranding existing products, also expanded its product portfolio by introducing 'MUST' fruit juices and 'Nurpur low fat UHT milk'. The company's sales increased two times but costs took up 97 percent of it, eventually resulting in a loss of Rs2 billion for the year.Other factors which contributed to losses was the inability to pass on the increased costs to the consumer since low priced loose milk was available in the market through the undocumented sector. The increase in cost was due to the additional regulatory duty and change in tax rules.

One challenge that the company faced during the year was the negative opinion created in the market regarding packaged milk and specific labeling requirements imposed by the Punjab Food Authority, essentially on tea whiteners. However, it was able to overcome this challenge as is evident by the sales figures.The period of loss continued in CY18. The challenges regarding the negative perception created around the packaged milk remained resulting in a decline in the overall dairy sector remained. On the other hand, the company's sales of UHT milk were adversely impacted due to the Honorable Supreme Court order which was eventually reversed after retesting, however the negative impact had already been created. In order to come out of the period of loss the company has undertaken efficient management procedures for input costs. The cost of raw materials was affected by the fluctuation in foreign currency exchange rates, with the total cost of sales exceeding the top-line.

Since FFL operates in the FMCG sector, it is affected by the consumer's ability and willingness to spend which was negatively impacted due to inflation and weakening of the currency. Thus, a decline in top-line of almost 25 percent was observed. In addition, the weakening of the currency led to high cost of sales. Moreover, the government's decision to expand the tax base along with increasing policy rate led to high finance cost and tax expense. Consequently the company marked yet another year of loss.

Quarterly result and future outlook

Comparing the nine months ended of CY19 and CY18, the company's top-line has declined year on year by nearly 29 percent while costs continued to exceed the top-line. The economy was noted by monetary tightening, upward revision of policy rate and changes in import duties which created an unfavourable impact on the overall business activity. FFL also tried to adjust the price in its tea whitener category; however the market remained unaffected so the company reversed its decision. This led to volume losses and the need for greater sales support.

Despite the adverse macroeconomic environment, FFL, according to its annual report, remained positive about the future of the country's economy. The company hopes that China Pakistan Economic Corridor's (CPEC) contribution to the development of infrastructure would drive the growth momentum and consumption of the economy which would result in greater demand and reach for their product.