Unilever Pakistan Limited (ULEVER), formerly known as Lever Brothers Pakistan Limited (LBPL) is a wholly-owned subsidiary of Unilever Overseas Holdings Limited, UK, whereas its ultimate parent company is the consumer products giant, Unilever PLC, UK.
Following a series of high-profile acquisitions, including US-based Bestfoods, Unilevers foods business is the worlds third largest after Nestle and Kraft. It is a global leader in culinary foods, ice cream, margarine and tea-based beverages.
Major brands include Knorr, Lipton and Magnum. ULEVER was incorporated in Pakistan in 1948 as Lever Brothers Pakistan Limited and merged with Lipton in 1989 and Brooke Bond in 1997. It became the largest ice cream manufacturers in Pakistan through an amalgamation with Polka in May 1999. These acquisitions have further strengthened the distribution network of ULEVER. It is listed on all the three stock exchanges of Pakistan.
Currently, ULEVER is the largest fast moving consumer goods (FMCGs) company in Pakistan. It is engaged in manufacture and marketing of home and personal care products, beverages, ice cream and spreads. ULEVER has adapted Unilever global brands such as Lifebuoy, Lux, Surf and Walls to local consumer needs at affordable prices. It has increased its leading market position over the years, in most of its core home and personal care and foods categories, eg, personal wash, personal care, laundry, beverages (tea) and ice cream.
Unilever Pakistan has been exporting a range of products catering to the "external constituency", for the last forty years. Since 1998, ULEVER has been entrusted with the responsibility of developing the Afghanistan business through a dedicated sales and distribution network. A wide range of home care, personal care, foods, ice cream and beverage brands are offered for export. In June 07, Unilever Overseas Holding Limited, a wholly-owned subsidiary of Unilever PLC, UK, the ultimate parent company, purchased all the shares held by the Government of Punjab. This has increased its shareholding from 67.04% to 70.4%.
SEGMENTS AT A GLANCE (FY08)
UNILEVER COMPRISES FOUR SEGMENTS:
-- Home and Personal Care - represents laundry and a wide range of cleaning, skin care, hair care and oral care products
-- Beverages - represents tea
-- Ice Cream - represents ice cream
-- Other - represents margarine
HOME AND PERSONAL CARE The HPC continues to be the major driver behind the top and bottom line growth. In FY08, net sales of this high margin segment increased by 42% (on account of both volumetric growth and inflationary impact). ULEVER maintains its market leadership in laundry detergent powders, hair and personal wash categories. The star performers were Surf detergent powder, Lifebuoy shampoo and soap. Despite this impressive turnover, the unprecedented inflation in international commodity prices resulted in subdued gross margins. However, optimal advertising and low operating costs led to a profit growth of 38%.
BEVERAGES
Net sales for FY08 grew by 22%. A sharp rise in Kenyan tea prices of around 24% and the currency devaluation resulted in lower than expected gross margins. Lipton Yellow Label continues to grow, amidst cut-throat competition in mature tea market, on the back of various promotional campaigns and trade offers. Brooke Bond Supreme was supported through customer activation strategies, and registered a growth despite facing the issues like continuous pressure from small rural brands and smuggled tea.
ICE CREAM AND SPREADS
Gross sales for Walls in FY07 increased by 9%, well below expectations. In FY07, the monsoon was earlier and more severe, there were acute power shortages in the south and delay in completing the factory expansion project, resulting in serious supply disruption in 2Q07. This damaged the trades confidence and attention to ice cream sales, which were countered by leasing cold storage facilities in Karachi and Lahore. Hence higher distribution and additional factory costs resulted in lower sector profits and eroded gross margin. On spreads side, Blue Band Margarine registered a 23% sales growth on the back of successful brand activation programmes. However, the overall margins for the segment remained flat at 40%.
FINANCIAL PERFORMANCE (DEC03-DEC07)
Overall, sales grew an impressive 32.7% (2006: 11.17%) as it built the growth momentum that started in 2005. This growth was particularly impressive considering the recent trends of increasing commodity costs, depreciation of rupee, high borrowing costs and increasing power outages. Sharp focus and increased resource allocation in marketing and customer management were the prime drivers. The sales mix improved with robust growth in home and personal care. Beverages sales grew by 22%. Though spreads sales grew by 24.5%, it did not meet the expected performance levels.
However this overall sales growth did not trickle down to the bottom line, mainly due to shielding of customers from the impact of high input and conversion costs. Despite high COGS (increase of 40.5%), overall gross margins improved by around 20% in FY08 on the back of growth in HPC segment, which contributed 66% to the gross profit. ROA showed a decline due to a high increase in assets base. ROE showed a positive trend on account of increasing profit after tax. The overall PAT for FY07 increased by a meagre 17.6%, after a meagre growth of 2% in last year. This was due to the volume increase in all segments, especially HPC and tea business.
All the liquidity ratios of ULEVER have posted a declining trend over the 6-year period. The current ratio has decreased from 1.04 in 2003 to 0.71 in 2008. This shows that companys current liabilities (mainly the short term borrowings) are rising far more than its rising current assets, reflecting a decline in companys ability to pay off its short-term obligations. Quick ratio, a better measure of liquidity followed a trend similar to current ratios, first increased slightly in 2004 and then declined onwards. Thus it is deduced that though there is a positive growth in current assets, yet the growth in current liabilities are far more.
Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO for ULEVER, though has declined during 2004, but has been on a slight rise then onwards. The slight increase is indicative of ULEVERs declining operational efficiency with growth in net sales lagging behind the growth in inventory kept by the company. Especially in FY08 the growth in inventories has been exponential, with a rise of 54.5%. Reasonable ITO shows that ULEVER is able to efficiently turn its inventory into sales.
Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. The trend line indicates a sharp decline in this ratio in 2004, after which, its been on a constant rise (slightly) till FY07 due to growth in net sales lagging behind that in trade debts (37% in FY07) indicating that perhaps the company is deliberately pursuing easy credit policy to attract large number of creditors. However in FY08, DSO fell from 3.69 to 2.66, due to decline in trade debts of 4.3%. This along with the growth in sales has showed that the recent tightening policy of debt collection is not affecting the growth in sales. Also, the DSO is still very negligible compared to ITO. The operating cycle of ULEVER hence followed the same trend as that of ITO in the respective years. Initially it was much higher than the industry average but later it started declining to converge with the industry trend.
Tato of ULEVER has remained flat at 3 over the period under review, reflecting that the company is anticipating any increase in its sales and responding to it in a timely fashion by enhancing its assets base accordingly. It has declined slightly in FY07 and FY08. Sales/equity on the other hand shows a rising trend after 2004 on account of declining equity base in the subsequent years. Also, sales in FY08 have registered a positive growth, which explains the rise in that year.
As far as debt management is concerned both D/A and D/E ratios after 2004 (the decline in 2004 is because the ULEVER retired significant amounts of debt in that year) show ULEVERs increased reliance on debt financing rather than equity financing. The trend lines in particular, show that D/A (0.63 to 0.80) ratio has remained almost stable over the years where as D/E ratio has increased significantly (1.8 to 4.13) owing to increasing long term debts (as further evident by the long term debt to equity ratio) to finance the expansion.
The TIE ratio has increased in 2004 but again nose-dived in 2005 due to high interest rates offsetting the increase in EBIT, thus having an adverse impact on ULEVERs interest covering ability. Even though this ability increased in 2006 (owing to comparatively lower finance costs), a massive surge in finance costs (70.64%) vis-à-vis a 3% increase in EBIT, was responsible for a plunge in FY07 TIE ratio. Finance costs also rose sharply in FY08, mainly due to mark-up on short term borrowings and exchange loss, which caused further decline in TIE. Looking at this, we can infer that ULEVERs is being adversely affected due to higher mark-ups in high interest rate regime.
The (P/E) ratio shows that how much investors willing to pay per rupee of the reported profits, depends on the companys price per share and its earnings per share (EPS). ULEVERs EPS has been erratic (fluctuating between 120 and 130) till FY07, driven mainly by any changes in companys profit after tax (as its number of shares have been constant so far in last five years). In FY08, the growth in profit after tax caused EPS to cross the Rs 130 mark and went to Rs 149.
The year-end market prices of ULEVER have been increasing over the 5 years period. Consequently, the P/E ratio also followed a rising trend driven by increases in market price of shares, reflecting the investors confident in ULEVER. In FY08, the market prices went down due to the ongoing stock crisis in the country, coupled with the global recession. Initially, ULEVERs book value per share was very high, however, in 2004 onwards, the companys book value per share plummeted on account of declining equity base (due to decline in reserves) but it again surged in FY07 and FY08 on back of high reserves, compared to no change in the number of shares outstanding.
Also, companys DPS followed the same trend as that of book value per share till 2005. However, unlike book value per share, it showed a slight increase in the FY06. In FY08, it remained at the same level as of FY07. The company has followed the policy of maximum DPO averaging 100% and the dividend yield has been constant at 5-6% over the last 5 years. Despite a decline in real payout (with inflation growth surpassing the dividend growth), the major beneficiary of this nominal growth is ULEVERs associated undertaking (Unilever Overseas Holdings Ltd). Overall both DPS and BPS of ULEVER are greater than the average industry showing that the good return to shareholders is the primary objective of ULEVER.
FUTURE OUTLOOK
The Pakistan market has become very lucrative for fast moving consumer goods (FMCGs) businesses and to new entrants, both local and international players, in the wholesale and retail industry due to sustained economic growth, rising rural incomes and changing lifestyles. Despite the downturn, the Pakistani market is one of most lucrative in the regions, and the giants plan to stick it out in anticipation of better times ahead. On the flip side, the market environment remains very competitive and ULEVER continues to invest heavily behind its growing brands. Restoring positive gross margins especially of ice cream business is of key importance in FY 2009.
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UNILEVER PAKISTAN LIMITED (UPL) - FINANCIALS
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Balance Sheet (PKR mn) 2003 2004 2005 2006 2007 2008
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Property, plant and equipment 1,445 1,524 1,761 2,137 3,513 4,428
Other non-current assets 573 615 609 607 479 969
Inventories 2763 1930 1930 2362 2906.419 4493
Trade debts 470 84 105 175 239.313 229
Cash and cash equivalents 1,160 759 365 586 188.682 106
Current assets 4,803 3,753 3,437 3,686 4,092 5,989
Total assets 6,821 5,892 5,807 6,430 8,084 11,386
Ordinary share capital 664 664 664 664 664 664
Preference share capital 5 5 5 5 5 5
Reserves 1,345 1,437 1,178 1,161 1,311 1,547
Total equity 2,014 2,106 1,847 1,830 1,980 2,216
Surplus on revaluation of fixed assets 19 16 16 15 14 13
Non-current liabilities 153 90 369 348 502 687
Current liabilities 4,635 3,680 3,575 4,237 5,588 8,470
Total liabilities 4,788 3,770 3,944 4,585 6,090 9,157
Total equity and liabilities 6,821 5,892 5,807 6,430 8,084 11,386
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Income Statement (PKR mn) 2003 2004 2005 2006 2007 2008
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Net sales 21,472 18,238 17,671 20,988 23,332 30,957
COGS 14,677 12,679 10,817 13,110 14,249 20,021
Gross profit 6,795 5,559 6,854 7,878 9,083 10,936
Operating profit / EBIT 2,600 2,242 2,559 2,561 2,639 3,391
Finance Cost 51 35 77 64 109 466
Profit before tax 2,521 2,167 2,482 2,497 2,529 2,925
Taxation 922 442 880 853 842 940
Profit after tax 1,599 1,725 1,602 1,644 1,687 1,984
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PROFITABILITY RATIOS 2003 2004 2005 2006 2007 2008
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Profit Margin 7.45% 9.46% 9.07% 7.83% 7.23% 6.41%
Gross profit margin 31.65% 30.48% 38.79% 37.54% 38.93% 35.33%
Return on Assets 36.96% 36.78% 42.74% 38.83% 31.28% 25.69%
Return on Equity 79.39% 81.91% 86.74% 89.84% 85.20% 89.53%
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LIQUIDITY RATIOS 2003 2004 2005 2006 2007 2008
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Quick Ratio 0.44 0.50 0.42 0.31 0.21 0.18
Current Ratio 1.04 1.02 0.96 0.87 0.73 0.71
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ASSET MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008
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Inventory Turnover(Days) 46.32 38.10 39.32 40.51 44.84 52.25
Day Sales Outstanding (Days) 7.88 1.66 2.14 3.00 3.69 2.66
Operating cycle (Days) 54.20 39.75 41.46 43.52 48.54 54.91
Total Asset Turnover 3.15 3.10 3.04 3.26 2.89 2.72
Sales/Equity 10.66 8.66 9.57 11.47 11.78 13.97
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DEBT MANAGEMENT RATIOS 2003 2004 2005 2006 2007 2008
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Debt to Asset 0.70 0.64 0.68 0.71 0.75 0.80
Debt to Equity Ratio 2.38 1.79 2.14 2.51 3.08 4.13
Long Term Debt to Equity(%) 0.08 0.04 0.20 0.19 0.25 0.31
Times Interest Earned 50.98 64.06 33.23 40.02 24.16 7.28
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MARKET RATIOS 2003 2004 2005 2006 2007 2008
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Earning per share 120.28 129.76 120.51 123.66 126.90 149.24
Price/Earnings Ratio 12.06 11.37 14.73 16.17 17.97 12.11
Dividend per share 126.00 135.02 119.98 122.01 122.99 122.99
Book value per share 151.50 158.42 138.93 137.66 148.94 166.69
No of Shares issued (in thousands) 13294.00 13294.00 13294.00 13294.00 13294.00 13294.00
Market prices(Year End) 1450.00 1475.00 1775.00 2000.00 2280.00 1808.00
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