National Foods Limited (PSX: NATF) as a private limited company in 1970 under the Companies Act, of 1913. It was later converted into a public limited company under the repealed Companies Ordinance, of 1984. It manufactures and sells convenience-based food products, such as recipe mixes, salt, spices, ketchup, jam, etc.

As of June 30, 2020, a little over 34 percent of shares were held by the directors, CEO, their spouses, and minor children. Within this category, the majority of the shares are held by Mr. Khawar M. Butt. Over 33 percent of shares are held under the associated companies, undertakings, and related parties that solely include ATC Holdings (Private) Limited. The local general public owns 12.09 percent of shares while the remaining 16.85 percent of shares are with the rest of the shareholder categories.

Historical operational performance

National Foods Limited has consecutively witnessed a growing topline, whereas profit margins have remained more or less stable throughout the decade. In FY17, the revenue of the company grew by 12 percent, crossing Rs 14 billion in value terms. This was attributed to a volumetric gain in the core business by nearly 11 percent. Given that the company operates in the FMCG sector, it is difficult to increase the selling prices. As a result, most of its revenue-driving categories witnessed a subdued growth trend. Cost of production, on the other hand, reduced very marginally to 67 percent, keeping the gross margin more or less stable at close to 33 percent. With most other factors remaining unchanged, the slightly higher margin also trickled down to the bottom line, with the net margin recorded at 6.7 percent for the year, compared to nearly 6 percent in the previous year.

Revenue growth momentum continued in FY18, although it slowed down to single digits, at 9.5 percent, compared to the double-digit revenue growth seen for the last consecutive seven years. During the year, the company expanded its product portfolio, adding mayonnaise and snacks to its offering. Both products were received well in the market. The cost of production was down to a little over 65 percent, which helped raise the gross margin to over 34 percent. However, this did not translate into a higher operating or net margin due to increases in administrative and distribution costs as a percentage of revenue, the former particularly. The increase was due to a combination of factors such as growing salaries expenses, depreciation, repairs, and maintenance. Thus, the net margin fell to 5.8 percent.

In FY19, the company saw its lowest growth in revenue at a marginal 2.6 percent. This was due to the challenging economic and business environment after the election of the new government. With high inflation, disposable incomes were reduced, which had an adverse impact on domestic consumption. On the other hand, the company commenced production at its new facility in Nooriabad, and also furthered its product portfolio by adding National Garlic Mayo. Given the inflationary pressure, the cost of production increased to nearly 68 percent of revenue, shrinking gross margin to 32 percent; however, operating and net margin increased on the back of increased other income that grew to Rs 255 million. This primarily came from a net exchange gain due to currency devaluation. Thus, the net margin grew to 6.6 percent for the year.

Revenue growth bounced back in FY20 as it grew by 16 percent, crossing Rs 19 billion in value terms. While local sales were driven on the back of brand loyalty and promotions, export sales were driven by currency devaluation as which made exports more competitive in the global market. During the year, the company also launched the Rozana Recipe range that catered to the making of daily meals; additionally, it recreated the image for Recipe Mixes- an already existing product range. With the cost of production increasing negligibly, the gross margin was fairly stable at 31.7 percent, while the net margin reduced to 5.7 percent due to relatively higher taxation.

While the COVID-19 pandemic had a relatively less impact on the operations of the essential foods companies as they were allowed to operate without lockdown restrictions, food inflation pushed up the raw material cost and dragged gross profits for companies where the cost pressures could not be passed on entirely to the consumers. National Foods Limited’s unconsolidated earnings were seen climbing by 14.5 percent year-on-year in FY21. The growth in profits emanated from higher revenue growth, which stood at 20 percent year-on-year, mainly through brand and consumer-led initiatives to drive volume. The double-digit revenue growth came from both local and export sales. However, with over 22 percent rise in the cost of sales, NAFT’s gross margins dipped slightly during the year. On the expenses side, distribution and administrative costs increased in tandem with the operations with marketing and sales promotion a big chunk of the distribution cost.

NAFT in FY22

NAFT’s profits increased by a whopping 55 percent year-on-year in FY22 The company’s topline grew by 16 percent year-on-year during the year mainly and growth was witnessed in both local and international markets. Exports sales mostly to UAE as well as to North America and Europe account for 6-6.5 percent of the total company’s non-consolidated revenues on average primarily through aggressive marketing locally as well as in export markets and brand and consumer-led initiatives to drive volume. Thus double-digit revenue growth came from both local and export sales. High commodity prices and inflation pushed the raw material cost upwards. Also, distribution and administrative costs increased during the year.

During the first quarter of FY23 however, the company faced depressed business on the domestic front, while the International business also remained challenged given the global slowdown in consumption and demand. This has been due to high economic uncertainty and global price volatility.