Ecopack Limited (PSX: ECOP) is incorporated in Pakistan as a limited liability company. The company is engaged in the manufacturing and sale of Polyethylene Terephthalate (PET) bottles and preforms for beverages and other liquids packing industries. Coca Cola, PepsiCo, Murree Brewery, Qarshi Industries and Punjab Oil mills are few of the renowned customers of ECOP.
Pattern of Shareholding
As of June 30, 2022, ECOP has a total of 41.96 million shares outstanding which are held by 2242 shareholders. Local general public is the largest shareholder of ECOP with 51.38 percent shares. This category is followed by Directors, CEO, their spouse and minor children having 17.35 percent stake in the company. The remaining shares are held by other categories of shareholders.
Historical Performance (2018-22)
Barring 2020, ECOP’s topline has been ascending since 2018.Coversely, its bottomline slid in 2019 and then in 2020 to register a net loss. The margins of the company had been shrinking until 2020 and then posted a rebound in 2021. In the subsequent year, while operating and net margins continued to look up, gross margin significantly plunged. The detailed performance review of each of the years under consideration is given below.
In 2019, ECOP’s topline posted a 23 percent year-on-year rise. Despite the sluggish economic activity on account of high inflation, hike in discount rate and electricity tariffs and Pak Rupee depreciation, the company was able to keep its sales volume almost intact at the previous year’s levels. During 2019, ECOP increased the capacity utilization of its blowing segment from 57 percent in 2018 to 58 percent in 2019. It also completed its new investment of large sized bottles and containers to enhance its customer base. This drove up the annual capacity of its injection segment from 510.983 million bottles in 2018 to 796.733 million bottles in 2019. The company ended up utilizing 59 percent of its injection segment’s annual capacity in 2019 to meet the demand. ECOP couldn’t pass on the impact of a spike in the cost of production to its customers (beverage manufacturers) as they themselves were bearing the brunt of inflationary headwinds as the demand of beverages in inversely proportional to increase in its sales prices which made them incapable of increasing their prices proportionately. This pushed the GP margin down to 9.5 percent in 2019 from 11 percent in 2018 despite 6 percent year-on-year rise in gross profit for the year. Selling and administrative expense grew by 15 percent and 20 percent respectively mainly on account of higher payroll expense as the number of employees grew from 266 in 2018 to 280 in 2019 and also because of 35 percent hike in petroleum prices which inflated the truck freight rates by 12 percent. Operating profit registered 18 percent year-on-year improvement, however, GP margin slightly tumbled to 5.8 percent in 2019 from 6 percent in 2018. Finance cost grew by 90 percent year-on-year due to hike in discount rate coupled with financing obtained for the plant expansion undertaken during the year. Additional financing drove ECOP’s debt-to-equity ratio to 33 percent in 2019 from 24 percent in 2018. Net profit plunged by 39 percent year-on-year in 2019 to clock in at Rs.74.81 million with an NP margin of 1.8 percent which was significantly lower than the NP margin of 3.7 percent posted by the company in 2018. EPS also marched down from Rs.3.56 in 2018 to Rs.1.96 in 2019.
In 2020, ECOP’s topline dwindled by 25 year-on-year as COVID-19 hit at the time of seasonal peak in the demand of beverages. Due to depressed demand, the capacity utilization was downward adjusted at 41 percent and 52 percent for the blowing and injection segments respectively. During the year, the company increased the annual capacity of its blowing plant from 304.2 million bottles in 2019 to 327.14 million bottles in 2020. The capacity enhanced catered large bottles for edible oil and drinking water. However, that couldn’t bring in additional sales as they key customers for this segment couldn’t operationalize their production lines on account of quarantine protocols which impeded the movement of people and technologies across the borders. Cost of sales dipped by a lesser magnitude of 21 percent year-on-year in 2020, translating into a 62 percent thinner gross profit and GP margin slid down to 4.8 percent. Another key factor that contributed towards a weaker gross margin was the decline in PET resin price due to Russia and OPEC crude oil war which not only alleviated the topline but resulted in an unforeseen inventory loss for the company. Selling expense grew by 2 percent year-on-year in 2020 despite petite volumes due to 14 percent spike in freight charges during the year. Administrative expense, however, shrank by 5 percent year-on-year as the number of employees significantly reduced from 280 in 2019 to 247 in 2020. Operating profit posted a 95 percent decline in 2020 with the lowest OP margin of 0.4 percent. Finance cost grew by 24 percent year-on-year due to high discount rate for the most part of the year. ECOP posted a net loss of Rs.103.70 million in 2020 with a loss per share of Rs.2.72.
With the second wave of COVID-19 hitting during 1QFY21 and the Delta variant in the 4QFY21, ECOP’s sales couldn’t really pick up as its peak season again came under the pressure with the closure of educational institutions, markets and wedding halls coupled with an intermittent ban on inter-city travel. The topline could only post a marginal 2 percent uptick in 2021 which came on account of large containers and bottles sales which was added to ECOP’s portfolio last year. Preform sales also grew by 9 percent year-on-year in 2021, however, the sales volume of bottles dropped by 5 percent year-on-year, largely swallowing the impact of an increase in the other off-take of the other two categories. Cost of sales dipped by 4 percent year-on-year in 2021 which resulted in a 104 percent boost in the gross profit. GP margin also jumped up to 9.7 percent in 2021. Selling expense dipped by 5 percent year-on-year in 2021 due to lesser crude oil prices resulting in rationalized freight, travelling and conveyance charges. Administrative expense grew by 4 percent year-on-year in 2021 due to higher payroll expense. Operating profit multiplied by 12 times in 2021 with OP margin rebounding to 5.1 percent. Finance cost shrank by 41 percent year-on-year in 2021 due to significant reduction in discount rate. As a consequence, ECOP was able to post a net profit of Rs.46.11 million in 2021 with an NP margin of 1.5 percent and an EPS of Rs.1.10.
In 2022, Pakistan’s economy saw recovery from global pandemic which spurred economic growth, however, the same was crippled towards the end of the year on account of current account and fiscal slippages and immense political turmoil that began to circle the economy. During 2022, ECOP’s topline posted a staggering 62 percent year-on-year growth which was on account of 84 percent year-on-year rise in bottle sales and 42 percent year-on-year rise in preform sales. Furthermore, the spike in PET Resin prices also resulted in an upward revision in the prices of the company’s products. Cost of sales grew by an immense 65 percent year-on-year due to historic high crude oil prices, hike in electricity tariff, overall inflation and Pak Rupee depreciation. Gross profit grew by 36 percent year-on-year, however, GP margin deteriorated to clock in at 8.2 percent in 2022 from 9.7 percent in the previous year. Selling expense grew by 4 percent year-on-year due to higher sales volume as well as increased freight charges on account of higher petroleum prices. Administrative expense also elevated by 12 percent year-on-year in 2022 as the number of contractual employees grew from 368 in 2021 to 591 in 2022, however, permanent employee tally dropped to 224 in 2022 from 246 in 2021. Operating profit registered a 68 percent year-on-year rise in 2022 with OP slightly improving to stand at 5.3 percent. Finance cost grew by 32 percent year-on-year in 2022 due to multiple rounds of monetary tightening during the year. Net profit managed to post 117 percent year-on-year growth to clock in at Rs.100.18 million with an NP margin of 2 percent and an EPS of Rs.2.39.
Recent Performance (9MFY23)
During 9MFY23, ECOP’s net sales posted a 35 percent year-on-year rise on account of higher prices of PET Resin and improved sales volume of high-value bottles. Conversely, the sale of preforms couldn’t pick up due to floods and dislocation of large population in the 1QFY23. Cost of sales grew by 38 percent year-on-year due to rise in the prices of basic raw materials and hike in electricity tariff during the period. Gross profit grew by 10 percent year-on-year in 9MFY23, however, GP margin sank from 8.4 percent in 9MFY22 to 6.8 percent in 9MFY23. Selling and administrative expense grew by 21 percent and 19 percent respectively during the period translating into a 9 percent year-on-year growth in operating profit. OP margin marched down from 4.7 percent in 9MFY22 to 3.8 percent in 9MFY23. Higher discount rate as well as increased working capital requirements pushed the finance cost up by 94 percent year-on-year in 9MFY23. ECOP ended up posting a net loss of Rs.22.976 million in 9MFY23 with a loss per share of Rs.0.48 versus an EPS of Rs.0.86 during the same period last year.
Future Outlook
With deteriorating purchasing power amid high inflation, consumers barely afford the essentials – let alone beverages and drinks. Upward price revisionsmay not be sustainable solution to boost net sales. The demand may not make greater strides in the times to come except for the seasonal peak during summers and Ramadan. However, ECOP diversification into packaging of cooking oil and bottled water may save the day for the company and bring homethe volumes lost in the beverages industry.