National Foods Limited (PSX: NATF) was incorporated in Pakistan as a private limited company in 1971 and was subsequently converted into a public limited company. The principal activity of the company is the manufacturing and sale of convenience-based food products. The company has a diverse portfolio of 250 products pertaining to 12 broad categories. It has a global footprint in 40 countries across 5 continents. ATC Holdings (Private) Limited is the ultimate holding company of NATF.
Pattern of Shareholding
As of June 30, 2024, NATF has a total of 233.115 million shares outstanding which are held by 3737 shareholders. Associated companies, undertakings & related parties have the majority stake of 66.57 percent in the company followed by the company’s directors, CEO, their spouse & minor children holding 18.94 percent of the company’s shares. Local general public accounts for 7.55 percent of the outstanding shares of NATF while Banks, DFIs, and NBFIs hold 1.87 percent shares. The remaining ownership is distributed among other categories of shareholders.
Financial Performance (2019-24)
Despite adverse economic conditions, NATF has consistently improved its financial performance since 2019 as evidenced by an uphill journey of its top line and bottom line. Over the period under consideration, NATF’s bottom line only dipped in 2024. Notably, the company’s margins have followed a cyclical pattern (see graph of profitability ratios). After a three-year decline, the gross margin rebounded in 2022 and 2023 followed by a dip in 2024. Conversely, operating and net margins increased in 2019 and then declined in 2020 and 2021. For the next two years, the operating and net margins strengthened followed by a plunge in 2024. The detailed performance review of the period under consideration is given below.
In 2019, NATF’s topline posted a marginal 2.62 percent year-on-year rise. The spike in inflation and depreciation of the Pak Rupee resulted in shrunken pockets of consumers, leading to tamed local demand. Due to sluggish demand, the company produced 6 percent fewer products in 2019 (refer to the graph of actual production). The topline growth was primarily the result of changes in the sales mix as well as upward price revisions as the economic challenges haunting the economy in 2019 not only suppressed the demand but also drove up the cost of sales by 6.30 percent year-on-year. This translated into 4.39 percent smaller gross profit recorded in 2019 with GP margin falling down from 34.4 percent in 2018 to 32 percent in 2019. 13 percent lesser distribution expense incurred in 2019 was the effect of curtailed advertising and promotion expense when compared to the previous year. Administrative expenses grew by 31.13 percent year-on-year in 2019 mainly on account of higher payroll expenses as the number of employees grew from 694 in 2018 to 753 in 2019. This was the consequence of capacity enhancements at various plants of the company including recipe line extension as well as addition to the product portfolio in the paste section. Furthermore, there was an increase in the packaging capacity during the year which also required more human resources. The company earned tremendous exchange gains from export sales which culminated in a 372.30 percent improvement in its other income during 2019. Operating profit augmented by 29.76 percent year-on-year in 2019 with OP margin climbing up from 7.24 percent in 2018 to 9.15 percent in 2019. 44.91 percent year-on-year escalation in finance cost was the result of a high discount rate coupled with increased borrowings particularly long-term financing to undertake capacity enhancements during the year. This diluted the bottom-line growth to 15.24 percent in 2019. Net profit stood at Rs.1090.86 million in 2019 with EPS of Rs.7.31. NP margin improved from 5.85 percent in 2018 to 6.57 percent in 2019.
In 2020, when many other industries were grappling with the economic meltdown owing to COVID-19, NATF, being categorized as an essential services business, continued to sustain and posted a reasonable 16 percent year-on-year growth in its net sales. NATF production volume stood at 100,414 MT which was 6 percent higher than the previous year. The depreciation of local currency fared well for the company and translated into significant exchange gains. The company also increased its ketchup manufacturing capacity from 10,000 MT in 2019 to 20,000 MT in 2020. Besides, the installation and commissioning of universal multilane machines, cold rooms, and online salt brine cleaning and charging mechanisms greatly improved productivity. The hike in the cost of raw and packaging materials, elevated prices of fuel, as well as local currency depreciation, pushed the cost of sales up by 16.55 percent year-on-year in 2020. Gross profit grew by 14.84 percent year-on-year in 2020, however, GP margin posted a downtick to clock in at 31.72 percent. Distribution expense posted a 15.72 percent year-on-year hike in 2020 which was the effect of rigorous advertising and sales promotion drives launched during the year coupled with elevated freight and handling charges not only because of robust sales volume but also because of a hike in the prices of POL products. Administrative expenses grew by 8 percent year-on-year in 2020 because of higher payroll expenses despite a drop in the HR count to 722 in 2020. NATF posted net other income of Rs.95.32 million in 2020, down 35 percent year-on-year. Operating profit improved by 15.29 percent year-on-year in 2020 with OP margin slightly ticking down to 9.1 percent. Finance cost registered a marginal 4.34 percent year-on-year hike in 2020 despite a significant reduction in external financing. This was because the discount rate was high for the most part of the year in 2020. This coupled with a higher effective tax rate on account of the tax effect of permanent differences resulted in a skimpy 1.25 percent year-on-year growth in the bottom line. NATF’s net profit for 2020 stood at Rs.1104.50 million with an NP margin of 5.74 percent. EPS slid to Rs.5.92 on account of issuance of bonus shares during the year.
In 2021, NATF recorded a 20 percent year-on-year improvement in its topline. As the economy started recovering after COVID-19 and with the resumption of the HORECA industry, educational institutions, offices, and businesses, the demand for NATF products started picking up. With a 5 percent year-on-year increase, the company’s production volume stood at 105,071 MT in 2021. Both local and export sales performed well during the year. Cost of sales grew by 22.28 percent year-on-year in 2021 resulting in 15 percent year-on-year growth in gross profit; however, GP margin marched down to 30.44 percent. Distribution expense expanded by 16.33 percent year-on-year in 2021 which was the effect of focused sales promotion drives to boost market share and also because of increased freight and handling charges on account of high sales volume. Administrative expenses also ticked up by 11.75 percent year-on-year in 2021 as the number of employees grew to 788 in 2021 which drove the payroll expense up. NATF posted net other expenses of Rs.32.88 million in 2021 on account of a 51 percent year-on-year drop in other income and a 14 percent year-on-year hike in other expenses. This was mainly due to exchange loss incurred during the year. Operating profit could post a meager 5.59 percent year-on-year rise in 2021 with OP margin slipping to 8 percent. Finance costs eased by 17 percent year-on-year in 2021 due to a lower discount rate despite increased short-term borrowings. This translated into 14.55 percent year-on-year progress in net profit which stood at Rs.1265.19 million in 2021 with an NP margin of 5.47 percent. EPS slid to Rs.5.43 in 2021 due to the issuance of bonus shares during the year.
Despite myriad economic challenges including high inflation and discount rate, Pak Rupee depreciation, hike in electricity tariff, etc, NATF’s topline continued to post a 16.12 percent year-on-year escalation in 2022. The production grew by a mere 3 percent in 2022 to clock in at 108,104 MT which gives a clear indication that the growth in net sales was primarily driven by portfolio rationalization, price revisions, and also because of translation gain on export sales. Export volume remained depressed during the year owing to shipping constraints. The company undertook cost transformation measures and made strategic buying decisions. This kept a check on its cost of sales which grew by 11.17 percent year-on-year and trickled down into a 27.45 percent year-on-year rise in gross profit. GP margin which was going downhill until 2021 also recoiled to 33.41 percent in 2022. Distribution expense registered a massive 31.98 percent year-on-year spike in 2022 which was on account of aggressive marketing campaigns launched during the year. In 2022, NATF revamped the packaging of its complete range of recipe mixes and launched a new variant in the ketchup category coupled with several other digital, BTL, and PR campaigns. Administrative expenses grew by 13.71 percent year-on-year on account of inflation and also because of increased employee tally to 850 on account of capacity enhancement particularly in the ketchup line which added 27.5 million ketchup pouches to the annual capacity of the plant. As against the net other expense in the previous year, NATF recorded a tremendous net other income of Rs.378.69 million in 2022. This was due to a staggering 526 percent year-on-year growth in other income on the back of massive exchange gain. Operating profit posted a splendid 49.28 percent year-on-year growth in 2022 with OP margin jumping up to 10.3 percent. Finance cost magnified by 32.56 percent year-on-year in 2022 on account of successive rounds of monetary tightening coupled with huge short-term borrowings particularly acquiring running finance to meet working capital requirements. The bottom line posted 55.32 percent year-on-year growth in 2022 to clock in at Rs. 1965.08 million with an NP margin of 7.32 percent and an EPS of Rs.8.43.
NATF registered 10.28 percent year-on-year growth in its net sales in 2023. This was the consequence of a 9 percent improvement in local sales and a 77 percent enhancement in export sales in 2023. Production volume slumped by 6 percent to clock in at 101,083 M tons due to lower demand. Cost optimization measures and translation gain resulted in a 14.21 percent year-on-year enhancement in gross profit in 2023 with GP margin touching its peak level of 34.6 percent. Distribution and administrative expenses escalated by 8.67 percent and 35 percent respectively, signifying high inflation and soaring freight charges due to an uptick in the prices of POL products. During the year, the company curtailed its workforce to 808 employees. NATF posted net other income of Rs.606.50 million in 2023, boasting a 60 percent year-on-year rebound. This was primarily the consequence of the translation of foreign currency balances in 2023. Other factors which contributed in driving up other income in 2023 were higher dividend income and no demurrage cost incurred during the year. Operating profit picked up by 20.34 percent year-on-year in 2023 with OP margin climbing up to 11.23 percent. Finance costs mounted by 244.63 percent year-on-year in 2023 due to elevated discount rates and increased borrowings obtained from financial institutions. Net profit picked up by 11.35 percent year-on-year to clock in at Rs.2188.04 million in 2023 with an NP margin of 7.4 percent and EPS of Rs.9.39.
In 2024, NATF posted 26.26 percent year-on-year growth in its topline. Production volume slid by 17 percent during the year to clock in at 84,046 M tons, however, on account of improved economic fundamentals, demand started showing improvement towards the end of the year. Cost of sales mounted on account of elevated energy tariffs and inflationary pressure. Amidst lower demand, the company couldn’t pass on the impact of cost hikes to its consumers, resulting in GP margin dipping to 31.67 percent in 2024. In absolute terms, gross profit improved by 15.56 percent in 2024. Distribution expense multiplied by 13.61 percent in 2024 mainly on account of higher advertising & sales promotion activities undertaken during the year. Administrative expenses mounted by 37.79 percent in 2024 due to higher payroll expenses. This was the result of inflationary pressure and the induction of more employees as the company inaugurated its Faisalabad plant during the year. Number of employees stood at 825 in 2024. Net other income declined by 84 percent to clock in at Rs.95.63 million in 2024 due to provision booked on property plant and equipment and exchange loss incurred during the year as against exchange gain recognized in the previous year. This resulted in an 11 percent nosedive in operating profit in 2024 with OP margin falling down to 7.91 percent. Finance costs surged by 152.29 percent in 2024 due to a higher discount rate and increased long-term borrowings for the establishment of the Faisalabad plant. Higher finance costs dampened the bottom line of NATF in 2024 which stood at Rs.1268.57 million, down 42 percent year-on-year. EPS fell to Rs. 5.44 in 2024 while NP margin clocked in at 3.39 percent.
Recent Performance [1QFY25]
During 1QFY25, NATF posted 26.39 percent year-on-year growth. This was led by volumetric growth in both local and export markets. Cost of sales hiked by 33.10 percent in 1QFY25 due to heightened energy tariffs. Gross profit ticked up by 12.45 percent in 1QFY25; however, GP margin dipped from 32.48 percent in 1QFY24 to 28.89 percent in 1QFY25. This was on account of stability in the value of local currency. Higher sales volume, greater capacity utilization, and launch of new products during the year resulted in 13.43 percent higher distribution expense and 14.97 percent higher administrative expense in 1QFY25. Other expenses dropped by 96.69 percent during the period under consideration probably due to no profit-related provisioning done during the year. Conversely, other income enhanced by 204.53 percent during the period may be on account of higher exchange gain as export volumes surged during the period. NATF’s operating profit multiplied by 41.44 percent during 1QFY25 with OP margin clocking in at 4.87 percent versus OP margin of 4.35 percent recorded in the same period last year. Finance cost escalated by 107.81 percent in 1QFY25 due to increased borrowing due to investment in a new facility located at Faisalabad. Higher finance costs took its toll on the bottom line of the company. NATF posted a net loss of Rs.78.605 million in 1QFY25 versus a net profit of Rs.55.159 posted during the same period last year. Loss per share clocked in at Rs.0.34 in 1QFY25 versus EPS of Rs.0.24 registered in 1QFY24.
Future Outlook
The newly commenced Faisalabad plant aims to attain operational efficiency, automation, and process simplification. The company has also been working to source its materials from local stakeholders. These factors may ease cost pressure and can place NATF in a better position to price its products competitively and attract greater sales. The recent recovery in local and export sales volume bears testament to the improvement in economic fundamentals and the company’s unwavering efforts to penetrate the market. Finance cost appears to be the only Achilles heel affecting the company’s performance.