Engro Foods entered the market back in 2007, set to topple Nestle as the leader in dairy industry. The company didn't disappoint its investors either: by CY15, it had become a fifty billion rupees company. The management was set to spread its wings beyond dairy and desserts to include beverages, meat, fats & butter and pasteurized and even powdered milk.

But if the financial trajectory of the company over the past two years is any guide, it appears that the management tried to expand too quickly and too much. According to industry sources, the company has lost two-thirds of volume in dairy from its peak of 1.5 million litres per day in CY15.

Efoods downward spiral could be attributed to several reasons. While the company insists that the industry is facing an inhospitable regulatory environment, from imposition of input tax in CY16 to hounding of its flagship Olper's in media and courts as package industry came under fire when samples of certain rival brands were found to be contaminated last year. The company has struggled to maintain profitability and even the entry of a foreign investor, Friesland Campina, has failed to turn around its fortunes. During 1HCY18, topline was reduced by 15 percent as lower demand has caused a decline in overall production. Cost of sales fell in line with revenue, allowing the company to maintain a semblance of improvement in gross profitability. Efficiencies in supply chain, lean management, and fewer production days allows gross margin to expand by 3 percentage points compared to same period last year. While the company managed to keep marketing & distribution expense at last year's level, they continue to form a major chunk of its operating expense, at an average of 15 percent of net revenue.

Despite the poor performance of core operations, the company managed to show a substantial 24 percent in operating profit, primarily on what appears to be gains recorded on revaluation of biological asset, i.e., livestock animals. While earnings from disposal of livestock can constitute a substantial source of non-core income for Efoods as it has in the past, no business in growth phase can bank on gains from disposal of assets to keep it afloat. Its time for Efoods to do some introspection and streamline its core business or it may soon run into financial trouble.