Leiner Pak Gelatine Limited was incorporated in Pakistan on 14 February, 1983. Its main products are gelatine and gelatine's by-product Di-calcium Phosphate.
Gelatin is a translucent, colourless, brittle (when dry) and flavourless substance. In Pakistan, it is derived from the collagen mainly inside cattle bones. It is commonly used as a gelling agent in food, pharmaceuticals, photography, and cosmetic manufacturing. It is classified as a food product and found in some gummy candies such as marshmallows.
Global industry overview
Food and beverage is the largest application of gelatin products, accounting for nearly 30 percent of its consumption globally in 2015. By 2022, the global market for gelatin is projected to exceed 480 thousand tons from its current level of 413 thousand tonnes. Demand is expected to be driven by its myriad applications in food, pharmaceutical and nutritional solutions. Growing demand for medicine, strong consumer interest in micro-nutrition, and the ensuing rise in consumption of multivitamins and supplements are trends that will push the value of gelatin in the nutraceutical industry.
Furthermore, growing spending on appearance maintenance products among the expanding base of affluent middle class population is expected to increase the use of gelatin in cosmetic formulations. Another factor that drives its growth is the increasing demand for convenience foods since it is used as an ingredient in confectionaries.
Financial and operational overview
In FY17, Leiner's turnover fell by nearly 5 percent as compared to the year before. Export sales could not achieve their target because the Malaysian Halal Authority delayed the granting of approval for Halal and Veterinary certification, a document necessary for exports to Malaysia, Indonesia and other Far East countries. The extensive documentation requirement and the delay in processing took up most of the financial year and as a result, only 20 percent of the total pending orders could be processed. Export sales consist of about 7 percent of total sales.
On the cost of sales side, Leiner faced difficulties due to limited supply of animal bones in Pakistan. The export of animal bones to Iran, China, Japan and other neighbouring countries are one of the major impediments in growth to the gelatin industry, identified in Leiner's company accounts. Less availability of crushed bones resulted in higher raw bone stones. Seasoning of raw bone to generate desirable quality of crushed bone also lengthened the manufacturing period and less quantity of gelatin was produced.
Non-availability of the export market, difficulties in procurement of raw material, and the price hike in gas charges due to shifting to LNG rate deeply impacted Leiner's financial performance in FY17. The company had negative cash flows from operating activities and incurred a net loss of Rs 3 million. Its accumulated losses were nearly Rs 4 million and the current liabilities exceeded its current assets by Rs 51 million. Though Leiner's management believes that the incidence of losses is a temporary phase, which will be soon over, there is room for doubts as to whether the company will continue to operate as a going concern.
Despite the high costs in procuring its key raw material, its gross margins are not as alarmingly low as its net profit margins. Its PAT performance paints a dire picture with the company experiencing nearly $53 million in losses in 2014. Its net profit margin hovered around 1 percent or below in years it did make a profit, including FY16 when it brought the highest turnover in its history. The firm's cash flow problems are being addressed by increasing short term borrowings, which adds further doubts as to whether Leiner can continue operating as a going concern. This is also indicated by its gearing ratio, which increased from 69 percent in FY16 to 75 percent in FY17.
1QFY18 performance
As a result of production problems in FY17, there was a decline in sales in 1QFY18. Additionally, the production process was overhauled after the end of the last quarter due to which production was halted. When production commenced, only the by-product Di-calcium Phosphate was available for sales. Some key customers were sold gelatin stock that was brought over from last period since its production had been delayed till mid-October.
Administrative expenses continue to be the biggest expense eating away Leiner's gross profit. Though administrative expenses have declined since the same period last year, they still account for 60 percent of the gross profit. Within this category, the biggest expense was salaries, wages and benefits in the past. The increase in distribution costs is due to shipping of exports.
Improvement in gross profit margin and the decrease in administrative expenses resulted in a marginal increase in net profit margin. The improvement in gross profit margin was because of higher proportion of Di-calcium Phosphate sales, which as a by-product has a lower cost of production.
Future outlook
There is substantial demand for halal gelatin within the country and abroad since it is used for myriad of purposes. Since Muslim-dominated countries do not consume non-halal gelatin (made from pig bones), there is considerable scope for exports. In Pakistan, Nisma Pharmaceuticals predict that the nutraceutical market will grow at a compound annual growth rate of 20 percent till 2020. Therefore, Leiner can potentially increase turnover at home and abroad.
On the other hand, procurement of quality bones at feasible prices is posing challenging to gelatin's production. One proposed solution is imposition of duties on export of animal bones. However, this problem has persisted in recent years. Furthermore, the lack of profitability does not seem to lie in controlling cost of sales but rather administrative expenses that eat up a huge chunk of its profit.
Leiner's outlook seems bleak. In its best operational year of FY16, its net profit margin was below 1 percent. Though it attributes its lack of profitability in the last couple of years to gas charges and animal bones prices, in previous years it suffered from similar lack of profitability, which it attributed to other causes. In other words, its low margins seem chronic. In the long run, if it is not able to effectively increase its net profit margins and control its costs, it is likely to fail as a growing concern.
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Leiner Pak Gelatine Limited : Latest financials
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Rs. (000) 1QFY18 1QFY17 Chg
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Net Sales 112,641 123,114 -9%
Cost of Sales 91,012 102,596 -11%
Gross profit 21,629 20,518 5%
Other income 25 2 1150%
Distribution costs 2084 551 278%
Administrative expenses 12965 14745 -12%
Finance costs 242 155 56%
Profit after taxation 2,056 1,714 19.95%
Earnings per share (Rs.) 0.27 0.23 17.39%
Gross profit margin 19% 17% 1500 bps
Net profit margin 1.8% 1.4% 3100 bps
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Source: Company accounts
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Leiner Pak Gelatine Limited-Pattern of shareholding No. of Shares % of total
(as at 30 June, 2017) shareholders held shares
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Directors, CEO and their spouse and minor children 10 4,177,235 41.98%
Associated companies, undertakings and related parties 2 370,000 3.72%
Investment Corporation of Pakistan 1 25 0.00%
Commercial banks 3 4,852 0.05%
General public 564 2,843,730 28.58%
Joint stock companies 7 101,576 1.02%
Other companies 1 88 0.00%
Shareholders holding 10% or more 3 2,452,885 24.65%
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Total 9,950,391 100%
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