Punjab Oil Mills Limited (PSX: POML) was founded in 1983 as a manufacturer of banaspati and cooking oil. POML offers wide range of cooking and baking mediums, along with other specialty fats, under the flagship brand names of Zaiqa and CanOlive.
Industry overview
Amongst the top edible oil importing countries, Pakistan has a per capita consumption of about 17kgs. As per the Pakistan Edible Oil Conference (PEOC) held earlier this year, total consumption of oil and fats was about 4.41 million tons in 2017.
Since the raw materials for the edible oil sector are based on imports, a large part of gross profits are dependent on international prices and exchange rate fluctuations. Edible oil imports comprises mostly of palm oil though in recent years soybean oil imports have been on the rise. Soybean seed imports have been increasing as well. Used to make meal for poultry feed, crushing of soybean produces oil which is absorbed by the domestic oil market.
In the budget FY19, tariffs on imported soybean oil were increased to protect the nascent domestic oil manufacturing market. Since POML's main offerings consist of olive oil, sunflower oil, and canola oil, the tariff helps protect it from competition as well.
The directors of POML are of the view that the edible oils industry is a low margin industry operating within an intensely competitive environment on the consumer end. However, there has been a growing awareness about the health benefits of edible oil as compared to other cooking fats.
Though POML also offers banaspati products which have been impacted by the bad publicity of Punjab Food Authority's ban on manufacturing, sale and purchase of banaspati, its focus is on the higher margin cooking oils that fit the trend of urban consumers' preferring healthier options.
Financial history
In recent years, POML saw its top-line peak in 2014 due to better average prices and higher volumes. 2015 saw a sudden dip in sales but its gross profit and profit after tax have continued to rise in absolute terms every year. In terms of margins however, profitability declined last year.
2015's top-line decreased by 11 percent because of prices declining by 6 percent on average and lower volumes by 5 percent. The decrease in volume was somewhat deliberate since the POML did not aggressively push the sale of lowest margin banaspati products. POML was not able to charge the required prices to justify allocation of resources that would have enabled higher sales of banaspati goods that were on the lower end of the spectrum thus let the volume drop. The drop in average prices was due to market dynamics under which all companies in the sector were forced to share lower prices for edible oil.
Another element that impacted POML's sales and profitability negatively was Punjab's government actions under the Price Control Act that fixed the prices of edible oil and banaspati. When the policy was announced that prevented price increases, there was initial confusion regarding higher prices based on brand differentiation and quality and some traders refused to stock inventory for fear of being proceeded against till a clear policy was announced.
Despite this, POML's profitability increased because its premium brands Zaiqa and CanOlive showed growth in volumes. Marketing and branding activities increase sales especially in Ramazan resulting in an increase in share of higher margin products that led growth in the bottom-line.
In 2016, revenue remained stagnant due a 3.5 percent decrease in average selling price which offset the 2.3 percent increase in volume. Favourable oil prices and focus on premium products contributed to push up profits.
Sales rose in 2017 on the back of overall rise in average selling prices and a spurt of growth in volume in the last quarter of the year. Margins and profits declined due to higher raw material costs which could not be passed on to the producer partly because of price regulations in Punjab and partly because of the sector's competitive environment.
9MFY18
Top-line witnessed a healthy double digit increase along with gross profit but its affect did not trickle down to net profit. Sales increased mostly because of higher volumes and higher average prices though their contribution to the top-line was much smaller. As before, cooking oils and specialty fat products were mainly responsible was the growth in sales.
Since POML's main offerings are consumer products, the nearly 30 percent increase in selling expenses due to a higher allocation to advertising brought down profitability. Increase in salaries and wages, not only because of annual increments but also because of new hiring to build up the sales force to introduce new products, further adversely impacted the bottom-line.
POML's tax liability if calculated based on raw material oil purchases. The tax bill was higher this year due to higher oil prices as well as increased buying of oil to support higher production.
Future outlook
International prices of edible oil and volatility of exchange rates will remain a challenge for POML. As the exchange rate makes the rupee weaker, the cost of raw materials for Punjab Oil Mills will rise further. A competitive consumer market makes passing on higher prices more daunting especially since a high advertising budget needs to be allotted to maintain and increase market share.
However, demand for edible oil is high and rising as health awareness grows. PEOC predicts that edible oil consumption is expected to rise by 3 to 5 percent on a yearly basis, indicating a rising market for POML's products.
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Punjab Oil Mills Limited
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Rs. mn 9MFY18 9MFY17 YoY
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Sales 3,571 3,130 14%
Cost of sales 3,013 2,631 15%
Gross profit 558 498 12%
Selling and distribution costs 230 183 26%
Administrative expenses 104 95 9%
Operating profit 224 220 2%
Finance costs 6.7 2.1 219%
Other operating charges 16 16 0%
Other income 5 7 -26%
Profit before tax 206 208 -1%
Tax 81 61 33%
Profit after tax 125 147 -15%
Gross profit margin 16% 16% -2%
Net profit margin 4% 5% -25%
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Source: company accounts
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Pattern of shareholding (as on June 30, 2017)
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Categories of shareholders Shares held %
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Directors, CEO and their spouses 1,393,954 25.86
Associated companies/undertaking and related parties 415,793 7.71
NIT and ICP 43,846 0.81
Bankes Development Financial Institutions - 0
and Non-Banking Financial Institutions
Insurance companies - 0
Modarabas and mutual Funds 952,851 17.68
General public 2,533,188 47
Joint stock companies 51,020 0.951
Shareholders holding 5% or more voting interest
CDC-Trustee National Investment (Unit) Trust 517,651 9.6
Usman Ilahi Malik 446,323 8.5
Furqan Anwar Batia 437,224 8.1
Mansoor Ilahi Malik 365,226 6.8
Teejay Corporation (Pvt) Ltd 363,822 6.8
Mian Jilani Jahangir 340,893 6.3
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