Analyst Briefing: Fauji Foods’ confidence brightens on growth outlook of Pakistan’s dairy milk

June 18, 2021 (MLN): Fauji Foods Limited (FFL) recently conducted a corporate briefing session to discuss its financial performance during 1QCY21 and the future outlook of the company.

To note, during 1QCY21, FFL had reported a 64% YoY decline in loss after tax to clock in at Rs347 million (LPS: Rs0.43) as a result of an upsurge in sales revenue by 43% YoY to Rs2.4billion.

According to the key takeaways covered by Foundation Securities, the management attributes decline in loss to phenomenal volumetric growth amid higher prices, lower finance cost due to financial restructuring amid a decline in interest rates and change in management strategy to deploy resources in an efficient manner.

The company’s flagship brand, Nurpur UHT Milk, recorded a growth of 16% YoY in 1QCY21. Its second-largest volumes driving category is Dostea Tea whitener which holds a strong position in North, witnessed a growth of 37% YoY during the same period. It is also gaining ground in the South.

Regarding the new product development, the management stated that the FFL, during the last six months, launched several new product categories, including the introduction of butter tubs and dairy creams in Jan’21, followed by renovations in the Cheese category in Jun’21.

After witnessing 240% YoY growth in the south market, the company is now targeting to build a strong distribution network in this region in the next 2 years, the research added.

The FFL management also discussed the increase in input costs due to inflationary pressures and said that the price of raw milk has increased by Rs4-5 per liter during the years. In addition, the price of skimmed milk powder has gone up on the back of rupee depreciation and the rise in international prices. To highlight, the effects of higher input costs have already been passed on to consumers through multiple price hikes.

From CY16-19, the company has spent around Rs7.3 billion in CAPEX to upgrade its plant and machinery and to improve the production process. The management believed that due to rapid urbanization in the country, the formal dairy sector of Pakistan has a strong growth outlook, said Noor Huda, Research Analyst at BMA Securities.

Speaking on proposals on the federal budget, the management said that the Pakistan Dairy Association is in consultation with government authorities and inputs are provided for final budget approval.

Going by the report of Foundation Securities, it is expected that the company’s losses will further reduce in the future due to a change in management strategy towards increased penetration in the household retail segment, change in consumer preferences from loose milk to packaged milk products (already triggered by the outbreak of COVID-19). Further, the management believed that losses will further shrink on the back of higher prices of loose milk given increased regulatory tightening, increased revenue contribution of value-added products and decline in finance cost due to a cut in the policy rate by SBP and conversion parent company debt into equity.

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