June 9, 2021: Fauji Foods Limited (FFL), one of the notable companies which is widely known for its dairy products and brands such as Nurpur, and Dostea.
To recall, FFBL acquired FFL, previously known as Noon Pakistan Limited in order to tap the potential of Pakistan’s dairy industry. To make its way on the path of success, the company introduced its liquid tea Whitener ‘DOSTEA’ in 2016 and relaunched its Nurpur brand in the same year.
According to the report by Insight Securities, the company invested heavily in its infrastructure and adopted an aggressive marketing strategy. Despite its notable presence in the dairy industry, the company have been found in a shaky state in terms of financial numbers. FFL recorded cumulative operating loss of Rs10billion during the span of 2016 to 2020 and became a drag on FFBL’s profitability and liquidity position.
The recorded financial loss of Rs14.5bn since 2013 is primarily due to the stiff competition from informal/loose milk segment, negative campaigns against packaged milk, removal from zero rating regime, aggressive marketing expenses, inability to pass on cost side pressures, higher debt servicing charges, and abrupt PKR devaluation.
The continuous losses and subdued topline resulted in significant increase in company's debt, including sponsor loan worth Rs5.9bn, which rose from Rs1.9bn in CY15 to Rs14bn in CY20, up by whopping 7x. Furthermore, during 2016-2020, FFL raised equity multiple times through right shares and conversion of sponsor debt into equity, the report added.
The report also noted that company has figured a way out to report better financial numbers through revamped corporate strategy. This strategic move resulted in an impressive turnaround in topline where company recorded revenue of PKR6.5bn in last 9 months with an average gross margin of approximately 7%.
In last 9 months, company launched Unsalted butter, Butter tub, Dairy cream and upgraded its Cheese recipe. FFL recorded significant growth in its overall sales volume during 1QCY21, which is attributable to enhanced distribution network, efficient procurement and process improvement.
In addition, FFL has witnessed an aggressive transformation in its top leadership over the last years. The change in management started bearing fruits straight away as company recorded an improvement in its topline and gross margins, the report highlighted.
FFL’s debt soared by a massive 3.5x in last 5 years thus, putting additional pressure on company bottom-line. In addition to this, company also obtained loan from its sponsors (FFBL), currently stands at PKR5.9bn. To improve company’s liquidity position, FFL restructured its loan profile. Furthermore, FFL’s BOD has recommended an increase in its authorized capital from PKR10bn to PKR18bn.
It is expected that company will probably issue right shares or convert its sponsors loan into equity. This development will further ease pressure on company’s debt servicing and will improve its solvency ratios, said by Muhammad Shahroz, Equity Research Analyst at Insight Securities.
Going in to the details, the focus of new management is to grow company’s topline and to achieve that, FFL is actively working on expanding its distribution network. As per management, company has strengthened its retail network in northern regions and it is also penetrating in southern market by enhancing its footprint in Karachi.
Since, domestic dairy industry has a lot of potential, mainly fueled by rapid urbanization and shift in consumer preferences. Given this scenario, FFL will likely be a potential target for international players, who want to get exposure in growing dairy industry.
To note, FFL has incurred capex of $44mn between 2016-2019, making it one of the latest production facility with state of the art technology. Company’s current utilization levels stand at 30%, providing room for further volumetric sales. We believe that induction of foreign partner will further strengthen its balance sheet, the report noted.
Going by the report, FFL’s fixed asset turnover ratio stands at 0.97x as compared to 3.39x and 3.6x of FCEPL & NESTLE, respectively. Furthermore, FFL’s capacity utilization stands at 30%. By looking at industry’s fixed asset turnover ratio and FFL’s underutilized capacity, it is expected that FFL can grow its topline by 4x (5-year CAGR: 27%) from current levels.
Company has recorded topline of Rs2.3bn during 1QCY21, up by 43% YoY. Given this, it is expected that FFL is set to post decent growth in its topline attributable to addition of new products in portfolio, enhanced focus towards retail distribution, and improving capital structure.
Likewise, gross margins witnessed massive turnaround and currently stands at 11% as compared to 3-year average of negative 7%. In comparison FCEPL 3-year average gross margins stand at 14%. The reversal in FFL’s gross margins is attributable to improved contribution from high margin products (cheese, butter etc) and better fixed cost absorption.
According to Muhammad Shahroz, Equity Research Analyst at Insight Securities, given the improved outlook of sales volume, better margins, restructuring of debt, borrowing price differential between packaged and loose milk and recent change in taxation regime, it is expected company’s bottom-line to turn positive in CY23.
Copyright Mettis Link News
42165
