Consumer Sector of Pakistan: Slowdown in September quarter profits – Topline Research
By: Zeeshan Afzal, Topline Securities Pvt. Ltd.
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Consumer Sector: Profits of Efoods declined 72% QoQ in 3Q2013 due to decline in sales and margins. Well, Efoods is not alone in the list here. Profits of our broader sample of consumer firms also declined 25.6% QoQ along with the sales drop of 6.7% QoQ. In 9M2013, sales and profits of these firms increased by 10% and 16.9%, respectively. This is lower than 5 year (2008-12) sales and profit CAGR of 18% and 20%, respectively.
We attribute the historical growth to rising subsidies; agriculture support prices and income support program that turned country’s rural economy into epicenter of consumer demand. However, down cycle emerged due to rising costs of living, govt budgetary measures and shift in govt focus which resulted into slowdown in sales, and hence profits, of these consumer firms.
We believe that low sales phenomenon can persist for next 2-3 quarters. However, expected recovery in the economy and reversal in the cycle is expected to bring sector’s habitual growth back.
Drop in 3Q2013: Sales 6.7% QoQ, profits 25.6% QoQ
September 2013 quarter proved difficult, at least on the income statements, for Pakistan’s consumer sector. During the quarter, sales and profits of our sample companies declined 6.7% and 25.6% to Rs89.8bn and Rs5.9bn, respectively. Same was the story for gross and net margins, which declined by 2ppt QoQ and 1.7ppt QoQ to 25.9%, respectively. On year on year basis, situation was positive on sales sides as it improved by 11.5% YoY but low margins resulted into 10% YoY drop in profits.
Our sample is based on 25 companies (including NESTLE, PAKT, COLG, EFOODS, RMPL, ABOT, GLAXO, UPFL, PKGS, NATF) from Food producers, FMCGs, Pharmaceuticals etc. with the market capitalization of Rs809bn (US$7.6bn).
Govt shift, inflation & seasonality are the culprits
Our discussions and meetings with the industry people revealed that rising cost of livings, especially in the rural, and overall down cycle in the consumer demand affected sales. Recently, govt has increased taxes, reduced subsidies and rationalized energy prices which have left households will lesser disposable income. Further, govt’s focus shift from agriculture to industry has also slowed down the rural economy.
These factors have not only reduced sales of these companies but also limited companies’ ability to pass on cost pressures.
9M2013: Growth lower than historical average
During 9M2013, cumulative sales of our sample companies stood at Rs274.4bn, up 10% YoY. Though complete details are unavailable, we think that the growth is sales in more price-driven (inflation), rather than demand. Further, the growth rate is much lower than the 5 year (2008-12) sales CAGR of 18%.
However, profits increased by 16.9% which is comparable to the historical CAGR of 20%. We attribute the decent improvement in profits to higher realized margins in 1H2013. During 9M2013 gross and net margins stood at 27.6% (up 60bps YoY) and 7.9% (up 40bps YoY).
Efoods: Maintain ‘Hold’, 2013 EPS Rs1.74
Despite the decline in sales and profits, we are firm on our faith on the sector. We believe that it’s a matter of 2-3 quarters when rising standards of living and overall economic growth will overcome the down cycle.
In FMCGs, we cover Efoods and maintain ‘Hold’ on the scrip and believe that 2013 will be a bad year for the company while there would be growth in the latter half of 2014 and onwards. We expect company to post EPS of Rs1.74 and Rs1.94 in 2013 and 2014, respectively.