By: Elixir Securities Private Limited
2QCY15 results in line with expectations: Engro Foods Limited posted 1HCY15 earnings at PKR2.58/sh, up 5.0x YoY, in line with our expectations. EPS for 2QCY15 clocked in at PKR1.19, up 7.3x YoY but down 15% on QoQ basis. Although international milk prices have remained subdued during 2QCY15 as well, QoQ margin attrition is attributable to seasonal factors where onset of lean season has led to increasing procurement prices for fresh milk, the primary raw material for the company. On a cumulative basis, gross margins clocked in at 26.2% during 1HCY15, significantly up 5.8pp on YoY basis, largely emanating from favorable exogenous factors (low international milk prices and fuel & power costs), propping up margins for the company.
Dominant position maintained in Dairy segment: Overall volumetric growth in the Dairy segment remained robust with total volumes rising by 25% YoY during 1HCY15. Apart from organic growth in UHT segment, sharp volumetric growth was also a result of price off in Tarang in Aug-14 and price discount on Olpers relative to Milkpak. Consequently, market share of the company in UHT category has inched up by a considerable 4pp on YoY basis to 55% as at May-15. Even though NESTLE has brought down its price of Milkpak by PKR10/litre in Mar-15, eliminating price premium relative to Olpers, the company has been able to defend its market share in the UHT segment.
Dairy Omung update: The company is currently under litigation with Punjab Food Authority over classification of Omung as a dairy product. The management highlighted that PSQCA’s (Pakistan Standard Quality Control Authority) views are also aligned with the company’s view of having a single federal benchmark for classification for Omung as opposed to four different provincial classifications. The company is hopeful of an amicable resolution to the case.