Company Review : Engro Foods (Efoods) – Global Securities Research

Company Review : Engro Foods (Efoods) – Global Securities Research

EFoods reported profit of PKR 460mn (EPS: PKR 0.60), representing a sequential drop of 30% QoQ in its 2Q CY13 earnings. On YoY basis, the company posted earnings of PKR 1.11bn (EPS of PKR 1.46), an increase of 9% in 1H CY13.

 

	3mo ending		%	3mo ending		%	6mo ending		%
PKR mn	Mar13	Jun13	D	Jun12	Jun13	D	Jun12	Jun13	D
Net Revenues	9,624	9,309	-3%	10,099	9,309	-8%	19,765	18,933	-4%
Cost of Goods	6,782	6,853	1%	7,512	6,853	-9%	14,922	13,636	-9%
Gross Profit	2,841	2,456	-14%	2,587	2,456	-5%	4,843	5,297	9%
Sell & Dist Exp.	1,356	1,273	-6%	1,394	1,273	-9%	2,464	2,629	7%
EBIT	1,206	793	-34%	1,004	793	-21%	1,960	1,999	2%
Finance Cost	200	198	-1%	232	198	-15%	441	398	-10%
PAT	653	460	-30%	532	460	-14%	1,018	1,113	9%
EPS (PKR)	0.86	0.60		0.70	0.60		1.34	1.46

 Source: Company Accounts, Global Research

 

Earnings driver: Dairy segment teetering

Revenue from dairy & beverage segment slid by 9% QoQ to PKR 8.33bn due to slowdown in off-take.  On YoY basis, the Ambient UHT segment registered a decline of 13% in volumes and 4% in value. However, the juices segment saw an increase of 15% YoY in value. This decline in Ambient UHT volume is a cause of concern for the company as the company’s strategy to launch Omung to cater to the loose milk market has not yielded results. According to the company, the market share of the company in Ambient UHT in May13 was at the same level of 51%, showing that the company lost market share to loose milk. We feel that Omung, which is at PKR 4-6/litre discount to loose milk, was targeted to capture loose milk market share but has been unable to do so.

At the same time, the company’s GP margin dipped by 5% to 24% in 2Q CY13 due to: 1) 3% contribution from cost push inflation that the company did not pass on; and 2) 2% contribution from volume dip. The management gave guidance that they will not be able to pass on the higher price in the coming quarter and the margin is likely to remain at current levels. On the brighter side, the ice cream and frozen desserts segment, which is considered a high-margin segment (48% margin in 2Q CY13), turned into green for the first time and the company realized profit of PKR 18mn in 2Q CY13.

 

 

Efoods to continue its search for stars

1)      Fresh Dairy

Efoods will continue its battle to tap the huge loose milk market. According to company estimates, Karachi has PKR 104bn/annum loose milk market. The company’s pilot project will use the current infrastructure for milk collection and develop new infrastructure for its distribution in fresh form. As this is a pilot project, there will be limited capital outlay of PKR 101mn and PKR 103mn in CY13 and CY14, respectively. The company did not divulge details regarding branding but they plan to follow Amul India model. Amul has helped India to emerge as the largest milk producer in the world.

We feel that Engro will use its existing collection network of 10,000 villages, process the milk and sell it through its own network of shops, along with distribution at consumer touch points. Moreover, we feel that they will brand it under a new name so as to change the perception of packaged milk of the company to fresh milk amongst the masses.

2)      Meat

The company plans to use its existing collection network to buy animals for meat and remove the middle man from the supply chain. According to the company, the nationwide market size of meat is PKR 1.33tn and Lahore, where the pilot project will be launched, consumes around 15% of the total consumption. The company plans to develop the infrastructure for distribution and will use existing slaughter house with tolling charges. As a result the cost of the pilot project will be on lower side at PKR 134mn and PKR 142mn in CY13 and CY14, respectively.

 

Outlook

We believe that the growth of the company has subsided for the time till a new product takes over. The company has ventured into new products like lassi, which haven’t taken off. At the current price of PKR 122/share, we have a NEUTRAL stance on the scrip.