Despite a rising population growth rate and demand for fast moving consumer goods (FMCG) on the rise, Packages Limited (PL), the market leader in the packaging industry, is experiencing pressure on its margins and profitability. This has recently been exacerbated as the nation deals with an inflationary bout, stiff competition in the paper market, and general economic slowdown. A notice released by the KSE on 18 October 2011 posted new financial highlights for the company’s third quarter ended on 30 September, 2011.
Analysis of KSE notice of 3QFY11 results
Local revenue generation increased by 11.94 per cent and was reported at Rs17,679 million for 3QFY11 compared to Rs15,794 million during 3QFY10. On the other hand, export sales took a downfall by 0.82 per cent and were reported at Rs 196 million for 3QFY11 from Rs1,075 million 3QFY10. Resultantly, PL exhibited an overall gross sales growth of merely 5.97 per cent. After taking into account taxes and sales commissions, net sales growth of 4.19 per cent for the third quarter were reported at Rs 14,945 million. Prices of raw materials such as wood pulp, packaging films, chemicals and non-availability of fuel contributed to the rising cost of sales as these accounted for 95.33 per cent of sales and were reported at Rs14,246 million for 3QFY11.
Thus, the company reported a gross margin of 4.68 per cent from 5.92 per cent during 3QFY10. Operating expenses rose over the period with administrative expenses contributing to the rise and were reported at Rs472 million, depicting rising working capital requirements. Distribution and marketing expenses experienced a dip of 2.53 per cent and were reported at Rs436 million. Other operating income, which mainly comprises interest income from bank deposits, management fees and gains on foreign exchange, witnessed a jump of 60.32 per cent, thus supplementing profitability. The company witnessed rising financial charges which stood at Rs1,191 million during 3QFY11 from Rs 898 million (an 32.68 per cent rise) during 3QFY10 on additional loans obtained during the year.
However, this is subject to further examination upon release of detailed financial statements by the company. This rise in financial charges has been reported despite repayment of a major long term loan (Rs5,185 million) that is to begin in Jun-12. Additionally contributing to Packages Limited’s pacifying effect is the increase in dividend income which has been mainly accounted for by Tetra Pak Limited and was reported at Rs729 million. PL has a diverse investment portfolio (45 per cent of PL’s equity) comprising investments in dairy and food business, packaging, and financial sector entities. Packages Limited, for its third quarter ended, has thus reported a net profit margin of -3.98 per cent compared to 0.86 per cent during the same period last year.
Credit and future outlook
In the latest report available from PACRA, the agency assigned a long term rating of AA and a short term rating of A1+. Packages Limited has overall been a stable concern with regard to its credit rating as it has held the AA notch since June 2007. For the remaining quarter, PL requires and intends to strengthen its market position by utilising a comprehensive strategy which will cover increasing capacity utilisation, curbing operational expenses and implementing a solid marketing plan in order to boost revenues. PL has invested in alternate sources of power generation in order to cope with the power shortages. These include an established 41 MW gas powered power plant and an additional 11MW back-up plant. The ratings reflect PL’s leading market position in local paperboard, packaging and tissue industry which can be gauged from the strength of its established brand, efficient supply chain management, solid customer relationships and a history of success within the industry. While the tissue segment maintains a leading position of 70 per cent in the local market, other segments are susceptible to challenges which include power shortages and foreign competition. Despite all odds, detailed accounts are yet to be released by the company, which will provide further insight into the company’s financial performance and expectations for the last quarter. PL has portrayed a history of success with its presence as a market leader, strong asset base and credit standing. Thus, its performance in the next quarter should be monitored closely as the company possesses the capacity to rebound.
