FrieslandCampina Engro Pakistan (FCEPL) addressed a Analyst Briefing and announced its plans to launch new products (7-8 months lead time to market) in the Dairy space with extensions into yoghurt, cheese, and nutrition in which the management discussed recent financial performance and outlook of the company.
Key Takeaways and Outlook
The penetration/adoption of packaged milk (UHT) in Pakistan presently stands at just 8% of the total milk consumption with the remaining being loose milk. More accelerated conversions from loose to packaged milk (tipping point) would require regulatory support (on health standards), reduction in price premium of UHT vs. loose milk, and awareness campaigns.
FCEPL plans to launch new products (7-8 months lead time to market) in the Dairy space with extensions into yoghurt, cheese, and nutrition. These categories are expected to have better margins vs. the plain milk or UHT segment. FCEPL will continue to grow with 2-3 innovations per year. That said, plain milk will continue to remain the heart of the business. This should coincide with double digit growth targeted for its existing portfolio.
In the Finance Bill FY22 (Budget), UHT Milk has been reverted to the Zero Rated Regime. FCEPL will now be able to claim sales tax refunds on inputs which translates into sizeable cash savings (c. PKR7-8/liter or c. +5% of price). Importantly, FCEPL will not be passing on the impact of these savings to consumers, but will utilize the extra funds to increase awareness of the benefits of packaged milk vs. loose milk and for infrastructural development at the farm level. That said, tax refunds are likely to be received with a lag as witnessed in pre-2016.
FCEPL reported strong earnings in 1QCY21 (EPS PKR0.71 vs. a loss of PKR0.17/sh SPLY). This was led by early start of the ice cream season with deployments coming in as early as February. This, together with improved supply chain efficiencies translated into strong margins in 1QCY21 to c. 20% vs. 15% SPLY.
Whereas a rise in global SMP prices have a dilutive impact on Tarang’s gross margins – being a key input – FCEPL offsets the same from its local milk powder production, which is also sold to industrial customers. Work is underway to lower the reliance on international SMP for Tarang.
Olpers has 40-45% market share in UHT milk while Tarang’s market share within the Tea creamer category presently stands at 20-25%. Market share in the Ice cream segment stands around 30% (second largest after Walls of Unilever Pakistan). Management is targeting 12-13% market share for the full cream milk powder in the next two years, in the nutrition milk powder space (not including infant category).
We think a broad based recovery is underway in Pakistan’s Dairy sector, after few years of a tough regulatory environment, with FCEPL being a key beneficiary. The zero rated regime will lead to savings of c. PKR7-8/litre for FCEPL; which, together with rebounding sales of the existing brands and potential new product launches, should spearhead strong growth in the coming quarters, in our view.
Courtesy – Intermarket Securities Limited.