Foods: RAFHAN MAIZE - Analysis of Financial Statements Financial Year 2003 - Financial Year 2008
OVERVIEW (December 11 2009): Since 1953, Rafhan Maize has been the premier provider of refined corn-based products and ingredients in Pakistan. The company has focused on defending and reinventing traditional markets through delivering the right products at the right prices.
Rafhan Maize has the capacity and capability to produce a wide range of food, industrial and animal nutrition and health ingredients. Important segments of diverse customers' base include textiles, paper, food and confectionery, baking, pharmaceutical, livestock feed and edible oil refiners.
RECENT RESULTS (FY08)
Rafhan Maize's earnings after tax for the year ended FY08 were Rs 1492 million, which was higher by 37% compared to FY07. PBT for FY08 was Rs 2,299 million, which was higher by 36.8% compared to year 2007. Earnings per share for the year at Rs 161.57 were up by 37% compared to the last year on a comparable basis. This improved profitability, amidst difficult business environment was on the back of volumetric growth, improved product mix, effective marketing efforts and continued commitment to operational efficiencies.
The company's various consuming industries like textiles (for starch segment) and paper and corrugation industries could not operate to their capacities, due to slackened global demand. Gross sales break-up reveals a lion share by domestic sales, as against the exports. Despite the industrial slowdown, the company was able to capitalize on its diversification, investment in technology and R&D as one can witness a robust 41.8% growth in sales in FY08 on the back of greater performance in food and animal nutrition business, with buoyant demand. However this sales rise was outpaced by a stronger 46.1% growth in cost of sales on the back inflated inputs and high energy and fuel costs. The net effect of this was such that the gross profit surged by 30.6% in FY08.
On the operating front, a 15.8% decline in distribution expenses with a meagre 8.2% increase in administrative expenses resulted in operating profit to increase by 37.6% in FY08. Other operating income, mainly on back of higher interest income earned over the same period last year also added to the increasing EBIT that surged by 37.9% in FY08 vis-à-vis FY07. Moreover, gross, operating and net profit margins improved in FY08, vis-à-vis FY07.
Financial charges of Rs 2.26 million declined by a mere 2.43% comparatively, as the only non-current liability is deferred taxation. Other operating expense also surged by 37.2% in FY08. On the balance sheet front, the company's liquidity position deteriorated in H1'08 vis-à-vis FY07, due to 112% rise in current liabilities, as against a 37% surge in the current assets. Also the company availed a short-term running finance facility of Rs 202.5 million in H1'08 to finance it operations. Furthermore trade payables and taxation provisions increased significantly.
Rafhan Maize has excellent records of continuous growth performance and, in the years of mixed uncertainties, the company has continued to reinforce its market position. Discussed are the financial highlights of Rafhan Maize over the period FY03-FY08. Off the total sales, material and services account for 71.5%, dividend and retention for 13.9%, financial cost for 9.1%, employee cost for 5.2% and finance cost for 0.3%.
The industrial sector continued to face tough competition in the domestic and global markets in FY08. Despite that, the company continued to build on growth momentum and once again achieved encouraging results in 2008. The high sale of sweeteners and animal nutrition and health ingredients remained the major driver of growth in volume sales. The slackened demand of starches from consuming industries resulted in lower than goal sale of industrial grade unmodified and modified starches.
In the recent years, the profitability has improved and has posted a rather stable and rising trend continuing till FY08, despite the record increase in the price of maize, basic raw material and the overall sluggish situation of industrial sector in the country. Solid steps were taken to alleviate the adverse impact on profitability through operational efficiencies, cost cutting initiatives and effective marketing mix. The implementation of these measures is reflected in 42% impressive increase in net sales over last year. The volume growth coupled with reduction in costs lifted profit after tax to Rs 1492 million from Rs 1089 million of 2007 and the earnings per share improved to Rs 161.57.
Gross profit margin has shown an erratic trend over the years. The gross profit margin declined after 2004, despite a significant rise in sales as the cost of goods sold also increased tremendously. The higher sales translated into better margins despite the price of corn, which is the basic raw material for the company, which stands at 25.51% in FY08 as compared to 27.69%in F07. Both ROE and ROA declined in 2005 because of a 9% fall in profit after taxes, but recovered in 2006 as profit after taxes increased by 32.24% compared to the previous year. Both follow the same trend in all years and have risen in FY08 sue to higher profits.
The liquidity position of the company has improved significantly up till the year 2007 as evident from the rising current and quick ratios. This can be primarily attributed to the phenomenal increase in the company's cash reserves by over 1000%, and a relatively lower increase in the current liabilities, which failed to mitigate the effect of the rise in the current assets. However during FY08, the current ratio declined from 3.38 to 2.19 and the quick ratio declined from 1.01 to 0.29 owing to a 112% increase in current liabilities and 96% decline in cash reserves.
Rafhan Maize's asset management as far as the inventories are concerned has been commendable. The operating cycle was the highest in 2003 at 110.45 days. This shows that the company faced little bit difficulty in utilizing its inventories and obtaining cash against its credit sales. However, during 2006, the operating cycle declined considerably primarily due to a sharp decline in the inventory turnover (days), hence showing that with aggressive marketing strategies to boost sales, the company has been able to better utilize its inventories in the recent years.
However, the operating cycle again increased and now stands at an all-time high of 134.09 days primarily due to a rise in inventory turnover. Despite this the day sales outstanding has reduced considerably during FY08 from 15.61 to 11.87 which means that now cash is received after a credit sale in lesser time than before. The total asset turnover ratio and sales/equity ratios of Rafhan Maize have witnessed a rising trend since 2004. This can be attributed to the sharp rise in sales over the years owing to the aggressive marketing efforts by the company, which attracted a large number of customers. The total assets turnover ratio has increased from 1.96 to 2.06, due to a 42% rise in sales as against a 34% rise in total assets.
Total liabilities of the company have declined as evident from the declining debt to asset and debt to equity ratios. This shows that Rafhan Maize is managing its debts well and has improved its credit policies over the years. The current and non-current liabilities of the company have increased over the years, but the effect has been largely mitigated by the increase in assets and equity of the firm. Consequently, the debt to asset and debt to equity ratios have declined (except in FY07 where the increase in debt was higher due to which the ratios remained flat). Long-term debt to equity has posted a rising trend in recent years mainly due to deferred taxation.
Times interest earned for the company has declined since 2004, primarily because of a sharp hike in interest rates owing to inflationary pressures in the country. The operating profit of Rafhan Maize saw a decline in 2005, but a recovery in 2006. However, the rise in the operating profit was not sufficient to off set the effect of a rise in interest rates. A spike can be seen in FY07 due to lower finance cost and higher EBIT, perhaps showing company's improved ability to cover its interest expense. This high ratio can indicate that a company has an undesirable lack of debt or is paying down too much debt with earnings that could be used for other projects. However, TIE reduced significantly to 64.65 primarily due to a 206% rise in finance cost.
The earnings per share improved over the years, as did the book value per share. This is because of the net income increased subsequently over the years except in 2005. This decrease can be attributed only to lower net income in 2005, as the number of shares remained constant 2003 onwards. However, it increased tremendously in FY08 due to higher profits from discontinued operations. A major factor of the increase in this book value per share is the positive image the company projects through its marketing activities and focus on quality. The authorized capital of the company remained consistent over the years, and the increase in equity was primarily due to an increase in the reserves of the company, over the years FY03, FY04, FY05, FY06, FY07 and FY08.
Moreover, the overall cash position of the company improved which is evident by the positive trend of DPS. It has increased from Rs 26/share in FY03 to Rs 100/share in FY08, showing the good return to shareholders as the primary objective of the company. The (P/E) ratio shows how much the investors are willing to pay per rupee of the reported profits depends on the company's price per share and its earnings per share (EPS). Rafhan's EPS has been on a constant rise from 2003 onwards with a slight decline in FY05. In FY08 there was a sudden jump in P/E ratio from 10.27 to 19.12, due to a hike in price per share. But P/E ratio came down again to 14.74 due to a significant rise in EPS as the price per share only marginally increased.
Overall, Rafhan Maize has maintained a commendable record as far as asset, debt, and liquidity management is concerned. It faced an erratic trend as far as profitability is concerned possibly because of a sharp rise in corn prices, the major raw material for the company. However, recently FY08 profits have shown significant improvements due to operational efficiencies, cost cutting initiatives and effective marketing mix. By maintaining its focus on growth and placing its customers as a nucleus of all business activities, the Company was able to expand its customer base in the domestic and export markets. Rafhan Maize is well positioned to take advantage of its experience, knowledge and innovative product line to further expand export business in the region.
The price of maize has drastically increased and this trend is projected to continue throughout 2009 in view of increased demand of maize from poultry and livestock feeds and food and industrial sectors. The energy cost is forecasted to increase further due to continuous rise in oil price and overall shortfall in the country. Due to high cost of maize, energy and other inputs, the pressure on selling prices of finished goods will further intensify and it may be difficult to pass on the total impact of increased costs to the consuming segments since the overall business and industrial environment may turn more difficult. The energy crisis affecting industrial production particularly the unorganized sector, increase in cost of production on multiple accounts and high delivery cost may squeeze margins to affect income and profitability.
COURTESY: Economics and Finance Department, Institute of Business Administration