Engro Foods (EFOODS): Q2017 LPS Rs0.01 vs. LPS Rs0.27 in 4Q2016; DPS Rs0.4/share (Result below expectations)
Monday, 12 February 2018
By: Topline Securities (Private) Limited
EFOODS’ sales continue to disappoint as volume suffer owing to stiff competition in the industry, we believe. Consequently, earnings in 4Q2017 fared below expectations, posting loss of Rs0.01/share though, better than loss of Rs0.27 in same period last year. Despite this, the company announced dividend of Rs0.4/share.
Net revenues shrank 24% YoY during the outgoing quarter, primarily as a result of lower volumes, we believe. This was due to the growing competition in Dairy industry, especially in tea-whitening segment. ‘Tarang’, EFOODS’ only liquid tea-whitener, which used to enjoy a leadership position in its category, a couple of years back and constituted 45-50% of the company’s UHT sales, has greatly suffered from new entrants.
The company reported gross margins of 13.4%, down 703bps in 4Q2017. We attribute this to 1) lower volumetric sales thereby making it difficult for the company to pass on fixed charges, 2) tax legislative changes announced by the Govt., which substantially increased the cost of doing business for the UHT industry, and 3) payment of technical fees of 0.5% and 2% of net revenues to Engro Corp (ENGRO) and Royal FrieslandCampina (RFC), respectively.
Distribution expenses of the company were down 49% YoY in the outgoing quarter. We believe that this was due to lower advertisement expense (constitutes around 50% of total distribution charges).