FCEPL: the worst is over – BR Research


It got a lot worse before it could finally get better. After hitting bottom in CY18, Friesland Campina Pakistan (PSX: FCEPL) added Rs 6 billion (on average) to its turnover every year. According to annual financials disclosed to the stock exchange yesterday, the company closed CY21 with net sales of Rs 52 billion, five percent higher than the highest revenue on record six years ago (CY15).

Five years after its acquisition by foreign major Friesland Campina (a Dutch dairy cooperative), FCEPL is now a much leaner company. While it hasn’t entirely cut the tea whitener and dairy beverage categories, the company appears to have doubled its growing volume in the liquid whole milk category.

In an interview with BR Research last year, CEO Ali Ahmed Khan said that if the zero-rate GST regime was reinstated, grade conversion would once again become the core of the dairy industry’s growth strategy. The double-digit (%) increase in Olper’s flagship volume seems to indicate that management is delivering on its promise.

And with the disappearance of upstream taxes on raw materials (packaging), profitability has made a strong comeback on the books of the market leader in processed dairy products. Gross margin was 17%, up 348 basis points from a year ago. Because the tax breaks implemented in the FY22 federal budget were only applicable for half of the FCEP’s fiscal year, margins remained lower than the good old days before 2016. Profitability could see a further rise in CY22, provided that the PTI government does not cancel the GST exemption under pressure from the IMF in June 2022.

With dairy segment revenues returning to their full glory, the frozen dessert category’s revenue contribution may become less significant to the company’s portfolio in the future. Based on the average of the last 5 years, the share of ice cream is now estimated at 10% of sales, assuming organic volume growth. However, past analyst briefings by management suggest that due to its higher margins, ice cream remains important to the company’s bottom line. This can become particularly important if the company ventures into low-cost category conversion initiatives, to expand the pie of the processed dairy universe.

The main risk weighing on the growth of the FCEPL during the year CY22 may therefore come from the stability of exchange rates, such as the price of raw materials for packaging; powdered milk, flavourings, edible oil, etc. are all dollar based. If production costs increase, the company will be unwittingly forced to accept price increases, which will jeopardize the chances of increasing volume.


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