ENGRO Foods is engaged in the manufacturing, processing and marketing of dairy products, ice cream, frozen desserts and beverages. The company also owns and operates a dairy farm.

The company’s CEO, Babur Sultan, told this writer last week that the firm derives 92pc of its income from the dairy segment, with the ice cream segment contributing 7pc to revenues.

EFOODS’ ultra high temperature (UHT) business comprises three brands: ‘Olpers,’ ‘Tarang’ and the affordable ‘Umang’. Sultan asserted that tea whitener is a fast-growing product segment as opposed to liquid or loose milk since tea is widely consumed in the country, while the habit of drinking milk is not that widespread.

Sultan asserted that ‘Olpers’ had managed to wrest a bigger market share, while Tarang’s market share dropped a little.

A food sector analyst suggested that Tarang had dug its heels in the rural segment, which was why the recently launched liquid tea whitener ‘Cup Shup’ by Dalda, the cooking oil manufacturer, would not pose an immediate danger for EFOODS. The company’s management reckons that Dalda’s entry into the segment will require a lot of investment and its brand will take time to develop an identity.

Meanwhile, the Fauji group has also entered the dairy business with its acquisition of Noon Pakistan Limited (NOPK), the producer of the ‘Nurpur’ brand of butter and other dairy products.

However, Babur Sultan told this scribe that EFOODS will remain ahead of the competition by focusing on key growth parameters like innovation in packaging, brand health, national line extensions and the launch of new products.

An increase in volumetric sales, resolution of distribution issues and lower inflation all led to the company’s market share in the UHT segment rising to 56pc from 53pc last year

Engro Foods posted an after-tax profit of Rs2.6bn for the nine months ending September 30 (9MCY15), a growth of 9.3 times from net earnings of Rs252m in the corresponding period of 2014. Its sales rose 22.8pc to Rs37.7bn from Rs30.7bn. The company’s directors noted in their report to shareholders that the top-line growth was “mainly on the back of robust performance in the dairy segment”.

Topline Securities analyst Nabeel Khursheed noted that EFOODS recorded revenues of Rs12.8bn in the third quarter (3QCY15), up 17pc from 3QCY14. This was a result of an increase in volumetric sales, resolution of distribution issues and lower inflation, which led to higher disposable income for consumers. This led to the company’s market share in the UHT segment rising to 56pc from 53pc last year.

The company also jumped out of a red of Rs77m in 3QCY14 to a post-tax profit of Rs624m in the third quarter of this year.

Hasan Azhar, an analyst at Taurus Securities, said the firm’s revenues jumped by 4pc to Rs12.8bn in 3QCY15 from the previous quarter (QoQ) owing to a 5pc volumetric improvement in the dairy and beverage segment. However, its gross margins witnessed a seasonal drop of 260 basis points from 2QCY15 as the cost of raw milk was said to have risen during the ‘lean’ season. Consequently, the company’s gross profit declined by 7pc QoQ to Rs2.9bn.

Amreen Soorani, an analyst at JS Global Securities, commented that the firm’s third quarter earnings “fell short of street expectations owing to a decline in 3QCY15 margins and a one-time cost pertaining to the Employee Share Option Scheme (ESOS)”.

At an analyst briefing held a day after the announcement of the third quarter results, the EFOODS management said revenues from both the dairy and ice cream segments had grown, leading to a 1pc rise in the company’s market share in the ice cream segment to 29pc.

The ‘Omore’ ice cream brand contributed Rs1.34bn to EFOODS’ top-line and Rs140m to net earnings for the third quarter, said the CEO.

Arif Habib Limited analyst Tahir Abbas pointed out that “a bigger herd size enabled the company to reduce its losses in the farm segment”.

The CEO, Sultan, added energy costs for the company had reduced and there was not a burdensome increase in international fodder prices, which helped the firm’s farm segment.

By end-September, the company held total assets of Rs28.1bn. Its share capital stood at Rs7.67bn in the form of 767m outstanding shares, 667.4m (87.06pc) of which were held by its parent Engro Corporation. Its free float is estimated at 15pc (115m shares), while no other shareholder has over 10pc of the company’s equity (which requires mandatory reporting).

At last Thursday’s closing price of Rs150.91, the company’s market capitalisation works out at Rs115.7bn.

Some of the possible risk factors identified by sector analysts include an unanticipated rise in international milk powder prices, drop in farmers’ income and competition from new entrants in the tea-whitener category.

Some key upside triggers are thought to include a further drop in skimmed milk powder prices, better-than-expected volumetric growth and collaboration with foreign entities to enter into value-added products.

Published in Dawn, Business & Finance weekly, December 14th, 2015