ENGRO Foods Limited, a majority owned subsidiary of Engro Corporation, 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.

Engro Foods has set foot in the international market as well, with its first venture to manage the halal food business. It is represented by Al Safa Halal Inc. in North America, which had been acquired by Engro Corporation through Engro Foods Netherlands B.V. By virtue of the transfer of investment in EF Netherlands to the company, the Dutch entity converted to a wholly owned subsidiary of Engro Foods at the end of 2013.

The company’s balance sheet shows total assets of Rs24bn. With share capital of Rs 7.67bn in 767m outstanding shares of par value Rs10 — 87.06pc of which are vested in associated companies and 4.10pc is held by the general public — Engro Foods’ market capitalisation works out at Rs81bn, given that the stock trades at the market price of around Rs104.

Engro Foods’ ice cream business witnessed its highest-ever sales of Rs1.2bn in the second quarter, with volumetric growth of 26pc over the same period last year

Regardless, most investment analysts have given a ‘sell’ call, as the Engro Foods (EFOODS) stock has underperformed the booming stock market by a whooping 71pc. Investors’ disappointment with the company was triggered by dismal second quarter 2014 (2Q2014) results.

Zeeshan Afzal, an investment analyst at Topline Securities, explains why: “After the resolution of distribution issues and encouraging first quarter results, investors were of the view that EFOODS would be back on its growth path. Yet, a sharp decline of 50pc in profit-after-tax (PAT) to Rs110m, translating into earnings-per-share (eps) of Re0.14, from Rs219m and eps of Re0.29 in 1Q2014” left a bad taste in investors’ mouths.

During the quarter, ultra high temperature (UHT) dairy sales dropped 9.3pc to Rs8.6bn. Ice cream sales, however, showed seasonal upsurge by 128pc to reach Rs1.2bn. The company had increased dairy prices on May 20 by around 5pc, and consequently sales of its Tarang brand dropped.

To make matters worse, the Punjab Food Authority imposed restriction on the sales and distribution of Omung in the province. Under UHT dairy, the company offers Olpers, Tarang and Omung products. The significance of ‘dairy and beverages’ lay in the fact that it constitutes 93pc of EFOODS’ revenue.

Taseer Abbas, an analyst at BMA Capital, says that in an analyst briefing last week, the company’s management asserted that 2Q2014 sales of Rs9.8bn marked growth of 5pc from Rs9.3bn in the same quarter of the previous year. However, the sales growth could not be translated into higher gross profit as the company was unable to pass on the cost push during most of the quarter, squeezing gross margins to 18pc. But these are likely to improve as the benefits of price increase in May trickles down.

Adding to the blow was a sharp rise of 77pc in finance cost, as the company required additional finances for its new powder milk plant. As a result, net earnings plunged by 77pc over the same quarter last year.

The management says that the company has launched new products like ‘Lassi’ and flavoured milk Olper’s Rooh Afza, besides re-launching juices. Engo Food’s pilot project Mabrook now has 14 operational outlets, while another 23 are under development. The company has maintained a 51pc market share in the UHT milk segment.

“The ice cream business witnessed highest-ever sales of Rs1.2bn in 2Q2014, with volumetric growth of 26pc over the same period last year,” the management said, and added that its market share in the ice cream segment was 28pc, with gross margins at 43pc.

Although the overall profit slumped in the second quarter, the farm business posted its maiden profit of Rs10m. Al Safa Foods, the company’s overseas subsidiary, revealed a decline in sales following the discontinuation of nonviable products to curtail losses. “The company is currently reviewing whether to divest Al Safa or to put in more money for viable projects. However, if it decides to sell off, the net realisable value is likely to be lower than the book value of Rs396m,” management says.

Engro Foods’ Chairman Aliuddin Ansari and CEO Sarfaraz A Rehman had stated in the director’s report for 2013: “The management will continue to focus on key growth parameters of innovation, brand differentiation and continuous business expansion, including expansion in new products.”

A research note by Taurus Securities said that as per the management, the focus in the medium-term is on augmenting market share and volumes, while raising margins is secondary. Nonetheless, the last price increase in May is expected to fully reflect in third quarter earnings. Taurus noted: “As Nestle has further raised its UHT milk prices recently, the company could follow suit for its products Olpers, while Tarang prices may remain on hold for a while to boost volumes, in order to offer tough competition to Haleeb”.

Published in Dawn, Economic & Business, Aug 11th, 2014