Karachi, The food sector faced significant challenges in the fourth quarter of the calendar year 2023, with inflationary pressures leading to a downturn in the sector's earnings. An analysis of nine listed food companies revealed a mixed performance during 4QCY23, where macroeconomic headwinds resulted in a 28% year-over-year (YoY) and 36% quarter-over-quarter (QoQ) decline in earnings growth. Despite these challenges, the sector experienced robust sales growth, with a 24% YoY and 1% QoQ increase in the top line, and gross margins reaching 27%, surpassing the recent average of 25%.
According to JS Global, the increased preference for local brands impacted multinational food companies (MNCs) within the sample, exacerbating the effect of rising financial charges due to an all-time high interest rate environment. Specifically, companies like Fauji Foods Limited (FFL) and Murree Brewery (MUREB) stood out for their margin and profit after tax (PAT) growth YoY. National Foods (NATF) and Ismail Industries Limited (ISIL) led in top-line growth for the quarter. Mitchells Fruit Farms Ltd (MFL) showed notable top-line and operating profit growth due to a 44% jump in rice exports sales volume, though its bottom-line growth was hindered by increased financial charges.
The report further highlighted that MNCs, specifically NESTLE and Unilever Pakistan Foods Ltd (UPLF), experienced sharper contractions in operating margins, partly due to increased selling expenses amidst shifting consumer preferences towards local brands. NESTLE's reclassification of its royalty expenses did not impact operating margins but indicated financial adjustments within the company.
Looking ahead, JS Global anticipates that companies with high leverage like ISIL, NATF, MFL, and Fauji Cement Company Limited (FCEPL) will benefit from the expected monetary easing cycle, despite potential challenges from the second-round impact of demand recovery. The report emphasizes that the impact on half of the sample would be limited due to fixed financing rates (NESTLE) and debt-free or low-debt positions (UPLF, FFL, MUREB, RMPL).
In conclusion, while the food sector grapples with inflationary pressures and high interest rates, strategic adjustments and market dynamics offer opportunities for recovery and growth. JS Global maintains a nuanced outlook on the sector, factoring in both challenges and prospects for future performance.