Karachi, November 16, 2022 (PPI-OT): Food Sector: Consistent growth in sales with stable margins

The food sector has outperformed the benchmark index by ~13% in the last 12 months (+5% vs -8% return for the index) and currently trades at a trailing P/S and P/E of 1.54x and 19.40x, respectively.

Food sector’s profits during the last 4 quarters have jumped by 19% YoY owing to 28% YoY higher sales and operational efficiencies.

Average gross margins during the last four quarters clocked in at 23% where Unilever Foods, National Foods, Nestle and At-Tahur reported higher gross level performance as compared to peers while Fauji Foods was the laggard among our sample of 10 food companies.

Revenue increases 28% YoY during last 4 quarters

We review Food sector’s financial performance with a sample size of ten companies (refer table below) as a proxy to the listed food sector. The sector’s trailing annual top-line has expanded by 28% YoY (last four quarters) as a result of rising commodity prices, changing consumer behaviour and higher inflation. On the other hand, (1) higher finance costs owing to rise in interest rates and (2) higher taxation due to the imposition of Super Tax, impacted bottom-line for the period which was fairly offset by the passing on of higher manufacturing costs that led bottom line to rise 19% YoY.

Profitability increased due to operational management

The sector’s margins faced some pressures in the previous few quarters as input costs increased for food manufacturers making them struggle to completely pass on the impact of unprecedented increment in commodity prices along with a surge in fixed costs to the end-consumer. Nevertheless, our sample base managed to maintain gross margins at 24% for Sep-2022 quarter, slightly lower (-1ppt) on a QoQ basis and also compared to SPLY.

Despite a rising cost scenario, the sector was able to broadly preserve its operating margins over the quarters depicted by only 1ppt QoQ/YoY decline during September quarter, clocking in at 12%. This was possible by control over selling and administrative costs.

Sector thrives on back of rising profitability

During the last 12 months, the food sector outperformed the benchmark index by ~13% (5.3% performance), taking the sector’s trailing P/S and P/E to 1.54x and 19.40x, respectively. We believe that based on current multiples, forward P/E of ~16.17x suggests that there is further upside potential if the bottom line growth rate for the food sector is assumed to be 20%.