EUR 10.00 For Business Accounts Only

Engro Foods (EFOODS): 2Q2018 EPS Rs0.3 vs. LPS Rs0.2 in 2Q2017 (Above expectations)

• Contrary to our expectation of a loss during the outgoing quarter, EFOODS reported profits of Rs210mn (Rs0.27/share), mainly due to a tax credit of Rs196mn (Rs0.26/share) and higher than expected other income. However, in-line with expectations, the company reported decline in revenues in 2Q2018, down 12% YoY, as competition from new entrants continue to weigh in on the company’s sales.
• While we await management clarity on tax credit and other income, we attribute higher other income mainly to revaluation gain on biological assets due to currency devaluation. We believe that both events are a one off. 
• To note, the company is struggling to re-position itself in the dairy segment which constitutes over 90% of the company’s revenues. This was due to the growing competition in the tea-whitening segment where EFOODS used to dominate the industry through its flagship ‘Tarang’. 
• The company reported gross margins of 19.7%, up 415bps in 2Q2018. We attribute this to better sales mix compared to last year.
• Administrative expenses of the company were up 29% YoY during the outgoing quarter. We believe that this was due to higher salary expenses (constitutes around 50% of total admin charges).
• In 1H2018, EFOODS booked profits of Rs511mn (Rs0.7/share), up 175% YoY due to better margins, higher other income and tax credit.
• We flag, 1) rising competition 2) decline in processed milk consumption, 3) any unanticipated regulatory change and 4) volatility in international raw milk prices as key risks for EFOODS.