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Pakistan Consumer: Profits (ex discretionary) rise in 2Q2020; Margins improve QoQ

• Pakistan consumer companies’ (Staples, Pharmaceuticals and Discretionary) have recorded a decline of 10% YoY in profits in 2Q2020 (vs. -7% YoY in 1Q2020). Ex-Discretionary, the profits have increased by 33% YoY (vs. 8% YoY in 1Q2020).
• Consumer Discretionary turned in losses in 2Q2020 vs. profits in the same period last year, while the profitability of Pharmaceuticals doubled (+103% YoY), followed by increase in Consumer Staples (+21% YoY).
• Continuation of country wide lockdown, which started during the last week of 1Q2020 in the wake of COVID-19, resulted in lower sales of Consumer Discretionary (mainly autos) by 69% YoY. The sales of Staples and Pharmaceuticals remain stable -1% YoY and +1% YoY, respectively.
• Discretionary firms decline in revenues by 69% YoY was due to slowdown in overall economic activity amid country wide lockdowns. Car sales during 2Q2020 were down by 76% YoY.
• Pharmaceuticals’ witnessed significant improvement in sales of nutrition supplements, while sales of other pharma medicines took a hit as hospitals and OPDs were largely closed for non-COVID-19 related illnesses and patient visits. GSKCH (+22% YoY) and SEARL (+15% YoY) led sales increase.
• Notable decline in sales within the staples segment was seen in BATA (-69% YoY) due to lower volumetric sales amidst closure of educational institutions and MUREB (-38% YoY) due to decline in impulse buying during lockdown days. However, COLG and UPFL posted increases in revenues by 20% YoY and 18% YoY respectively, where higher revenues were a mixture of (1) increase in prices to pass on higher costs due to currency devaluation and (2) higher volumetric sales compared to last year.
• Overall, gross margins of consumer firms increased by 4.87ppts YoY to 25.5% in 2Q2020, as all companies have mostly passed on the impact of PKR deprecation along with high costs due to inflation.
• The gross margins of the staples business were up by 1.82ppts YoY to 30.6%. Notable increase in gross margins of staples was seen in PAEL (+11.8ppts YoY to 22%) and PMPK (+10.2ppts YoY to 47%).
• Pharmaceuticals’ gross margins increased by 2.6ppts YoY to 33.3% amid price increase (linked to annual CPI), positive sales mix, and favorable exchange rate. GLAXO (+5.9ppts YoY to 23%), and ABOT (+5.6ppts YoY to 36%) reported notable increase in gross margins.
• All companies in Discretionary segment reported gross loss, with exception of Honda Car (HCAR), which reported a nominal gross profit.
• Overall sales during 2Q2020 declined of 19% QoQ; again due to decline in revenues of Consumer Discretionary (-59% QoQ) due to closure amidst country wide lockdown. 
• Turnover of Pharmaceuticals’ were up by 2% QoQ, whereas sales of Consumer Staples were remained stable.
• The overall gross margins were up by 2.9ppts QoQ.
• Overall profitability was up by 4% QoQ led by Consumer Staples (+50% QoQ) and Pharmaceuticals (+35% QoQ) as the companies were able to pass on the impact of currency devaluation and inflation. However Consumer Discretionary firms posted losses during 2Q2020 compared to profits in 1Q2020.

We believe that higher-than-expected economic recovery due to sharp decline in COVID-19 cases will help improve the sales of overall consumer segment with Discretionary segment expected to record a sharp recovery. Furthermore, higher margins along with decline in finance cost will keep the profitability of consumer companies on the higher side.