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Pakistan Consumer: Staples Profits Flat; Pharma & Discretionary Posted Decline

 

• Pakistan consumer companies (Staples, Pharmaceuticals & Discretionary) posted profitability decline of 8% YoY in 2018. Staples managed to close the year flat while profits of pharmaceuticals and discretionary firms fell 12% and 16%, respectively. We have excluded EFOODS & PMPK from our profitability analysis due to loss/one-off while we excluded PKGS from our overall analysis owing to its consolidation effect.
• Our analysis is based on a sample of listed firms with market capitalization of US$100mn and above.
• In 2018, overall sales grew by 15% YoY where staples, pharmaceuticals and discretionary posted sales growth of 12%, 16% and 18%, respectively.
• Staple sales growth was mainly led by PAKT (+22%) and NATF (+66%). Higher PAKT sales growth was mostly organic as the company strengthened its brand positioning to shift consumers from cheaper black market and smuggled cigarettes to legitimate brands. NATF sales growth was a result of strong performance posted by its local segment (Recipe, Ketchup & Pickles) as well as currency devaluation impact of its international division A1 Cash & Carry.
• Pharmaceuticals sales growth was primarily supported by ABOT (+14%) and GSKCH (79%). ABOT sales were led by volumetric growth where Nutritional segment sales showed strong performance thanks to higher sales from child nutrition supplements. GSKCH on the other hand had phenomenal sales growth mainly due to its merger with GSK OTC (Pvt.) which added 41% to GSKCH’s total sales.
• Discretionary firms reported robust sales, led by INDU (+24%), PSMC (+18%) and THALL (+15%). This was on the back of volumetric growth and multiple price hikes during the year.
• Gross margins of staples, pharmaceuticals & discretionary firms in 2018 contracted by 152bps, 387bps and 311bps to 33%, 34% and 11%, respectively. Overall gross margins of consumer firms down 273bps to 23% in 2018. Higher input and energy costs owing to significant PKR devaluation of 20% in 2018 against the greenback, led to across the board contraction in gross margins of consumer firms, which were not fully passed on to consumers.
• Most notable decline in GP margins of staples was seen in PAKT (-4.7ppts to 44%), COLG (-3.6ppts to 33%) and NESTLE (3.4ppts to 33%). In pharmaceuticals space, GSKCH (-8.2ppts to 29%), ABOT (-5.8ppts to 33%) and AGP (-4.3ppts to 56%) reported steepest fall in GP margins. This was owing to higher imported raw material cost on the back of PKR devaluation against dollar and merger effect (GSKCH).
• PSMC and HCAR witnessed notable fall in GP margins within discretionary sector, down 360bps and 429bps to 6% and 8%, respectively, owing to PKR devaluation.
• While profitability of staples remained flat in 2018, pharmaceuticals and discretionary segments witnessed decline in profits by 12% and 16%, respectively.
• Among staples, NATF profits grew by an impressive 138% thanks to 66% higher sales and 64% increase in other income due to currency devaluation that positively impacted the result of its dollar linked International businesses and A1 Cash & Carry. Second best performer in staples was UPFL which recorded profitability growth of 28%, mainly due to higher sales (+11% YoY) and sustained gross margins at 45%.
• In pharmaceuticals space, both SEARL and ABOT posted double digit decline in profits (16% and 36%, respectively), mainly on the back of lower gross margins. Both companies under GlaxoSmithKline (GLAXO and GSKCH) reported growth in profits (7% and 52%, respectively). While GLAXO pretax profits were down 5%, net earnings posted growth due to lower effective tax rate, which fell 7.5ppts to 31% while GSKCH profitability growth of 52% was mainly supported by higher sales (merger effect with GSK OTC).
• PSMC and HCAR profits fell 66% and 44%, respectively, which led to decline in profitability of discretionary firms. PSMC had the worst year among automobiles as PSMC was the only car assembler that posted quarterly loss during 2018 (in Dec 2018 Qtr). Last time the company reported loss was in Dec 2012 Qtr.
• We remain cautious on consumer space as consumer profitability will remain under pressure in short to medium term on the back of inflationary pressure, currency devaluation, higher interest rates and weak macroeconomic variables.