Karachi, January 17, 2022 (PPI-OT): Food sector stays neglected despite bottom-line expansion

After underperforming the benchmark index by ~6% in CY21 (-4% performance), the food sector currently trades at a trailing P/S and P/E of 1.6x and 21.3x, respectively; implying a nominal FMCG growth rate of 20% to the sector’s bottom-line reflects a forward P/E of ~18x.

In the trailing four quarters, the sector’s profits have jumped by 88% YoY on account of (1) 21% YoY higher sales and (2) improved operational efficiencies.

CY21: Lacklustre performance but improving profits

After underperforming the benchmark index by ~6% in CY21 (-4% performance), the food sector currently trades at a trailing P/S and P/E of 1.6x and 21.3x, respectively. This reflects that market participants are discounting sector’s potential growth implied by the forward P/E of ~18x based on FMCG sector’s bottom line growth rate of 20%. We believe the assumption of a ~20% YoY bottom-line expansion can be kept as base case given the ongoing growth trend in sales and intact margins briefed ahead.

Sales expand by more than 20% YoY

We review Food sector’s financial performance throughout and post pandemic phase with a sample size of eleven companies (refer table) as a proxy to the listed food sector. Given the spike in commodity prices, increase in consumption pattern and economic activity and higher inflation, the sector’s trailing annual top-line has expanded by more than 20% YoY. As the sector fell under the essential segments category, we highlight that the food sector remained operational and available throughout the lockdown quarters, eliminating any impact of a lower base as witnessed in other segments of the economy. Similarly, shift in preference of consuming packaged food/beverages during the pandemic may have played a part in lifting the volumetric growth.

Operational efficiencies boost profitability

The sector’s gross margins have been facing some pressures as food manufacturers have not been able to completely pass on the inflationary and commodity price impact of raw materials to the end-consumer. As a result, overall gross margins have declined from 25% to 22% in the recent times. Controlled selling and administrative expenses, however, have helped in sustaining the sector’s operating margins over the quarters in the vicinity of 10%-11%. Moreover, with improved interest coverage and relatively lower effective tax rate, the sector’s profitability during the same period has improved by 88% YoY.