Punjab Oil Mills Limited – BR Research
Punjab Oil Mills Limited (PSX: PMOL) was established as a limited company in 1981. It manufactures and sells ghee, cooking oil, specialty fats, laundry soap, mushrooms and coffee in its factory located in Islamabad.
As of June 30, 2021, more than 24% of the shares are held by the directors, the CEO, their spouses and their minor children. Of this total, the majority is held by Mr. Furqan Anwar Batla, a non-executive director. Almost 49 percent of the shares are owned by the local general public, followed by 10 percent in NIT & ICP. Another 8 percent of the shares are held in each of the following: modarabas and mutual funds, and associated companies, companies and related parties. The remaining shares, around 1%, are owned by joint-stock companies.
Historical operational performance
With the exception of three years i.e. FY15, FY16 and FY20, the company has seen growing revenue. Profit margins, by contrast, have followed a gradual downward trajectory.
After a two-year contract, revenue for fiscal 2017 increased by more than 5% due to improved prices and volumes. The latter came mainly from the cooking oils segment. But the price of raw materials has risen, leading the cost of production to consume a larger share of income to over 84 percent, up from nearly 81 percent in FY16. input cost could not be passed on to the consumer without losing market share. While other factors have remained more or less the same, the decrease in the net margin to 3.24%, from almost 5%, was not as significant due to the reduction in the tax burden.
FY18 sales grew 11.5%. This was mainly due to volume growth as prices changed only slightly. However, this did not translate into higher profitability as the cost of production increased, albeit marginally. Thus, was attributed to higher raw material costs as well as a higher contribution of low margin products in the total turnover. In addition, higher marketing expenses, coupled with an expansion of the sales force, increased distribution expenses. In addition, the tax burden was also higher year on year, therefore the net margin was reduced to 1.4% from 3.24% last year.
Revenue growth in fiscal 2019 was stable at 11%, with revenue exceeding Rs 5 billion. This has been attributed to an increase in volumes as well as the selling price. The cost of production remained close to 85 percent, keeping the gross margin more or less stable at around 15 percent. Distribution spend as a percentage of revenue has been reduced due to a conscious decision by the company to reduce ad spend. Thus, the net margin improved slightly to 1.9% for the year.
In FY20, revenues contracted 4.3% after increasing for three consecutive years. Sales in the first half of the year were affected by the refusal of wholesalers and distributors to come net of tax, while the second half of the year was affected by the Covid-19 pandemic which resulted in a drop in demand from the entertainment and restaurant industry. . With a marginal decrease in production costs, the gross margin improved slightly to almost 15%. However, the net margin was lower, albeit marginally at 1.6 percent, due to slight increases in overall operating and financial expenses.
In FY21, the company experienced the strongest revenue growth to date, at over 13%. This was mainly attributed to an increase in selling prices triggered by an increase in the international prices of edible oils. However, the increase in prices was not offset by the increase in the cost of inputs, therefore, the cost of production increased to consume more than 88 percent of the income. As a result, the gross margin fell to 11.7%. The increase in prices could not match the increase in costs due to competition and market trends. Along with other expenses incurred, the company suffered a loss of Rs 17 million for the first time.
Quarterly results and future outlook
FY22 first quarter revenue increased nearly 48% year-on-year. This has been attributed to volume growth alongside price growth. However, the similar trend of increasing input costs continued, as evidenced by the cost of production which absorbed almost 89% of revenues in 1QFY22, compared to nearly 83% in 1QFY21. Again, this could not be fully offset by a similar increase in the sale price. As a result, the gross margin was reduced to 11 percent, from 17 percent in the same period last year. This was reflected in the bottom line as well, but the reduction was somewhat limited by notable reductions in administrative and distribution expenses. As a result, the net margin was recorded at 1.5%, compared to almost 3% in 1QFY21.
The risk of future profitability persists as volatility in international oil prices persists, which will have a negative impact on input costs for the company.