Saifullah Sani
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Engro Foods the ‘Dairy’ of Omung in the limelight
In an unwelcome twist for the company, last week Punjab Food Authority (PFA) reportedly seized Engro Foods (EFOODS) ‘Dairy Omung’ product, on the basis that it does not fulfill the Punjab Pure Food Rules 2011.
The company has rapidly taken a stay order against the PFA from the Lahore High Court. Note that EFOODS markets the product as a ‘UHT dairy liquid’ and Punjab Food Rules 2011 do not have any classification and/or defined standards for the product.
While it is still too early to gauge whether the event will damage product sales/demand, our back of the envelope sensitivity analysis suggests that every 10% slide in Omung sales volume would trim EFOODS EPS by ~Rs0.06 (2.4% EPS impact in 2014E).
Separately, EFOODS has entered the retail dairy market via loose milk pilot project under the name of ‘Mabrook’. Given that the loose milk segment is known for water addition into milk to shore up margins, we believe the company may face a tough competition in that segment.
We reiterate our ‘Sell’ recommendation on EFOODS with a target price of Rs76, where we believe recent slowdown in growth trajectory and a murky margin/volume recovery outlook will limit meaningful returns.
PFA challenges ‘Dairy Omung’ classification
Engro Food’s (EFOODS) cash cow ‘Dairy Omung’ has hit the news lately due to product categorization issue. Reportedly, the Punjab Food Authority (PFA) seized the company’s Dairy Omung product on the grounds that it does not fulfill the Punjab Pure Food Rules 2011. Note meanwhile that EFOODS markets the product as a ‘UHT dairy liquid’ not ‘UHT milk’. As the Punjab Food Rules 2011 do not have any classification and/or defined standards for the product, the PFA required EFOODS to classify ‘Dairy Omung’ as either UHT milk or tea whitener. The seizure took place last week but within 2-3 days, the company got the matter under control as it rapidly took a stay order against PFA from the Lahore High Court.
EFOODS appears un-worried about the issue
Our discussion with EFOODS management suggests that the company is not unduly concerned about the issue. As against first rumors at the KSE that ‘Dairy Omung’ was benchmarked as substandard, EFOODS sees the event primarily as a classification issue that needs to be addressed by PFA. We believe EFOODS rapid damage control policy has also played out well where the issue has not gotten much print space in the media either.
On the other hand, we flag that if the question on Omung’s legitimacy as a substitute for milk lingers, the same may hurt consumer sentiment towards the product and Omung sales. Risk of the same comes at a bad time for the company where in 9M2013, EFOODS has found it difficult to sustain growth due to deterioration in margins and softening volumes.
Engro Foods the ‘Dairy’ of Omung in the limelight – JSGCL Research - Investor Guide Pakistan
In an unwelcome twist for the company, last week Punjab Food Authority (PFA) reportedly seized Engro Foods (EFOODS) ‘Dairy Omung’ product, on the basis that it does not fulfill the Punjab Pure Food Rules 2011.
The company has rapidly taken a stay order against the PFA from the Lahore High Court. Note that EFOODS markets the product as a ‘UHT dairy liquid’ and Punjab Food Rules 2011 do not have any classification and/or defined standards for the product.
While it is still too early to gauge whether the event will damage product sales/demand, our back of the envelope sensitivity analysis suggests that every 10% slide in Omung sales volume would trim EFOODS EPS by ~Rs0.06 (2.4% EPS impact in 2014E).
Separately, EFOODS has entered the retail dairy market via loose milk pilot project under the name of ‘Mabrook’. Given that the loose milk segment is known for water addition into milk to shore up margins, we believe the company may face a tough competition in that segment.
We reiterate our ‘Sell’ recommendation on EFOODS with a target price of Rs76, where we believe recent slowdown in growth trajectory and a murky margin/volume recovery outlook will limit meaningful returns.
PFA challenges ‘Dairy Omung’ classification
Engro Food’s (EFOODS) cash cow ‘Dairy Omung’ has hit the news lately due to product categorization issue. Reportedly, the Punjab Food Authority (PFA) seized the company’s Dairy Omung product on the grounds that it does not fulfill the Punjab Pure Food Rules 2011. Note meanwhile that EFOODS markets the product as a ‘UHT dairy liquid’ not ‘UHT milk’. As the Punjab Food Rules 2011 do not have any classification and/or defined standards for the product, the PFA required EFOODS to classify ‘Dairy Omung’ as either UHT milk or tea whitener. The seizure took place last week but within 2-3 days, the company got the matter under control as it rapidly took a stay order against PFA from the Lahore High Court.
EFOODS appears un-worried about the issue
Our discussion with EFOODS management suggests that the company is not unduly concerned about the issue. As against first rumors at the KSE that ‘Dairy Omung’ was benchmarked as substandard, EFOODS sees the event primarily as a classification issue that needs to be addressed by PFA. We believe EFOODS rapid damage control policy has also played out well where the issue has not gotten much print space in the media either.
On the other hand, we flag that if the question on Omung’s legitimacy as a substitute for milk lingers, the same may hurt consumer sentiment towards the product and Omung sales. Risk of the same comes at a bad time for the company where in 9M2013, EFOODS has found it difficult to sustain growth due to deterioration in margins and softening volumes.
Engro Foods the ‘Dairy’ of Omung in the limelight – JSGCL Research - Investor Guide Pakistan
