Pakistan's consumer sector earnings dip 26% in 2019

Decline comes on back of overall slowdown in economy

KARACHI: Pakistan’s consumer sector saw a decline of 26% in 2019 compared to the previous year due to an overall slowdown in the economy.

Companies from “staple”, pharmaceutical and “discretionary” sectors all showed a decline, led by the consumer discretionary sector, which witnessed a fall in earnings of 48% in the period under review.

Meanwhile, staple and pharmaceutical companies’ profits were down 13% each during the period.

Discretionary companies are those that are impacted by economic cycles more than others as consumers stop buying from them to meet their other basic needs first.

The overall slowdown in economic activity took its toll on consumers’ purchasing power as sales of companies such as Indus Motor, Thal Limited and Honda Atlas Cars declined by 23% in 2019. This sector’s five-year compound annual growth rate (CAGR) was 3%.

On the other hand, turnover for the other two segments - staple and pharmaceutical - registered a year-on-year uptick of 7% each, while the two had five-year CAGR of 8% and 16% respectively, according to a report compiled by Topline Securities. Overall, gross margins of consumer firms came down by 0.7% point to 23.9% in 2019 as companies were unable to fully pass on the impact of higher costs due to rupee devaluation, said Topline Securities’ analyst Sunny Kumar.

The increase in sales within the staple segment was largely broad-based, where higher revenues were largely driven by increase in prices to pass on higher costs due to currency devaluation, while in some cases volumes also declined compared to last year, he said.

Gross margins of staple businesses shrank by 1.4 percentage points to 28.4% as the companies were unable to fully pass on the impact of higher costs (including higher taxes) and also due to loss of operational efficiencies, said the analyst.

Pharmaceuticals’ sales growth came in at 7% in 2019, where the improvement in revenues stemmed from a combination of price increase and higher volumes.

However, gross margins in the segment declined by 2.4 percentage points to 31.2% as the price increase on the basis of recent rise in costs linked to the annual Consumer Price Index (CPI) will be applicable from July 1, 2020.

Discretionary firms reported a significant decline in sales of 23% year-on-year as the purchasing power of consumers took a major hit due to slowdown in overall economic activity. The decline was in spite of multiple price hikes as volumes during the period recorded a contraction of over 25% year-on-year.

Gross margins for this segment also fell by 2.73 percentage points to 10.1%.

On an upbeat note, sales in the fourth quarter of 2019 recorded an improvement of 8% against the previous quarter, where revenues of staple and pharmaceutical companies increased by 9% and 17% respectively.

“We largely believe sales have bottomed out in the third quarter of 2019, however, the impact of coronavirus can affect their sales and costs due to supply chain disruptions, if the country move towards a complete lockdown to contain the virus,” said Kumar.

Published in The Express Tribune, March 19^th, 2020.

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