Engro Foods to invest Rs8.7b in expansion

Plan to introduce more products in its dairy segment.

KARACHI:

With prospects of becoming the largest revenue maker of the conglomerate, Engro Foods plans to invest Rs8.7 billion in expansion this year, company officials said in a corporate briefing.

Rs2 billion will be allocated for the powdered milk business, whereas the rest will be divided between cold chain infrastructure development, dairy capacity expansion and livestock acquisition, says a BMA Capital research note issued on Thursday.

Rs5 billion will be financed by loans Rs5.0billion and Rs3.7 billion through internal cash generation, adds the note.

This is the last of the expansions for the Engro Corporation’s subsidiary, as the company does not plan further equity injection for at least the next five years.

Dairy: massive untapped potential

Engro Foods emerged as a leader in ultra-high temperature milk market in 2010 and presently holds a 44% market share, thanks to 22% dairy volume growth to 388 million litres in 2011. The segment thus contributed over 90% to Engro Foods total revenues of Rs29.9 billion.

Tarang remains the highest revenue driver, estimated to have contributed over half of dairy segment’s profitability in 2011. Dairy segment has a net profit margin of 5%, however, due to losses from ice cream segment, overall net profit margin stood at 3% in 2011.

Total milk market (loose and branded), at annual 38 billion litres, still carries massive untapped potential for branded dairy players, who represent only 8% – 5% UHT and 3% powdered – of the total milk market, says the note.

Engro Foods thus plans to fully capitalise on this opportunity for growth by not only investing in its existing high performance brands Omang, Tarang, and Olpers, but by also introducing other products in its dairy segment. The management expects Omang to drive future growth for the company, since the product, priced at Rs65 per litre, is already at a discount to unpackaged milk in urban areas.

The management disclosed that they had anticipated around 15% sales cannibalisation of Olpers by Omang, but the actual cannibalisation was encouragingly much less.

Engro Foods is expected to witness a double-digit growth in both dairy and ice cream segments, further says the note. Since the previous analyst briefing, the stock has appreciated by hefty 69% and outperformed the broader index significantly by 58%.

Published in The Express Tribune, March 9^th, 2012.