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Packages Limited

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05/10/2012
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Packages Limited
April 24, 2012 RECORDER REPORT 0 Comments

Packages Limited is an integrated packaging company, established in 1957 as a joint venture between the Ali Group of Pakistan and Akerlund & Rausing of Sweden. Incorporated in Pakistan, the company produces paper and paper-board products, provides customised packaging material for consumer goods industry, and produces consumer products like tissues, towels and napkins. In 1968, Packages established its first pulp and paper mill having capacity of 24,000 tons per annum, with IFC's participation. In 1981, the company modified its paper machine to produce tissues, and launched the "Rose Petal" brand. Later, it started producing toilet paper, kitchen roll and table napkins too. In 1986, Packages established a flexible packaging unit to meet the increasing demand of sophisticated packaging. In 1995, Tri-Pack Films Limited was established as a joint venture with Mitsubishi Corporation of Japan for the manufacture of Polypropylene films in NWFP. Packages also established Packages Lanka (Private) Limited in Sri Lanka which started manufacturing flexible packaging material in 1998. Packages launched the Bulleh Shah Paper Mill project in 2005 to expand the paper & paper-board capacity to 300,000 tons per annum. The project completed in 2009. In 2008, the company installed a new tissue paper manufacturing machine with a capacity of 31,000 tons. During CY11, capacity at its brown paper machine (PM-6) was expanded by 30,000 tons. Moreover, the upgradation of the Corrugator Machine at Kasur plant during the year increased its capacity by 14 percent. Packages has equity in many concerns, including its subsidiaries, DIC Pakistan Limited (54.98 percent) and Packages Lanka Limited (79.07 percent); its associated undertakings, IGI Insurance Limited (10.61 percent) and Tri-Pack Films Limited (33.33 percent); and other related parties, Tetra Pak Pakistan Limited (one million non-voting shares) and Nestle Pakistan Limited (8.04 percent). Revenue Generation The packaging giant enjoys both local and external sources of revenue; however it is largely dependent on domestic business. During CY11, the Company's net sales increased by 4.53 percent to Rs 19.375 billion, owing to 11.1 percent increase in local sales. The export sales, however, dropped by over one billion rupees to come down to Rs 214 million during the period. Compared to this, CY10 seems to be a rosy year when local sales grew by 30.57 percent and exports rose by 63.58 percent. The Company paid Rs 3.7 billion in sales tax and excise duties to the government in CY11. There are three major production divisions at the Company. The Packaging division achieved net sales of Rs 13.2 billion during the year, Consumer Products Division Rs 1.96 billion, and the rest was contributed by the Paper and Board Division. However, the external sales of paper and paper-board dropped by 39 percent over CY10 owing to the planned 1HCY11 shutdown of the brown paper machine (PM-6), energy shortages, boiler outages in 1HCY11, and dumping of imported writing & importing paper in the domestic market. It must be noted that in November last year, there was a fire incident at the Company's Lahore Plant, www.brecorder.com/company-news/235:pakistan/1181749:packages-limited/ 1/3

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which damaged stocks, tissue conversion equipment, and stores and associated buildings. The Company had to outsource its conversion operations to third part converters, but expects to resume commercial production of its consumer products during 2QCY12. Cost of sales According to Packages, raw materials account for approximately 75 percent of the total buying budget of the company. In the paper & paper-board segment, major raw materials used are wood pulp, wheat straw, waste paper and chemicals; whereas polyethylene, printing inks, packaging films (BOPP, polyester film, and PVC films) and solvents constitute major raw materials for the industrial packaging segment. The cost of sales rose by 7.11 percent during CY11, greater than the topline growth yet much less than the 29.15 percent growth in CY10 and 21.76 percent in CY09. The Company attributed the growth in cost to increased gas curtailment, electricity load shedding, higher usage of furnace oil, along with the rise in prices of imported wood pulp and local waste paper during 1HCY11. During CY11, the cost of sales as a percentage of gross sales increased to 82.21 percent compared to 81.24 percent in CY10. Other expenditures Expenditures on administration and selling & distribution activities have always been volatile for the packaging giant. During CY11, the administrative expenses grew by 21.33 percent, but the distribution costs came down by 2.76 percent. During the period, the 'other operating expenditures' decreased by 93.3 percent due negligible expenditures on workers welfare fund. The other operating income, however increased by 77.7 percent to Rs 359 million. During CY11, the Company charged impairment losses to the tune of Rs 391 million on investments. Previously, impairment charges worth Rs 1.794 billion were introduced in the profit & loss account in CY09 due to decline in value of shares of Nestle Pakistan Limited classified as available for sale investment. Finance Cost Finance costs for the company increased by a huge 34.38 percent, and consumed 7.04 percent of gross sales in CY11, compared to 5.54 percent in CY10 and 7.73 percent in CY09. Investment Income Investment income - which accounts for dividend income Packages receives from related parties and gains on sale of long-term and short-term investments - always provides a breather to the company's operating performance. The income increased by 4.31 percent to reach Rs 1.04 billion in CY11. Profit Margins The Company made a net loss of Rs 1.568 billion in CY11, making it the second successive loss year. The EPS was at negative Rs 18.58 for the shareholders. Revenue slippages along with rising operating and financial costs led to a severity in the extent of the loss. Liquidity The company's liquidity position had deteriorated during CY11. The current and quick ratios have dropped to a three year low. However, the operating cycle has improved to 80 days. Debt Management There's less debt accumulation in Packages' capital structure as the debt to equity ratio came down to 0.28 in CY11 from 0.3 in CY10. However, the company seems to be burdened by debt expenses as the interest coverage ratio has declined to 0.09 during CY11, in sharp contrast to 0.74 in CY10 and 5.55 in CY09. Future Outlook As the demand for packaged goods increases, the packaging firm would benefit. However, there are significant pressures from the consistent increases in energy costs as well prices of local and imported raw materials. Despite receiving gas supply guarantees from SNGPL, the Company faces gas load shedding just like other industries located in Punjab. To mitigate some of the challenges on the cost side, the Company is setting up its own waste paper collection operations, and is also considering alternative Agri-based fuels such as straw and corn stocks to reduce reliance on furnace oil, diesel and natural gas. The Company already has its own captive power plant with a capacity of about 40 megawatts but the cost of producing energy from this plant is high in the absence of natural gas supplies. On the revenue side, capturing the market of imported, high-quality paper products can be extremely rewarding for Packages. Moreover, international expansion plans in countries like Kenya, Ethiopia and Tanzania, which are still meeting most of their paper and paperboard requirements through imports, can help diversify the revenue streams away from the local market.

Econom ic Indicators

Market at Close

Annual
Foreign Debt Per Cap Income GDP Growth Av erage CPI

2011/12
$65.562bn $1,372 3.7% 10.08%

Monthly
Trade Balance Exports Imports

August
$-1.774 bln $1.911 bln $3.685 bln

Weekly
Reserv es

October 02, 2012
$14.841 bln

Top Traded
Symbol NML PACE KESC FCCL LPCL

Advancers
Price 61.40 3.49 5.70 6.46 5.92 Change 1.08 0.26 -0.75 0.06 0.12

Decliners
Volume 19,333,500 17,865,000 12,755,000 11,888,000 6,882,000

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