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Initiated in Pakistan in 1964, Shezan International Limited (KSE: SHEZ) was at the start a joint venture between Shahnawaz Group and the Alliance Development Corporation of USA. Involved in the manufacturing, and selling of juices, pickles, jams and ketchup, the firm has been relentlessly expanding both into local and in international markets ever since.

Subsequently purchasing all shares of the company in 1971, Shahnawaz Group made it a public limited company and was registered on the Karachi and Lahore stock exchanges. The establishment has been gradually expanding its production capacity over the years. In 1980-81, a separate unit was installed in Karachi, which now caters for Karachi, Sindh and export demand.

A new bottle filling plant was also set up in 1983 in the Lahore unit, growing the capacity five folds. An independent tetra brick plant was specially made in 1987 making the unit leading manufacturers with a complete range of production in the fruit processing field in Pakistan. Shezan has a juice factory in Hatter, Khyber- Pakhtunkhwa and a bottle filling plant in Lahore, which has increased its productivity significantly. The firm's head office is in Lahore and has distribution offices in the United Kingdom and Canada.

Recent Financial performance: Over the last five fiscal years Shezan has given quite a mix performance for a company that is a part of FMCG sector. Even though, compared to much bigger counterparts in the sector Shezan has grown slowly but steady over the years. However, compare to previous years FY 14 was a good year in terms of top line and bottom line.

Due to a quantitative surge in export sales of juices in bottled as well as tetra packaging helped the company to fatten its top line by 19.1 percent year-on-year, increasing to Rs 6.76 billion as compared to Rs 5.7 billion in the corresponding period last year. Sales for condiments (which include jams and jellies etc) stayed range bound. Likewise, their production facility at Karachi remained constant to meet the export requirements in Middle East, Africa, USA and Europe.

In FY14, the energy crisis was creating major issues for every industry in Punjab and Shezan was not different. The company was unremittingly dependent on furnace oil to run its boilers in the non-existence of gas. Similarly, diesel was used to run the generators. All these issues created the higher cost of production. Despite the fact that cost of sales increased by 19.5 percent year-on-year but the gross profits for SHEZ have improved in FY14.

Shezan reported the profit after tax Rs 259 million as against Rs 249 million of the former period due to a striking top line. But, the company has witnessed the distribution cost increased by 22 percent in terms of net sale. The rise in distribution cost primarily came on account of advertisement and sales promotion expenditure made to give a better promotional activity in the midst of the rigid competition amongst local and foreign packaged food brands in the market. The finance cost during the year came down quite significantly due to efficient use of borrowed capital. In any case, FY14 was a good year for the jam maker.

In an attempt to deal with tough competition threats, the company is trying to get its feet wet in the export market. From an export of Rs 267 million in FY12 - that made up only 4 percent of its total sales - the firm's exports grew to Rs 570 million in FY13 and Rs 946 million - or 11 percent of total top line - in FY14.

Shezan and 9MFY15:It was clear right from the second quarter of FY15 that Shezan is showing a mediocre performance in the financial year 2015. The company has witnessed tremendous competition from other producers like Mitchell's and Nestle. Shezan's nine-month sales tally came to Rs 4.421 billion as against Rs 4.463 billion of the corresponding period of 2014. Shizan has shown a 4 percent decline in its juices and drinks section that is significant because juices and drinks are its core business. Mostly this decline came from bottled juice drinks, and there is a 17 percent year-on-year sale increase in the sale of its other products.

Shezan's gross profits too have seen better days but in the nine-month period it eased by 100 bps points year-on-year to 28 percent. The company similar to previous years blame it largely on the energy crisis for the decrease in its gross profit. The gross margins of juice and drinks segment fell to 30 percent during the nine months in 2015 from 31 percent in the corresponding period last year.

In contrast, the other business segment that makes products likes pickles, ketchup, sauces, jams, squashes and syrups saw gross margins grow to 21 percent in 9MFY15 from 17 percent in 9MFY14. It is an interesting phenomenon for Shezan. However, juices and drinks form the bulk of the top line, the drop in margins in that segment weighed down overall profitability as a result of which the gross profit was down by nearly 4 percent.

Down towards the bottom line, the company didn't fare any better. The stiff competition in juices made Shezan spend heavily on distribution and promotion expense, but they have declined 100 bps in terms of top line during the period. On the other hand, Shezan's finance cost has increased quite high but it is mainly because of investment in inventories like pulps, glass bottles and tetra packaging material.

There is no discloser of export sales number in the document, but its directors say that the firm's juice products are showing encouraging export trends. Nevertheless, company's bottom line has decreased by almost 15 percent, and that is quite a lot. However, the directors have acknowledged the issue and accepted that there is a stiff competition in the juice and beverage sector in the local market. They have mentioned that the company has been innovating its products and establishing strong distribution channels to survive this tough competition.

Future outlook: Although, Shezan is a well-established brand and at the same time has an adamant footage on the ground, but the company has to face giant like Nestle to compete in the juice sector. Even though, there is domestic pressure but the exports are growing for Shezan rather quickly. There is certainly a case for Shezan to start focusing on its ketchup and sauces sector. The company needs to take advantage of growing urbanisation of the country and should draw a plan to tap into this growing sector.





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Shezan International

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Rs (000) 9MFY15 9MFY14 Chg

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Sales 4,421 4,463 -0.9%

Cost of sales 3174 3,166 0.3%

Gross profit 1248 1,298 -3.9%

Gross margin 28% 29% Down

100 bps

Admin expense 151 154 -1.8%

Distribution cost 787 802 -1.8%

Other operating expenses 111 102 8.8%

Other income 41 33 24.2%

Operating Profit 240 271 -11.6%

Operating profit margin 5% 6% Down

100 bps

Finance cost 46 20 130.0%

Proft before tax 194 251 -22.9%

Taxation 58 92 -37.0%

Proft after tax 136 159 -14.4%

Net Profit margin 3% 4% Down

100 bps

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Source: Company accounts

Copyright Business Recorder, 2015


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