National Foods Limited (PSX: NATF) is among the few companies in Pakistan that have brought a new concept in the food sector business. National Foods began its journey in 1970 as a spice company introduced the concept of having clean, healthy food, while at the same time reducing time spent in the kitchens. It came up with the revolutionary idea of pre-packaged spices and masalas mixes in the country. Today, it is a well-known name among Pakistanis and Pakistani expats alike. It has also created a space for itself on the spice racks of other Asians and non-Asians living abroad by expanding its global footprint.

Over the next 10 years, NATF went plant as well as product line expansion. In 1988, NATF, which was a private limited company up till then, became a public limited company. And over the next decade, National Foods added two more categories to its product portfolio, which included a varied range of jams and ketchup. In 2014, NATF opened its first foreign subsidiary, NF DMCC.

Moreover, in the same year, it took the lead and introduced system based controls for monitoring the presence of allergens in its products, which was a first in Pakistan.

Around 22 percent of the firm's shareholding is held by the directors and their spouses, while 33 percent is in control of Associate Textile Consultants (Private) Limited. The company also has a foreign holding of 15.5 percent, while the local general public has a share of a little over 28 percent.

Financial performance for FY16

Over the last six years, earnings of National Food have been solid. That should not be surprising because overall, the FMCG sector of Pakistan has witnessed an exceptional growth over the last half decade or so. However, this is more evident especially in the case of NATF, which has seen its turnover double during the last six years on the back of growing demand from both domestic and export market.

In FY16 NAFT's focus has been volume driven, and in order to do that it absorbed some of the key commodity price increases. Secondly, it has also reduced the prices of some of its products. This decision worked well and the company saw a robust growth in sales volume during the year. However, this policy of volume growth adversely affected the gross profit margin of the firm.

Firm's FY16 profits after tax reached 5.9 percent of net sales, which was 22 percent lower than FY15. This was mainly due to higher raw material costs and investments in the commercial structure made to support growth. The material costs increased year-on-year primarily driven by chilli, pepper, garlic and coriander that were negatively affected by weather conditions.

During FY16, the firm's performance was also impacted by changes in distributors - both in the local and international markets. During the year, the firm replaced one local regional distributor and two international due to their non-performance against the given targets.

In terms of exports, The Director's Report for FY16 highlights that National Foods faced some challenges, including distribution transitions in Afghanistan, political elements and currency devaluation in various markets including Australia, Canada and UK. However, with the corrective actions in place, the management expects that the next Fiscal Year (FY17) will be an important year for the growth in exports. Overall, the International Division made a contribution of 10.5 percent to the earnings after taxes. In FY16, the firm also launched its new Recipe and Rice variants.

National Food Limited has significantly invested in mutual funds and during FY16, the company received a healthy return on its investment, which has helped the firm boost its other income and improved operating margins. During the year, the firm's contribution to the national exchequer increased and the Company paid over Rs 3.124 billion versus Rs 2.428 billion in FY15 to the government.

1Q FY17 Performance

Riding into FY17 rather smoothly, National Foods continued to focus on volume driven sales growth; the three months of FY17 showed a seven percent increase year-on-year. Profits for the quarter too remained stable with a slight improvement of 2.7 percent year-on-year despite a decline in the gross profit margins due to the decrease in prices of certain products.

Outlook

National Foods Limited is the market leader in the spice sector with around 12 percent share in plain spices and 49 percent in recipe mix. Shan Food, which is not a publicly traded company, enjoys the second spot in both categories of spices. These are followed by smaller players like Mehran and Habib.

Moving on, the future prospects remain sanguine for the spice sector, and hence the market leader as the country sees a continued growth in food and related business. The demand is there, and it is expected to continue to climb with expanding middle class and their income levels. Also, the hard-hitting marketing campaigns and continued brand loyalty will create further openings for the company. National Foods is focusing on to become Rs 50 billion food company by the year 2020. it's necessary for the firm to focus on research and innovation as the competition is quickly catching up.