Industry overview
The paper and packaging industry in Pakistan started with Adamjee Paper Board in 1956 when the first plant of the sector was set up. While Pakistan did not having a single paper manufacturing plant in the country at the time of independence, by 2001 the industry was catering to almost 80 percent of domestic demand.
Due to extremely low density of forests in Pakistan, there is difficulty in maintaining supply of wood pulp required for production of paper and paperboard. This is why Pakistan's paper industry uses mostly non-wood fibrous material such as wheat straw, baggase and river grass.
There are about 100 units in the formal and informal sectors combined, having a capacity of approximately 650,000 tons a day, as per the latest data available. Punjab has the most units since it has a relatively abundant supply of underground water as well as availability of the primary raw material, wheat straw.
On the paper side the industry is struggling due to the challenges faced because of China's enforced environmental regulation that has banned its import of waste paper while closing down units in the paper industry in China. This has caused international paper prices to become volatile and increased Pakistan's import of news print paper. As a result Pakistan Pulp Paper & Board Mills Association has made an appeal to the government recently to increase tariffs on imports as prices of final products have fallen to unprecedented levels. The packaging sector on the other hand is doing well with many companies undergoing expansion plans.
The paper and paperboard's contribution to the LSM is marginal at 2.3 percent; however the industry grew at the rate of 7.2 percent in the last fiscal year as per SBP's report. As the LSM grew by over 5 percent, it positively impacted the paper and paperboard industry, which supplies the packaging of products. Growth in the FMCG sector in particular positively impacts the paper and paperboard industry.
Financial overview
Merit Packaging's performance has improved in recent years as compared to the losses it sustained in from FY12 to FY14, peaking in FY13. The losses in FY13 were because of the abnormal operational breakdown of one of Merit Packaging's key machines, which hampered its ability to utilize its full production capacity. Another reason because of which its sales were at the lowest level in FY13 was because of long delays in payment against invoices by some customers, which compelled Merit Packaging to decline those customers' orders. Together these reasons led to volume erosion resulting in record losses in FY13.
In FY14, its sales increase and losses decreased. The company courted new reputed corporate sector customers to replace those with whom they had a history of payment issues. Furthermore, Merit packaging was able to increase its prices to adjust rising costs, which resulted in a higher turnover.
FY15 saw the highest revenue in Merit Packaging's history. Enhancement in production capacity and improvements in operational efficiency increased production whereas expansion of market shared in corporate sector organisations drove demand for company's products. Better product mix helped increased its profitability.
The trends of FY15 were unable to continue in FY16 because of a fired in the main production are of Gravure unit of the company that occurred in FY15. Building, fixtures, plant and machinery, equipment and inventory on the production floor were all damaged due to it. This and the impact of ageing offset printed machines decreased its top and bottom line in FY16, as compared to FY15.
In the last fiscal year, sales and profits rose again due to revamping of Gravure department and the addition of a manufacturing unit in Lahore as the company in an expansion process. Merit Packaging has been working towards enhancing operation efficiencies and curtailing costs, which is reflected in its improved profitability ratios.
1QFY18
The top line showed significant year-on-year growth because of the investments made in machinery. As the quality of Merit packaging's offerings increased due to the investment, so did the top line.
Similar to other companies in the industry, Merit Packaging is facing a significant increase in cost of inputs which is elevating its cost of production. Though the company is trying to pay on the costs to the customers, the stiff competition in the printing industry is putting pressure on its margins.
Future outlook
Despite trends in the paper sector, the packaging sector is flourishing. Through its Food Regulation 2017, the Punjab Food Authority has recently imposed an embargo on the sale of open-food products. Furthermore, the FMCG sector, a major driver of packaging demand, is seeing double digit growth. Increase in awareness of hygiene and urbanization all boost demand for packaging.
To cater to the expected increase in demand, Merit Packaging has taken CAPEX measures such as induction of machine. It is working towards ensuring an uninterrupted production of higher value added products, especially through its new operation facilities in Lahore whereas the Gravure facility has been revamped. Baring events such as the fire, these efforts should allow Merit Packaging to continue increasing its revenue and profitability.
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Pattern of shareholding (as at June 30, 2017)
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Categories of shareholders Shares held %
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Directors, CEO, and their spouse
and minor children 74,915 0.19
Associaated Companies, undertakins
and related parties 22,545,364 55.92
NIT and ICP 3,288,732 8.16
Banks and other financial institutions 385 0
Modarbas and Mutual Funds 1,673,157 4.15
General public
a. Local 10,931,758 27.12
b. Foreign - 0
Others 1,799,888 4.46
Shareholders holding 10%
Directors, CEO, and their
spouse and minor children
Siza (pvt) limited 3,907,159 10%
Siza Services (Pvt) Limited 5,560,819 14%
Siza Commodities (Pvt) Limited 4,529,488 11%
Premier Fashions (Pvt) Limited 8,545,602 21%
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Source: company accounts
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Merit Packaging
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Rs (mn) 1QFY18 1QFY17 YoY
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Sales 541 404 34%
Cost of sales 490 367 34%
Gross profit 52 37 41%
General and administrative expenses -12 -9 33%
Selling and distribution expenses -9 -7 29%
Other income 1.2 0.7 71%
Other operating expenses -0.8 -0.8 0%
Operating profit 31 21 48%
Financial charges -31 -20 55%
Profit before tax 0.49 0.65 -25%
Tax 0 0 N/A
Profit after tax 0.49 0.65 -25%
EPS 0.01 0.02 -50%
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Source: company accounts