The leading corn refiner of Pakistan, Rafhan Maize Products Company Limited (PSX: RMPL) is the premier provider of agricultural-based products and ingredients in Pakistan. The company has a market cap of over Rs55.4 billion.
Rafhan Maize is an affiliate of Ingredion Incorporated, a US-based corn-refiner with commercial and manufacturing operations in more than sixty countries. It has three manufacturing locations: Faisalabad, and Jaranwala (Punjab), and Kotri, Jamshoro (Sindh).
The company processes thousands of tons of maize each year to produce food and industrial products Installed production capacity stands at 1,850 metric tons grinding per day, with utilization level averaging over 90 percent in recent years.
Although it falls under the category of food producer, Rafhan Maize produces a variety of starches and sweeteners that have applications in over 60 different types of industries, including textile, confectionery and bakery, paper and corrugation, food and beverages, pharmaceutical and chemical, poultry, livestock, aquaculture, and edible oils. These products use maize as basic raw material and are used to produce industrial starches, liquid glucose, dextrose, dextrin, and gluten meals.
The plant in Jaranwala processes manufactures dextrose and has a production capacity of fifty tons per day; whereas Faisalabad and Jamshoro plant both process maize into starches.
Pattern of shareholding
Pattern of shareholding indicates that majority share - over 71 percent belongs to holding company - the corn-refining multinational and Rafhan's parent concern, Ingredion Incorporated, USA.
Ingredion Incorporated (formerly Corn Products International, Inc) is an ingredient provider based in Westchester, state of Illinois. The company processes corn, tapioca, potatoes, and other vegetables and fruits into ingredients for the food, beverage, brewing, and pharmaceutical industries and numerous industrial sectors. It has more than 11,000 employees around the world in 44 locations, and customers in more than 60 markets. In 2018, net sales were $5.8 billion. The subsidiary in Pakistan contributes less than three percent to revenue on average of the global giant.
Past five-year performance
Between CY12 and CY17, the company posted stagnating top line, growing at a CAGR of less than two percent. As textile sector is the largest consuming segment of the company's industrial-grade starches, continuous slide in textile exports during that period adversely affected sale volumes. However, sales to other consuming segments such as confectionary, paper & corrugation and pharmaceutical kept the top line from sliding.
Profitability margins continued to improve during this period, led by cost-saving initiatives, such as improved energy mix from installation of 12MW coal-fired co-gen plant help optimized operational efficiencies. Moreover, improved acreage under corn, company's primary raw material ensured that corn prices remained stable, allowing company to expand contribution margin by more than 10 percentage points between CY13 and CY17. Note that corn accounts for close to seventy percent of cost of goods sold, with fuel and power taking up another 18 percent.
In addition, the company invested in capacity expansion back in CY12, with grinding capacity increasing by 15 percent. The company invested in enhancing its production capacity in 2013; however, due to declining demand from textile, capacity remained under-utilized even on pre-expansion levels, averaging at ninety percent.
The cost of the main raw material, corn, remained steady between 2014-17, while production has improved substantially (barring a decline in corn production during 2014 due to floods in Punjab). This explains the record-breaking growth in profitability margins, despite stagnant sales.
Despite the myriad products and industries, it caters to; Rafhan does not have separate operating segments reporting. This makes it difficult to pinpoint which products contribute higher value to margins.
As for exports, a recurring theme in the company's annual reports has been the mention of pursuing new growth opportunities in export markets. Between CY12 and CY13, exports grew in value by over two times, but since then have remained stagnant until CY17. This end and to its credit, Rafhan Maize has nearly doubled its exports from CY12 to CY17. However, as a percentage of sales, exports remain negligible at average five percent of gross revenue.
Financial performance CY18
Top line recorded dramatic double-digit growth after a five-year hiatus, nearing Rs30 billion for the first time in company's history. However, seven percent decline in maize acreage during 2017 kharif season (whole full effect reflected itself as cost for CY18 company financials) pushed raw material prices to a higher end, restricting margin growth despite substantial top line jump.
As a result, 84 bps were shaved off the contribution margin, which was partly offset by improved control on overheads such as salaries and amenities expenses. Additional boost received from mark-up on staff loans/bank deposits and foreign exchange movement gain on export proceeds realization was nearly not enough to restrict annual growth in WWF and WPPF contributions, which ensured that loss at EBIT and EBITDA margin levels remained in line with gross margin reduction.
Nevertheless, negligible short term borrowing and non-existent long term liabilities meant that the company remained fully insulated margin attrition on PBT level due to higher borrowing cost witnessed by real sector of the economy over the past 18 months, which has pushed borrowing cost by almost seven percentage points on average for most obligors in the productive segment of the economy.
Interim performance and full year outlook CY19
The renewed push on export-oriented textile sector by the new government in Islamabad has allowed the company to expand sales, with top line growth for 1HCY19 recording a quantum jump of 21 percent, primarily from sale of industrial-grade starches.
On the raw material front, maize production noted a rebound during 2018 kharif (with full effect to reflect in CY19 financials) as farmers' jettisoned cotton for higher returns on maize. However, cotton sowing has seemed to gain momentum on the back of onslaught of news from governments in Islamabad and Lahore calling for increase in cotton acreage. This began to reflect itself early on in maize prices, as traders feared that the crop will lose bonus acres gained in southern Punjab back to cotton. With cotton sowing target of over 2.9 million hectares for the ongoing kharif season, it appears that maize production is likely to suffer, which kept raw material prices on the higher side despite improved availability.
Moreover, competing demands for maize from other segments such as poultry indicates that Pakistan's maize demand/consumption by domestic economy is projected to soon outstrip domestic production by a wide margin. While industrial consumers such as Rafhan are better placed to pay higher margin to procure high quality crop, increased prices are bound to effect margins, which has already begun to reflect itself in 1HCY19 financial performance. It is no wonder than the company recorded a whopping 320bps decline on contribution level, which failed to salvage itself on EBIT and PBT levels despite efficient management of overheads.
Pattern of Shareholding (as on December 31, 2018)
Categories of Shareholders %
Ingredion Incorporated, USA 71.04%
Directors, spouses, & their dependents
Zulfikar Mannoo 2.58%
Wisal A. Mannoo 1.93%
Mian Adil Mannoo 1.89%
Sarwat Zulfikar 0.10%
Insurance companies 1.39%
Public sector corporations 0.63%
Banks, DFIs, Mudarbas, Pension Funds 0.18%
General Public-local 20.04%
Source: Annual Report, 2018
Rafhan Maize Products Company Limited
Rs (mn) CY18 CY17 YoY
Sales 29,564 26,018 14%
Cost of Sales (21,375) (18,593) 15%
Gross profit 8,189 7,425 10%
Administrative expenses (467) (488) -4%
Distribution costs (694) (639) 9%
Profit/(Loss) from core operations 7,028 6,299 12%
Other income 255 193 32%
Other expenses (472) (426) 11%
Earnings before interest & taxes 6,811 6,067 12%
Finance cost (26) (16) 65%
Profit before tax 6,785 6,051 12%
Taxation (2,014) (1,659) 21%
Net profit for the period 4,772 4,392 9%
Earnings per share (Rs) 516.62 475.54
GP margin 27.70% 28.54% -84 bps
Operating margin 23.77% 24.21% -44 bps
EBIT margin 23.04% 23.32% -28 bps
PBT margin 22.95% 23.26% -31 bps
PAT margin 16.14% 16.88% -74 bps
Source: Audited accounts
Rafhan Maize Products Company Limited
Rs (mn) 1HCY19 1HCY18 YoY
Sales 17,317 14,271 21%
Cost of Sales (13,394) (10,579) 27%
Gross profit 3,923 3,691 6%
Administrative expenses (286) (228) 25%
Distribution costs (425) (355) 20%
Profit/(Loss) from core operations 3,213 3,108 3%
Other income 225 119 89%
Other expenses (226) (208) 9%
Earnings before interest & taxes 3,212 3,019 6%
Finance cost (10) (8) 26%
Profit before tax 3,201 3,010 6%
Taxation (855) (878) -3%
Net profit for the period 2,347 2,133 10%
Earnings per share (Rs) 254.08 230.89
GP margin 22.65% 25.87% -321 bps
Operating margin 18.55% 21.78% -322 bps
EBIT margin 18.55% 21.15% -261 bps
PBT margin 18.49% 21.10% -261 bps
PAT margin 13.55% 14.94% -139 bps
Source: Company accounts