LAHORE  -  Pakistan consumer companies (Staples & Discretionary) posted 16 percent YoY decline in profits, steepest in last five quarters, mainly due to poor performance of consumer staples. Staples profits fell 23 percent YoY in Sep 2018 Qtr (excluding PKGS). While overall sales grew by 4 percent YoY (staple sales flat) in Sep Qtr 2018, profits were down owing to contraction in gross margins which fell by 314bps YoY to 27 percent. Staples and discretionary GP margins fell by 259bps and 271bps to 34 percent and 15 percent, respectively.

Profitability of NESTLE in Sep Qtr was marred by contraction in gross margins, down 197bps YoY to 32 percent and higher financial charges, up 71 percent YoY. Former due to higher input & energy costs and increase in commodity prices while latter owing to uptick in interest rates (+275bps in 2018YTD), we believe.

PAKT on the other hand witnessed significant contraction in gross margins, down 595bps YoY to 49 percent during the outgoing quarter. This coupled with higher distribution expenses led to 22 percent decline in bottom-line. We attribute pressure on margins to higher input costs and recent hike in excise duty which also affected the company’s volumetric sales as the company had a portfolio wide increase in cigarette prices, thereby widening the price gap with cheap duty evaded cigarettes. To note, illicit sector market share stood at 33.2 percent as of Aug 2018.

In discretionary space, INDU reported profitability decline of 3 percent YoY mainly due to contraction in gross margins, down 297bps YoY to 14 percent. However, margins fared better than expectations despite significant PKR depreciation since Dec 2017 (28 percent) as the company was able to maintain its gross margins up until last quarter. While THALL on the other hand reported YoY profitability growth of 19 percent, mainly owing to 19 percent increase in revenues and almost stable margins.