Higher Than Expected Economic Recovery Will Improve Consumer Segment Sales

Topline Securities brokerage house released their ‘Consumer profits (ex discretionary) rise in Q2 2020 report on October 5, showing improvement in margins on a quarter over quarter basis.

According to the report, Pakistani consumer companies’ (Staples, Pharmaceuticals and Discretionary) have recorded a decline of 10 percent YoY in profits in Q2 2020 (vs. -7 percent YoY in Q1 2020). However, the profits (ex-discretionary) have increased by 33 percent YoY (vs. 8 percent YoY in Q1 2020).

Consumer Discretionary turned in losses in Q2 2020 vs. profits in the same period last year, while the profitability of Pharmaceuticals doubled (+103 percent YoY), followed by an increase in Consumer Staples (+21 percent YoY).

Continuation of countrywide lockdown, which started during the last week of Q1 2020 in the wake of COVID-19, resulted in lower sales of Consumer Discretionary (mainly autos) by 69 percent YoY. The sales of Staples and Pharmaceuticals remain stable -1 percent YoY and +1 percent YoY, respectively.

Discretionary firms decline in revenues by 69 percent YoY was due to slowdown in overall economic activity amid countrywide lockdowns. Car sales during Q2 2020 were down by 76 percent YoY.

Pharmaceuticals’ witnessed significant improvement in sales of nutrition supplements, while sales of other pharma medicines took a hit, as hospitals and OPDs were largely closed for non-COVID-19 related illnesses and patient visits. GSKCH (+22 percent YoY) and SEARL (+15 percent YoY) led sales increase.

A notable decline in sales within the staples segment was seen in BATA (-69 percent YoY) due to lower volumetric sales amidst closure of educational institutions and MUREB (-38 percent YoY) due to a decline in impulse buying during lockdown days. However, COLG and UPFL posted increases in revenues by 20 percent YoY and 18 percent YoY respectively, where higher revenues were a mixture of (1) increase in prices to pass on higher costs due to currency devaluation and (2) higher volumetric sales compared to last year.

Overall, the gross margins of consumer firms increased by 4.87ppts YoY to 25.5 percent in Q2 2020, as all companies have mostly passed on the impact of PKR deprecation along with high costs due to inflation. The gross margins of the staples business were up by 1.82ppts YoY to 30.6 percent. A notable increase in gross margins of staples was seen in PAEL (+11.8ppts YoY to 22 percent) and PMPK (+10.2ppts YoY to 47 percent).

Pharmaceuticals’ gross margins increased by 2.6ppts YoY to 33.3 percent amid price increase (linked to annual CPI), positive sales mix, and favorable exchange rate. GLAXO (+5.9ppts YoY to 23 percent), and ABOT (+5.6ppts YoY to 36 percent) reported a notable increase in gross margins. All companies in the Discretionary segment reported gross loss, with exception of Honda Car (HCAR), which reported a nominal gross profit.

To summarize the quarterly returns, the overall sales during Q2 2020 declined by 19 percent QoQ; again due to the decline in revenues of Consumer Discretionary (-59 percent QoQ) due to closure amidst country-wide lockdown.

Turnover of Pharmaceuticals’ was up by 2 percent QoQ, whereas sales of Consumer Staples remained stable. The overall gross margins were up by 2.9ppts QoQ.

Overall profitability was up by 4 percent QoQ led by Consumer Staples (+50 percent QoQ) and Pharmaceuticals (+35 percent QoQ) as the companies were able to pass on the impact of currency devaluation and inflation. However, Consumer Discretionary firms posted losses during Q2 2020 compared to profits in Q1 2020.

We believe that higher-than-expected economic recovery due to a sharp decline in COVID-19 cases will help improve the sales of the overall consumer segment with the Discretionary segment expected to record a sharp recovery. Furthermore, higher margins along with a decline in finance cost will keep the profitability of consumer companies on the higher side, the report said.

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