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Sirjee

In: Business and Management

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Unilever Pakistan Limited, formerly known as Lever Brothers Pakistan Limited is a wholly-owned subsidiary of Unilever Overseas Holdings Limited, UK, whereas its ultimate parent company is the consumer products giant, Unilever PLC, UK.

Following a series of high-profile acquisitions, including US-based Bestfoods, Unilever's foods business is the world's third largest after Nestle and Kraft. It is a global leader in culinary foods, ice cream, margarine and tea-based beverages. Major brands include Knorr, Lipton and Magnum.

Unilever was incorporated in Pakistan in 1948 as Lever Brothers Pakistan Limited and merged with Lipton in 1989 and Brooke Bond in 1997. It became the largest ice cream manufacturers in Pakistan through an amalgamation with Polka in May 1999. These acquisitions have further strengthened the distribution network of Unilever. It is listed on all the three stock exchanges of Pakistan.

Currently, the company is the largest fast moving consumer products (FMCG) company in Pakistan. It is engaged in manufacture and marketing of home and personal care products, beverages, ice cream and spreads.

Unilever has adapted Unilever global brands such as Lifebuoy, Lux, Surf and Walls to local consumer needs at affordable prices. It has increased its leading market position over the years in most of its core home and personal care and food categories, eg personal wash, personal care, laundry, beverages (tea) and ice cream.

Unilever Pakistan has been exporting a range of products catering to the "external constituency", for the last forty years. Since 1998, Unilever has been entrusted with the responsibility of developing the Afghanistan business through a dedicated sales and distribution network. A wide range of home care, personal care, foods, ice cream and beverage brands are offered for export.

In June 07, Unilever Overseas Holding Limited, a wholly owned subsidiary of Unilever PLC, UK, the ultimate parent company, purchased all the shares held by the government of Punjab. This has increased Unilever's shareholding in the company from 67.04% to 70.4%.

Segments at a glance (FY07)

UNILEVER COMPRISES OF 4 SEGMENTS:

-- Home and personal care - represents laundry and a wide range of cleaning, skin care, hair care and oral care products

-- Beverages - represents tea

-- Ice cream - represents ice cream

-- Other - represents margarine

HOME AND PERSONAL CARE It continues to be the major driver behind the top and bottom line growth. In FY07, sales of this high margin segment increased by 26% (13% from volumetric growth and remaining via price increase), thereby increasing its contribution to the top line to around 52% from 47% last year. Unilever maintains its market leadership in laundry detergent powders, hair and personal wash categories. The star performers were Surf detergent powder, Sunsilk shampoo & Lux beauty soap. Sales of newly introduced Clear shampoo were also in line with forecast. Despite this impressive turnover, the unprecedented rise in palm oil, tallow prices and other materials resulted in decline of margins.

BEVERAGES Gross sales for FY07 were down 3% due to lower selling prices and volume loss to small local brands in rural areas that are using cheap smuggled tea. Lower tealeaf costs resulted in consumer price reduction by 5%. Following the normalisation of very high tea prices arising from severe drought conditions in 2006 in Kenya, normal gross margins have been restored. Lipton Yellow Label continues to grow, amidst cutthroat competition in a mature tea market, due to various promotional campaigns and trade offers.

ICE CREAM AND SPREADS Gross sales for Walls in FY07 increased by 9%, well below expectations. In FY07, the monsoon was earlier and more severe, there were acute power shortages in the south and there were delays in completing the factory expansion project, resulting in serious supply disruption in Q2'07. This damaged the ice cream sales, which were countered by leasing cold storage facilities in Karachi and Lahore. Hence higher distribution and additional factory costs resulted in lower profits and eroded the gross margin.

On spreads side, Blue Band Margarine registered a 23% sales growth due to successful brand activation programmes. However, the overall margins remained flat at 40%.

FINANCIAL PERFORMANCE (DEC03-DEC07) Overall, the sales grew by an impressive 11.17% (2006: 18.77%) as it built on the growth momentum started in 2005 with a 3-year CAGR of 9%. Sharper focus and increased resource allocation in marketing and customer management were the prime drivers. The sales mix improved with robust growth in home and personal care. The sales of beverages declined due to lower market selling prices and lower volumes. Ice cream performance was flat due to an unfavourable business environment.

However, this overall sales growth did not trickle down to the bottom line mainly due to cost pressures, high distribution expenses and restructuring costs, thereby eroding the operating and net profit margins respectively. Despite high COGS, overall gross margins improved slightly in FY07 on the back of double-digit growth in HPC segment, which contributed 60% to the gross profit. ROA showed a decline due to a higher increase in assets base due to expansion in the ice-cream business along with declining profits. Similarly, ROE showed a negative trend on account of declining profit after tax.

The overall PAT in FY07 increased by a meagre 2%, lagging the robust bottom-line growth. This was due to the volume decline in tea business along with lower ice cream sales for reasons mentioned above. All the liquidity ratios have posted a declining trend over the 5-year period. The current ratio has decreased from 1.04 in 2003 to 0.73 in 2007. This shows that company's current liabilities (mainly the short term borrowings) are rising far more than its current assets, reflecting a decline in company's ability to pay off its short-term obligations. Quick ratio, a better measure of liquidity followed a trend similar to current ratios, first increasing slightly in 2004 and then declining onwards.

Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO though, has declined during 2004, but has been on a slight rise then onwards. The slight increase is indicative of Unilever's declining operational efficiency with growth in net sales lagging behind the growth in inventory kept by the company. Reasonable ITO shows that Unilever is able to efficiently turn its inventory into sales.

Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid the risks of bad debts. The trend line indicates a sharp decline in this ratio in 2004 after which it has been on a constant rise (slightly) due to a growth in net sales lagging behind that in trade debts (37% in FY07) indicating that perhaps the company is deliberately pursuing easy credit policy to attract large number of creditors. However, its DSO is still very negligible compared to ITO. The operating cycle of Unilever hence followed the same trend as that of ITO in the respective years. Initially it was much higher than the industry average but later it started declining to converge with the industry trend.

TATO has remained flat at 3 over the period under review, reflecting that the company is anticipating any increase in its sales and responding to it in a timely fashion by enhancing its assets base accordingly. The sales/equity on the other hand shows a rising trend after 2004 on account of declining equity base in subsequent years. Also, sales in FY07 have registered a positive growth which explains the rise in that year.

As far as debt management is concerned, both D/A and D/E ratios after 2004 (the decline in 2004 is because the Unilever retired significant amounts of debt in that year) show Unilever's increased reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.63 to 0.75) ratio has remained almost stable over the years while D/E ratio has increased significantly (1.8 to 3.08) owing to increasing long term debts (as further evident by the long term debt to equity ratio) to finance the expansion, coupled with the declining equity base in the subsequent years.

The TIE ratio has increased in 2004 but again nose-dived in 2005 due to high interest rates offsetting the increase in EBIT, thus having an adverse impact on Unilever's interest covering ability. Even though this ability increased in 2006 (owing to comparatively lower finance costs), a massive surge in finance costs (70.64%) vis-à-vis a 3% increase in EBIT, was responsible for a plunge in FY07 TIE ratio. Looking at this, we can that infer that Unilever's is being adversely affected due to higher markups in high interest rate regime.

The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). Unilever's EPS has been erratic (fluctuating between 120 and 130) driven mainly by any changes in company's profit after tax (as its number of shares have been constant so far in last 5 years).

The year-end market prices of the company have been increasing over the 5-year period. Consequently, the P/E ratio also followed a rising trend driven by the increases in market price of shares, reflecting the investor's confidence in Unilever. As evident from the price chart, Unilever has outperformed the 100 index in all years under consideration.

Initially, its book value per share was very high, however, in 2004 onwards its book value per share plummeted on account of declining equity base (due to decline in reserves) but it again surged in FY07 on the back of higher reserves, compared to no change in the number of shares outstanding.

Also, the company's DPS followed the same trend as that of book value per share till 2005. However, unlike book value per share, it showed a slight increase in FY06. The company has followed the policy of maximum DPO averaging 100% and the dividend yield has been constant at 5-6% over the last 5 years. Despite a decline in real payout (with inflation growth surpassing the dividend growth), the major beneficiary of this nominal growth is Unilever's associated undertaking (Unilever Overseas Holdings Ltd). Overall, both DPS and BPS of Unilever are greater than the average industry showing that the good return to shareholders is the primary objective of Unilever.

FUTURE OUTLOOK The Pakistan market has become very lucrative for fast moving consumer goods (FMCG) businesses and to new entrants, both local and international players, in the wholesale and retail industry due to sustained economic growth, rising rural incomes and changing lifestyles. On the flip side, the market environment remains very competitive and Unilever continues to invest heavily behind its growing brands. Restoring beverage margins and returning Brooke Bond Supreme to growth is of key importance in FY08. Recent announcements by the Engro and the Dawn Bread to enter the ice cream and spreads business also pose serious rivalry for Unilever in these segments.

Unilever is concerned about the increasing volume of smuggled teas, rapidly rising input costs driven by high international oil costs and the impact on profit from the recently imposed tax on turnover. Social disruptions also make markets nervous, disrupt the trade and shakes local consumer and international confidence.

Keeping in view, Unilever's strong competitive edge of continuous innovation, global and local scale delivering cost advantages and deep local roots, one hopes that it will be able to face these challenges.…...

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