BMACapitalManagementLtd.801Unitower,I.I.

ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.

1
InvestmentThesis
Depressing2013E earnings (down 51%YoY) has brought the companysgrowth story
to an abrupt halt. Distribution issues and the companys inability to pass on cost
pressuresduetoincreasedcompetitioninthedairysegmenthasgreatlyundermined
thecompanysrevenues(down8%YoY)andhassqueezedmarginsterriblytoaverage
at21%for2013Efrom26%in2012
Thedairysegmenthasbeenthecompanysfocalpointandrevenuedriver,followed
bytheicecreamsegment.WehavetakenEfoodsshareintheUHTsegmentat51%in
the model in 2014. However, given the companys strong brand name, any
improvementinthemarketsharewillbenotverysurprisingandwillresultantlylead
toanupwardrevisioninourestimates
We anticipate the market growth in the icecream segment to remain subdued on
account of the ongoing power crisis and lack of cold chain infrastructure. Thus, the
company has shifted its focus towards taking away market shares form the existing
industry by frequently introducing new products. Thus, we have modeled in 27%
marketshareforOmorebyCY15
TP downgraded to PKR80/sh: We have used a blend of the following valuation
techniques: DCF, regional PE/PS comparison to calculate our TP. For DCF based
technique,wehaveusedriskfreerateofPKR12.5%(latest10yrPIBauctionrate),a
terminalgrowthrateof4%andbetaof1.28
FinancialHighlighs

EngroFoods
Notforthefainthearted!
WednesdayNovember6,2013
2012A 2013E 2014F 2015F
Sales 40,169 37,099 41,127 45,132
GrossProfit 10,321 8,282 9,280 10,192
OperatingProfit 4,823 2,700 4,517 5,121
FinanceCosts 933 776 1,183 1,278
ProfitBeforeTax 3,890 1,923 3,334 3,843
Tax 1,326 654 1,134 1,230
ProfitAfterTax 2,565 1,269 2,200 2,613
EPS 3.4 1.7 2.9 3.4
Source:BMAResearch
NEUTRAL
TargetPriceDec13:PKR80
CurrentPrice:PKR84
Valuations
2012A 2013F 2014F
EPS 3.4 1.7 2.9
DPS
CY13FDividendYield(%) 0%
CapitalGain(%) 5%
TotalGain(%) 5%
Efoodsvs.KSE100RelativeChart
EFOODS Profile: Engro Foods is a subsidiary of
Engro Corporation, headquartered in Karachi. The
company is engaged in manufacturing, processing
and selling dairy products, ice cream, and frozen
desserts. The company also owns and operates a
dairyfarm.
80
100
120
140
160
180
200
220
240
O
c
t

1
2
N
o
v

1
2
D
e
c

1
2
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
KSE100Index EFOODS
Bloomberg EFOODS.PA
Reuters ENFL.KA
MCAP(USDmn) 576
12MADT(USDmn.) 3.7
SharesOutstanding 766
ZoyaAhmed
zoya.ahmed@bmacapital.com
+92111262111Ext:2053
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.

2
TPreviseddowntoPKR80/sh;stanceNEUTRAL
We revise downwards our 2013E and 2014F earning projections for Efoods by 58% and
50%toPKR1.69/shandPKR2.9/shrespectively.Afteradjustingforrevenueslowdownand
marginweakening,ourmarginsnowstandat21%for2013and22%in2014.Asaresult,
ourTPgoesdowntoPKR80/shjustifyingaNEUTRALstance.
To arrive at our TP of PKR80/sh, we have used a blend of the following valuation
techniques:DCF,regionalPE/PScomparison.ForDCFbasedtechnique,wehaveusedrisk
free rate of PKR 12.5% (latest 10 yr PIB auction rate), a terminal growth rate of 4% and
betaof1.28.
Although we have a NEUTRAL stance on the stock, we advise shortterm investors to
remain watchful. To mention, the current PE stands at 47x on 2013E earnings of
PKR1.69/sh (57% higher than last 2 years average P/E of 20x). Assuming 21% discount
(basedon lasttwo years) toregional players, thecompany should trade at PE of25xon
2013E earnings, the market can batter the stock down to PKR43/sh to reflect the
downsideinearningspresentingawonderfulopportunitytoaccumulatethestock.
2013earningstodeclineby51%YoY
The company has been reporting tremendous increase in earnings growing at a CAGR of
144% since the last two years. However, 2013 failed to keep up the growth pace where
EPSisnowexpectedtogodownbyahefty51%toPKR1.69/shin2013versusPKR3.40/sh
in2012.Whatexactlywentwrong?
Disruptioninsupplychainnetworkhurtingsales
One of the key reasons behind such dismal performance of the company was the
disruptioninthecompanysdistributionnetworkwheredistributorshandlingalmost50%
ofthecompanyssalesdecidedtowindupoperationsin1QCY13.Sincethen,thingshave
not looked good as 9M2013 sales have slid by 5% to PKR28,023mn versus PKR29,395 in
thecorrespondingperiodlastyear.
AsperEfoodsmanagement,thedistributionissueshave beentakencareofbutwilltake
time to reflect on the bottomline. So, we expect revenues to pick up pace in 1H2014
onwards.
Newentrantsincreasingthebargainingpowerofbuyers
Secondly,thetotalmilkmarket(looseandbranded),atannual38bnliterscarriesmassive
untapped potential for branded dairy players, who represent only 8% (5% UHT and 3%
powdered) of total milk market. This mass untapped potential has attracted a lot of
competitionwithmanynewproductofferingscomingintoplay,enhancingthebargaining
powerofbuyers.Thishashamperedtheindustryspricingpowerascompaniesnowseek
to grow more volumetrically rather than focusing on margins (449bps drop in YoY
margins). Efoods plans to do the same focusing on getting the volumes back through
promotional offers by placing products at a discount. We believe this strategy will bode
well for volumes however; margins will remain under pressure in the remaining 2013 as
wellas1H2014.

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.

3
Efoods:CompetitionProfile

EFOODS:ProductProfileandPositioning
Since the beginning, Efoods story has been following a tremendous growth trajectory
betting on countrys favorable demographics and socioindicators (rising consumerism,
pacyurbanizationandincreasingmiddleincome).EFOODshassetitspresenceinallofthe
threesegmentsitoperatesinnamelyDairy,IceCreamandJuicesandisnothesitatingto
exploreotherlucrativeavenues(AlSafa,PowderedmilkandFrozenfoods).
The dairy segment has been the companys focal point and revenue driver, followed by
the icecream segment. We have taken Efoods share in the UHT segment at 51% in the
model in 2014. However, given the companys strong brand name, any improvement in
themarketsharewillbenotverysurprisingandwillresultantlyleadtoanupwardrevision
inourestimates.
Pakistansfivemaindairyproductsegments

Source:TetraPackReport2010
Products Company
CompetitiontoOlpers
MilkPak Nestle
Haleeb HaleebFoods
Goodmilk Shakarganjfoods
CompetitiontoOmung
DairyRozana Nurpur
DairyPure ShakarganjFoods
GroAur Haleebfoods
CompetitiontoTarang
Everyday Nestle
Chaika Shakarganj
TeaMax Haleeb
ChaiMax Nurpur
Millin Premier
Source:BMAResearch
Teacreamer
(22%)new
productsegmentfor
lowendconsumers
Whitemilk(73%),
positionedeither
asofferingnutritional
benefitsfor
growingchildrenorasan'all
purpose'
milkforfamilies
Others
5%
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.

4
Olpers:positionedtosnatchsharefromexistingbrandedplayers
The company initiated its journey in the Liquid Dairy Product (LDP) segment with UHT
packaged milk, Olpers in 2007. The product came in to take away share from other
established packaged players in the market and compete with offerings such as Milkpak,
Haleeb etc. Olpers was able to successfully do that for Efoods at that time but now the
market scenario and shopper dynamics have changed with consumers shifting their
purchases towards more affordable alternatives. To mention, this segment trades at a
pricepremiumof~20%tounprocessedmilkandotherdairyproductsandcaterstosocio
economicclassAandB.
Omung:thelowpricedalternativetoloosemilk
Engro Foods launched Dairy Omung in August 2011 calling it a dairy liquid. The current
strategy at Engro is to use Omung to take share from loose milk. Thus, the product is
priced at 810% discount to loose milk, thereby directly targeting consumers who still
preferloosemilk.Inadditionto,Engroalsolaunchedlassiandcreamproductsunderthe
Omungbanner,withtheideabeingtostrengthentheequityofthemasterbrand.Despite
all these efforts, Omung has still not been able to make any significant mark uptil now.
Having said, we anticipate Omung to drive momentum in revenues in years to come
primarilyduetoitslowerpriceasrisinginflationtrendwillurgepeopletomovetowards
such products. This will not only speed up conversion from unbranded loose milk, it will
alsohelpEfoodsgainmarketshare.
Tarang:targetingamarketofitsown
Teawhitenerhasbecomeanotherareaofinnovationinthepackagedmilksectortargeted
mainlyatlowerincomesegment.Teacreamersrepresentmorethan25%ofthetotalmilk
market.Affordabilityinconjunctionwithwidespreadteadrinkinghabits(32%oftotalmilk
consumptioninPakistanaccordingtoTetraPak)speaksvolumesaboutthegrowthofthe
saidsegment.
EffodshaseffectivelyusedTarangtobuildconsumptionthroughsmallerSKUs.Thebrand
now makes up ~60% of the total tea whitener industry category and will continue to be
themainrevenuecontributorforthecompany.
IcecreamSegment:characterizedbyhighmarginsandlowvolumes
PakistansIcecreammarketislargelydominatedbyUnileversWallswithmorethan50%
of the market share. Efoods Omore has effectively captured 26% of the market in 2012
and has become the second largest player. We anticipate the market growth in the ice
creamsegmenttoremainsubduedonaccountoftheongoingpowercrisisandlackofcold
chaininfrastructure.Thus,thecompanyhasshifteditsfocustowardstakingawaymarket
shares form the existing industry by frequently introducing new products. Thus, we have
modeledin27%marketshareforOmorebyCY15.
Against companys target of achieving profitability in the said segment in CY13, the ice
creamrevenueshaveslidby7%YoYin9M2013toPKR2,266mnconsequentlybringingthe
bottomlineforthesegmentinredbyPKR136mn.

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.

5
BeyondCY14:Theopportunityisstillthere!
Oncethedistributionissuessettleinandtheinflationshocktapersoff,volumesshouldget
back on track as the demand outlook for dairy products remain steady. The companys
strong brand name alongwith the favorable industry dynamics will help capitalize on the
growthopporunitieseasilythen.Undoubtedly,thepotentialishumungous.Whatneedsto
be followed now is the effectiveness of the potential and existing brands to tap this
potential.Thus,wehavenotyetfactoredinthesevariables.
Thenotrich,notpoorconsumersofferhugeprospectsonaccountof..
From a global perspective, emerging economies, primarily China, India, Brazil, Indonesia
andPakistanarenowbeingtermedasthebiggestmarketsforLiquidDairyProducts(LDP)
onaccountofavastmajorityofeconomicallyempoweredconsumers.Tomention,these
countriesaloneaccountfor76%ofthetotalLDPconsumptionindevelopingmarkets.
PakistanrankssecondhighestintermsofLDPconsumptionindevelopingcountrieswhere
64% of the population living on USD2USD8 per day accounts for 60% of all LDP
consumptioninthecountry,mostofwhichisstillconsumedinunpackagedform,making
theseconsumersanextremelyimportantsegmentformilkprocessors.Furthermore,from
20062009 consumption of packaged LDP in Pakistan increased steadily with a CAGR of
2.4%to22bnlitres.
.SpeedyUrbanization
Urban centres drive economic growth as urbanization leads to greater brand awareness
and higher disposable incomes. Today, 38% of Pakistans total population is urbanized
growingupby2.7%YoY.Weexpectthephenomenontocontinueandgivewaytofurther
growthinthedairyindustryaspeopleshifttheirspendingtowardsbrandedandhygienic
packagedmilk.
Anemergingmiddleclass
Thegrowingmiddleclassisanotherkeygrowthdriverofthedairyindustry.Thiseducated,
aware and wellinformed section of the society (~42% of the population) is increasingly
abletoaffordtreatedmilkavailableat1020%premiumtoitsloosemilkalternative.
Youngerpopulationpresentingopportunitytocreatemicrosegments
Pakistansagestructureinitselfpresentsawonderfulopportunityformicrosegmentation
todairyplayers.Currently,22%ofthetotalpopulationlieswithintheagebracketof1525
years. Youth demands much more than just plain white milk creating room for dairy
players to tap these opportunity sets through variants such as (flavored milk, flavored
yoghurt).

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact:
bmaresearch@bmacapital.comorcallUAN:111262

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy
orsellthesecuritiesmentioned.

6
Sixdevelopingcountriesrepresent76%ofLDPconsumptionindevelopingmarkets

Source:TetraPackReport2011
Expansionplanstodeterminethegrowthpacemovingahead
Efoodshaslaidoutanambitiousexpansionplanandisnothesitatingtoenterintoanyand
every segment that offers lucrative returns. From powdered milk plant (expected to
achieveCODbyCY13end)topasteurizedmilkshops(openinginearlyNovember2013as
a pilot project) and meat business (anticipated to come online in 1H2014), the
managementistappingontoeverygrowthavenueinordertobecomea100bnenterprise
by 2020. Our model suggests that due to hefty loan repayments, the precapex cash
position of the company will be sufficient to finance approximately 30% 40% of the
companys future expansionplans innext two years. That said, we expect debtto equity
to remain in the range of 70:30 in next two years. Since the company plans to utilize its
cashtofinancegrowth,weexpectnodividendpayoutsbythecompanyuntil2015.
Valuation
To arrive at our TP of PK80/sh, we have used a blend of the following valuation
techniques: DCF, regional PE comparison and regional PS comparison. For DCF based
technique, we have used risk free rate of PKR 12.5% (latest 10 yr PIB auction rate) and
betaof1.28.
Although we have a NEUTRAL stance on the stock, we advise shortterm investors to
remain watchful. To mention, the current PE stands at 47x on 2013E earnings of
PKR1.69/sh (57% higher than last 2 years average P/E of 20x). Assuming 21% discount
(basedon lasttwo years) toregional players, thecompany should trade at PE of25xon
2013E earnings, the market can batter the stock down to PKR43/sh to reflect the
downsideinearningspresentingawonderfulopportunitytoaccumulatethestock.
6
developing
markets
76%
Other
Developing
24%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%

50%
19%
6%
3%
22%
1%
Kenya
Indonesia
Brazil
China
Pakistan
India
2011TotalLDPConsumption 2011LDP6developingmarketsConsumption
72.5Bio/litres 55.2Bio/litres