June 26 (Bloomberg) -- Engro Foods Ltd., Pakistan’s second-largest dairy company, expects sales to increase 20 percent this year as an expanding middle class boosts demand for processed milk products in a nation where most people still buy the liquid raw and boil it.
Engro is seeking to almost quadruple annual revenue to 150 billion rupees ($1.52 billion) in seven years by adding higher-margin products such as infant formula and yogurt to cater to the world’s sixth-largest population, Chief Executive Officer Sarfaraz Ahmed Rehman said in an interview.
In a country where 95 percent of dairy products are sold unprocessed, Karachi-based Engro expects the growth of the middle class and its desire to buy products free of contaminants including flies and dung to drive revenue. Billionaire Mian Muhammad Mansha and the Fauji Foundation, a business group run by retired military officers, are seeking to enter the market dominated by Engro and Nestle Pakistan Ltd.
“I think the market will open up again, and there will be some growth coming through,” Rehman, 56, said. “Some of it might mean new competitors.”
Engro Foods shares rose 1.6 percent to 104.2 rupees at 9:35 a.m. in Karachi. They have declined 1 percent this year, valuing the company at 79.4 billion rupees. The KSE-100 Index has gained 15 percent.
Pakistan’s middle class has doubled to 70 million people in the past decade, driven by booms in agriculture and residential property, as well as jobs in telecom and media, according to Sakib Sherani, chief executive officer at Macroeconomic Insights in Islamabad. South Asia’s second-largest economy has a population of about 196 million.
The country is the world’s fourth-largest combined producer of liquid cow and buffalo milk, according to the U.S. Department of Agriculture. However, it is ranked bottom among the 20 largest milk-producing nations for the amount of the fluid that reaches processing companies, according to Kiel, Germany-based dairy research firm IFCN.
Engro Foods is controlled by Engro Corp. a holding company with eight different businesses that has its origins in fertilizer manufacturing. Engro Corp. is controlled by Chairman Hussain Dawood, one of Pakistan’s most prominent businesspeople. Engro Foods started operating in 2006.
Among Engro Food’s most-popular products are liquid tea whitener Tarang and UHT milk Olpers. It also sells juice, ice cream and lassi, a flavored milk drink. Since February, the company has manufactured powdered milk. Engro may collaborate with global consumer companies in the future, Rehman said.
Highest P/E Ratio
“They have gained market share massively despite competing with global food players including Nestle, and that’s a big achievement,” said Khurram Schehzad, chief investment officer at Karachi-based Lakson Investments, which oversees about $150 million and holds shares in Engro Corp. “They have had some issues with distributors, but being a new company, such things happen.”
A loss of distributors affected Engro Foods’ performance last year, when net income fell 66 percent to 870 million rupees, the lowest in three years. Sales declined 6 percent to 37.9 billion rupees in 2013.
That’s contributed to Engro Foods having the highest quarterly price-earnings ratio, about 193, in the KSE-100, compared with an index average of 11.
“The valuation is too high,” said Tahir Abbas, an analyst at Arif Habib Ltd. in Karachi. “The pilot project selling fresh milk in Karachi and the launch of powdered milk to consumers will be crucial for them.”
The company has about a dozen shops in Karachi under the Mabrook brand that sell pasteurized fresh milk.
The growth of Engro Foods and the prospects for greater sales of processed dairy products have drawn major Pakistani business groups to announce plans to enter the sector.
Consumer spending in Pakistan has increased at a 9.4 percent average annual pace in the last three years, compared with 4.3 percent for the Asia-Pacific region, according to Euromonitor International.
In addition to the planned dairy investments by billionaire Mansha and Fauji, Prime Minister Nawaz Sharif’s business group has said it will start to make cheese and butter and import Australian buffaloes.
ICI Pakistan Ltd. plans to buy 40 percent of the Pakistani distribution rights for fortified infant formula made by Japan’s Morinaga Milk Industry Company Ltd. from Unibrands Pvt. for 960 million rupees. The company expects to complete the deal in the next few weeks.
“There is huge potential,” ICI Pakistan CEO Asif Jooma said in an interview in Karachi on June 24. “I think we have just touched the tip of the iceberg.”
Tapal, a Pakistani manufacturer of tea products, may enter the dairy business, said Arfa Khatoon, a spokeswoman for Tapal in Karachi.
“In the end, all these consumer businesses are function of volume, you get enough volume, you’ll get profits way above,” said Rehman, who used to be the Pakistan country head for PepsiCo Inc. “Grab volume. That’s what I have grown up with.”
To contact the reporter on this story: Faseeh Mangi in Karachi at firstname.lastname@example.org