Petra Foods scrambles to rein in costs as profit margins sink to record lows

Blame the persistently weak rupiah.

Petra Foods is subsisting on record-low profit margins as the persistently weak Indonesian rupiah continues to dent its bottomline.

Analysts note that Petra's operating margins fell to 29.3% last quarter, the lowest level in more than three years. The second quarter also marked the first time that gross margins contracted for two sequential quarters.

"Last year, Petra Foods could still keep the effects of a falling Rp at bay. By 1H15, the effects of a falling Rp have hiked up material costs (in US$) enough to drive two sequential quarters of gross margin contraction, a trend never previously seen," said CIMB analyst Kenneth Ng in a report.

In a bid to salvage its sinking margins, Petra has rolled out a slew of measures to keep costs in check.

These measures include higher average selling prices, lower advertising and promotion expenses, and product resizing, among others.

However, analysts are doubtful as to whether these measures will succeed.

"Even though expectations are that the measures may help margins to gain some ground, we believe that these will be insufficient to offset the impact of the decline in the rupiah and form the view that gross and operating margins will be lower than before," said DBS analyst Alfie Yeo.

Petra's sales are also unlikely to improve in the near-term on back of weak consumer sentiment in Indonesia.

"The besieged Indonesian consumer is Petra's main problem. Back in 1Q15, wholesalers de-stocking was blamed for weak Indo sales. That de-stocking did not end. This second quarter of decline confirmed our fears of a prolonged downturn in Indonesian consumption," Ng said. 

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