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Merit Packaging Q3 FY26: Asset-Sale Liquidity Cuts Debt, but Core Margins Stay Thin

Merit Packaging’s Q3 core margins weakened after the Gravure exit, while Rs1bn asset-sale proceeds cut borrowings and a one-off gain lifted 9M profit.

Sep 23, 2026

Verdict

Merit Packaging Limited’s March 2026 quarter shows a business in the middle of a deliberate reshaping rather than a conventional earnings recovery. Q3 FY26 revenue fell 47.3% year on year to Rs760.7 million and gross profit dropped 91.2% to only Rs4.1 million, taking gross margin to about 0.5% from 3.2%. The operating loss widened to Rs53.2 million from Rs42.3 million. Yet the net loss narrowed by 51.7% to Rs48.9 million because finance charges were roughly halved and the quarter also benefited from levy and tax credits. The operating picture therefore weakened even as the bottom line became less negative.

The nine-month headline is even more distorted by a one-off. Revenue fell 43.5% to Rs2.54 billion and the company moved from a Rs28.4 million operating profit to a Rs109.3 million operating loss. However, a Rs505.7 million gain on the disposal of assets previously held for sale lifted nine-month profit after tax to Rs80.6 million from a Rs169.5 million loss. Management directly links the revenue contraction to lower Flexible Packaging volumes after the strategic disposal of Gravure machinery. The sale also brought in Rs1.0 billion of cash proceeds, allowing short-term borrowings and finance costs to fall sharply. The central question for the next cycle is whether the smaller post-disposal business can rebuild gross margin and operating profitability without giving back the balance-sheet repair achieved from the transaction.

Results at a glance

  • Company: Merit Packaging Limited
  • Ticker: MERIT
  • Reporting period: quarter and nine months ended March 31, 2026
  • Basis: standalone (unconsolidated) company-level condensed interim financial statements, presented in Pakistani rupees
  • Status: unaudited interim financial statements prepared under IAS 34 and the Companies Act, 2017; no external auditor review report is included in the quarterly filing
  • Q3 FY26 revenue: Rs760.7 million, down 47.3% year on year
  • Q3 gross profit: Rs4.1 million, down 91.2%; gross margin about 0.5% versus 3.2%
  • Q3 operating loss: Rs53.2 million versus Rs42.3 million loss; operating margin about -7.0% versus -2.9%
  • Q3 finance charges: Rs18.3 million, down 55.0%
  • Q3 profit after tax: Rs48.9 million loss versus Rs101.3 million loss; loss per share Rs0.24 versus Rs0.51
  • 9MFY26 revenue: Rs2.54 billion, down 43.5%
  • 9MFY26 operating loss: Rs109.3 million versus Rs28.4 million operating profit
  • 9MFY26 profit after tax: Rs80.6 million versus Rs169.5 million loss, primarily because of a Rs505.7 million gain on the asset disposal
  • 9MFY26 net operating cash flow: Rs207.7 million outflow versus Rs55.2 million outflow
  • March 2026 short-term borrowings: Rs151.7 million, down 82.0% from June 2025

Unless otherwise stated, the financial figures above and below are drawn from Merit Packaging’s official March 2026 filing on the Pakistan Stock Exchange; percentages are calculated from those disclosed figures.

What improved

The clearest improvement is financing risk. Finance charges fell 55.0% in Q3 to Rs18.3 million and 44.3% over nine months to Rs78.7 million. Management explicitly attributes the decline to reduced reliance on running-finance facilities after the asset sale injected liquidity. The balance sheet confirms that explanation: short-term borrowings fell from Rs841.3 million at June 2025 to Rs151.7 million at March 2026, while the Rs46.8 million current portion of long-term financing was fully repaid. This is a meaningful change because financing had been a major drag on a low-margin business.

Liquidity ratios also look less strained after the transaction. Current liabilities fell 47.7% from June to Rs1.23 billion, compared with a 36.3% decline in current assets to Rs1.60 billion, lifting the current ratio to roughly 1.30 from 1.07. Trade receivables declined 27.7% to Rs573.5 million and inventory fell 16.7% to Rs454.3 million as the business operated at a smaller scale. Trade and other payables also declined 27.2% to Rs1.05 billion. The balance sheet is therefore less dependent on bank working-capital lines than it was nine months earlier.

The quarterly net loss also narrowed substantially. That is useful, but the composition matters. Q3 finance charges were Rs22.4 million lower than a year earlier, while the levy-minimum-tax line contributed a Rs12.2 million credit rather than an Rs18.3 million charge, and taxation contributed a further Rs10.5 million credit. These items more than offset the Rs10.9 million deterioration in operating loss. The improved bottom line is therefore not evidence that the core operation strengthened during the quarter.

What weakened / needs attention

The sharp reduction in sales is the main operating issue. Q3 revenue was down Rs682.6 million year on year, while nine-month revenue was down almost Rs1.96 billion. Management says the decline was primarily caused by reduced Flexible Packaging volumes following the strategic disposal of Gravure machinery. This makes the contraction partly structural: the company intentionally exited assets and business capacity, so the pre-disposal revenue base is no longer a clean run-rate benchmark for the remaining operation.

The concern is that gross profitability weakened faster than revenue. Q3 gross profit fell to just Rs4.1 million and gross margin compressed by about 267 basis points to 0.5%. Over nine months, gross margin fell to about 3.2% from 5.4%. General, selling and other operating expenses did fall by 35.4% in Q3, but not nearly enough to match the revenue and gross-profit contraction. As a result, the quarterly operating loss widened 25.6% and the nine-month operation moved from profit to loss. The filing does not provide a detailed bridge for price, raw-material cost, mix or capacity utilization in the remaining business, so attributing the margin erosion to any one of those factors would be speculative.

This distinction is important because a smaller business can be financially healthier if the divested activity was structurally unattractive, but that case has not yet been demonstrated in the reported numbers. The company’s own note says the disposed plant and machinery had been classified for sale with the objective of making further investment in the offset-printing segment. The next results need to show whether that strategic pivot produces a better margin profile, not merely a lower sales base.

The Rs1 billion asset sale: balance-sheet repair, not recurring earnings

The disposed assets had a carrying value of about Rs494.3 million at June 2025. During 9MFY26 the company received Rs1.0 billion in proceeds and recognized a Rs505.7 million gain in profit or loss. The sale agreement also covered potential customers and goodwill of the business. Economically, this was a major portfolio action rather than ordinary operating income. The gain was more than six times the final nine-month profit after tax of Rs80.6 million, which makes the distinction between reported profit and underlying operating performance essential.

The cash-flow statement shows where the value of the transaction went. Investing activities generated Rs977.7 million, almost entirely from the Rs1.0 billion disposal proceeds, while financing activities used Rs73.8 million and short-term borrowings fell sharply on the balance sheet. Cash and cash equivalents improved by Rs696.2 million during the nine months, from a negative Rs838.7 million at the beginning of the period to negative Rs142.5 million at March-end. This is genuine deleveraging, but cash and bank balances themselves were only Rs9.2 million; the negative cash-equivalent position persisted because short-term borrowings were still Rs151.7 million.

The tax consequences also reduce the economic benefit of the headline gain. Merit recorded Rs183.1 million of tax expense in the nine months: Rs63.1 million of current super tax, primarily arising from the current-period asset disposal gain, and Rs119.9 million of prior-period super tax relating to the disposal of land and building in tax year 2024. Those charges are not a normal operating-cost signal, but they are real cash and balance-sheet consequences of prior asset monetization.

Despite releasing cash from inventory and receivables, operating cash flow deteriorated. Cash used in operating activities widened to Rs207.7 million from Rs55.2 million. Before working-capital changes, the business generated only Rs51.6 million compared with Rs205.9 million a year earlier. Working-capital movements then absorbed Rs94.8 million: lower stock and trade debts released about Rs310.5 million combined, but the Rs393.0 million reduction in trade and other payables was a larger cash use, while other items also moved against the company.

That pattern is consistent with a business shrinking its operating footprint after an asset disposal. Receivables, inventories and payables all came down, but the cash released from customers and stock did not translate into positive operating cash generation because supplier liabilities also had to be settled and pre-working-capital earnings were much lower. The next cycle should therefore be assessed on operating cash flow separately from disposal proceeds. Another large investing inflow cannot be assumed.

Sector and peer context: the contraction was not simply an industry-wide collapse

Pakistan’s broader manufacturing backdrop was improving during the period. The Pakistan Bureau of Statistics reported that large-scale manufacturing output grew 6.48% during July–March FY26 and 11.09% year on year in March 2026. The Pakistan Economic Survey reported Paper & Board output broadly flat but slightly positive over July–March, rather than experiencing anything close to Merit Packaging’s 43.5% revenue contraction. This does not provide a direct demand measure for printed flexible packaging, but it argues against treating Merit’s sales decline as a simple macro or sector-volume event.

A listed industry check points in the same direction. Century Paper & Board Mills, which is not a like-for-like packaging converter but supplies the broader paper-and-board ecosystem, reported Q3 sales volumes 17% higher year on year and a gross margin of 7.7% versus 4.2%. Century attributed its margin improvement to a better sales mix and lower raw-material and fuel costs. The comparison should not be overextended because the companies sell different products, but it reinforces management’s own explanation that Merit’s revenue reset was primarily company-specific and linked to the Gravure disposal rather than a uniform collapse in packaging demand.

Financing conditions also matter for the next quarter. The State Bank of Pakistan kept its policy rate at 10.5% on March 9, 2026, but raised it to 11.5% effective April 28 after the reporting period. Merit’s much lower borrowing base should cushion that change relative to its old funding structure, although the benefit will depend on actual facility utilization and pricing. Inference: deleveraging has become more valuable just as the benchmark-rate environment tightened again.

Recurring versus non-recurring drivers

The recurring operating picture is currently weak: a much smaller revenue base, very thin gross margin, an operating loss and negative operating cash flow. Lower general and selling expenses help, and the reduction in finance cost should be more durable if bank borrowings remain low. However, the latest quarter does not yet show that the remaining business can earn an acceptable gross margin on its post-disposal sales base.

The non-recurring items are much larger than the nine-month reported profit. The Rs505.7 million disposal gain is exceptional, and the related super-tax charges are transaction-linked rather than ordinary operating expenses. The Q3 levy and tax credits also improved that quarter’s loss and should not be extrapolated without further disclosure. For assessing the next result, operating profit, gross margin, cash from operations and average borrowings will be more informative than nine-month PAT.

What changed versus the recent pattern

The defining change is not merely a better or worse quarter; it is a change in business scale and capital structure. Merit exchanged a substantial part of its Flexible Packaging asset base for cash, recognized a one-off accounting gain, reduced bank borrowing and entered the final quarter of FY26 with a smaller operating footprint. That has improved near-term solvency measures but also exposed how thin the gross economics of the remaining business were in Q3. The next phase of the strategy is intended to emphasize offset printing, but the March filing does not yet show the earnings contribution, return on new investment or timing of that transition.

The result should therefore be read as a transition quarter. Balance-sheet risk is lower, but operating proof is still pending. A sustainable improvement would require revenue stabilization on the new base, gross-margin recovery, controlled operating costs and positive cash generation without another asset sale.

What to monitor next

  • Post-disposal revenue stabilization: whether the remaining offset and packaging operations establish a clearer recurring sales base after the Gravure exit.
  • Gross margin: Q3 margin of about 0.5% leaves almost no cushion for operating expenses; recovery here is the most direct test of the strategic reset.
  • Operating cash flow: the business used Rs207.7 million over nine months despite the release of inventory and receivables.
  • Short-term borrowings and finance charges: whether the sharp reduction in bank funding is sustained after the post-period increase in the SBP policy rate.
  • Offset-printing reinvestment: the filing says the asset disposal was intended to support further investment in this segment; future capex, utilization and contribution need to become visible in reported results.
  • Tax normalization: current and prior super-tax charges were linked to asset disposals, while Q3 carried levy and tax credits; the next result should reveal a cleaner recurring tax profile.
  • Governance matter: the company disclosed that its previous chief executive was removed in October 2025 over governance matters and that possible legal proceedings were still under evaluation at March-end; any material development warrants monitoring.

AlphaGen model outputs

  • Alpha QoQ Score: 61.33
  • TTM Performance Score: 32.08
  • 3Y Business Perf Score: 37.91
  • Sector Leadership Score: 32.979

These four measures are AlphaGen model outputs, not company-reported figures.

Sources

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