Pakistan Tobacco Industry News and Discussion

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Losses deepen at PMPK
By BR Research on October 21, 2019

It's time for another cigarette manufacturer to tell a sad story. Philip Morris (Pakistan) Limited (PSX: PMPK), which is only second to the tobacco giant Pakistan Tobacco Company Limited (PSX: PAKT) in the formal tobacco industry locally, has seen its financials beaten black and blue for the quarter ended September 30, 2019. (For a review of PAKT's quarterly performance, read: “Topline woes for PAKT," published October 18, 2019).














It isn't unusual for PMPK to suffer topline decline when rest of the industry is also struggling to grow the sales lately. But the magnitude of topline slump at PMPK is much higher in 3QCY19, compared to the market leader, PAKT.





































































































































































































































































































































































































































































Philip Morris (Pakistan) Limited: latest financials
(Rs mn) 3QCY19 3QCY18 Chg
Net turnover 1,520 3,503 -57%
Cost of sales 1,454 2,132 -32%
Gross Profit 66 1,371 -95%
Distribution & marketing expenses 752 759 -1%
Administrative expenses 419 334 26%
Other expenses 226 139 63%
Other income 121 45 173%
Operating profit (1,211) 184 -756%
Finance cost 8 7 22%
Profit before tax (1,219) 178 -785%
Taxation (437) 21 -2228%
Profit after tax (782) 157 -597%
EPS – Rs -12.7 2.55 -598%
Source: PSX notice




The PMPK's net turnover has more than halved over previous year in the quarter. It is a result of not only FED-led increase in prices of cigarette packs (which hurts volumes), but also the higher FED collected per rupee of revenue (which reduces how much of the gross sales the firm can count as net turnover). It would have helped if PMPK also started publishing gross turnover in its quarterly financial announcements.





But the topline fall isn't the whole story. The firm went on to score a large operating loss, mainly due to the fact that its costs and expenses did not fall in line with the sagging sales. As a result, ‘cost of sales' was 96 percent of the net turnover in 3QCY19, significantly up from 61 percent in the same period last year. Despite lower production, cost of sales is affected by higher input prices, due in part to rising cost of utilities and the impact of rupee devaluation this year.





The rest of the topline was overwhelmed by ‘distribution and marketing expenses' and ‘administrative expenses'. Together, the two accounts equated to 77 percent of net turnover in the quarter, way more than 31 percent seen in 3QCY18. In these lean times, PMPK must curtail these expenditures in line with the business outlook. Doing so won't push the firm back into profits, but it may at least curtail the losses.





With an operating loss equal to 80 percent of the net turnover, it appears that PMPK is much more sensitive to the industry's declining fortunes than what PAKT has managed in the quarter with an operating margin of 14 percent. Unless the topline turns around drastically, of which there is decreasing likelihood, the PMI subsidiary is en route to posting its worst loss-making year this decade.

https://www.brecorder.com/2019/10/21/533101/losses-deepen-at-pmpk/

 

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CY19: strong close for PAKT
By BR Research on February 26, 2020

While cigarette production is on a decline in Pakistan, a surprisingly strong fourth quarter has helped the tobacco giant Pakistan Tobacco Company (PSX: PAKT) produce healthy calendar year-end results. It is quite some feat that despite a decline in net revenues, company's bottomline saw a double-digit expansion during the period under review.

Formal tobacco industry has been under a cloud since PTI's mini-budget (March 2019) and the last federal budget (June 2019). Fiscal measures in the two money bills impacted the industry as the effective FED rate on cigarette sales in the formal sector was enhanced. This measure, ‘effective FED' rate, is the share of federal excise duties (FED) in gross turnover.

The result of higher FED in the last year was lower amount of gross revenues being retained by firms such as PAKT for their P&L. For PAKT, the effective FED had risen to 50 percent of gross turnover in CY19, compared with 46 percent effective FED rate in CY18. This brought down company's net turnover to 35 percent of gross turnover in CY19, from almost 39 percent in the year before.

However, the topline decline was mitigated by favorable movements among a mix of operating and non-operating factors. The double-digit decline in cost of sales, amid rising input costs, is perhaps explained by lower production volumes, which reduce the dominant head under cost of goods manufactured. The selling & distribution expenses declined, and administrative expenses posted a rather controlled growth.

Massive growth in ‘other income' – thanks mainly to a large reversal/writing-back of liabilities – helped offset the spike in company's forex-related losses parked under ‘other expenses'. The aforementioned factors, in the end, helped PAKT achieve a sizable and disproportionate expansion in net profits.

From the government's perspective, 2019 turned out alright for its tobacco taxes. Latest financials show that PAKT's tax contribution to the federal kitty during CY19 is over Rs102 billion, a growth rate of 15 percent over CY18. The belief that ‘higher FED works', would get strengthened by the fact that about 86 percent of the Rs13.5 billion in additional taxes for the year have come from growth in FED rate. However, 4QCY19 FED collection was almost flat at Rs20 billion compared to same period previous year.

Given the limits to further increase FED amid declining production in the formal sector, it remains to be seen if the federal government will go for another round of FED hike in next budget. Tobacco industry is complaining about FED hikes distorting the market, but prospects for lowering the FED are moot. The government seems to have very limited political capital in the current economic situation. It is likely to avoid a situation where it is seen to be pandering to any industry's demand for relief.

https://www.brecorder.com/2020/02/26/574893/cy19-strong-close-for-pakt/

 

[ejaz007]

Up in smoke
By BR Research on March 20, 2020

Health activists have something to cheer about. In the seven months ended January 2020, Pakistan's cigarette production went down by 33 percent year-on-year, to settle at 25 billion sticks, as per data from the Pakistan Bureau of Statistics. That's 12 billion less cigarettes produced in the formal industry in the fiscal with five months of data yet to come. At this pace, FY20 will end with a production shortfall of 20 billion cigarettes, which is significant for an industry that is capable of making over 60 billion sticks a year.

Throughout 2019, cigarette production averaged 4.2 billion sticks a month, sharply lower than 5.1 sticks a month seen the previous year. The January 2020 production of 3 billion sticks is even lower than the average last year. The formal industry, whose financials are coming under pressure, feels that the current government's fiscal decisions have made the illicit players price-competitive, as duty-non-paid (DNP) segment evade taxes and duties.

Recall that government had increased the tobacco FED twice (September 2018 and June 2019); besides it also got rid of the erstwhile three-tier FED regime (June 2019). The tobacco majors maintain that the illicit sector gained a market share of 34 percent in 2019 due to the excise-driven price increases, which leading players Pakistan Tobacco and Philip Morris Pakistan had to undertake to pass on the impact to consumers.

If the formal industry is being truthful that the DNP brands are the sole cause behind declining cigarette sales, it would imply that the decline in formal cigarette production has been a direct gain for illicit sector. (This would further imply that Pakistanis are not smoking less, which should disappoint health activists). The industry's claims need to be taken with a pinch of salt, though.

It's not like the illicit sector suddenly woke up in 2019 to undercut the formal players due to higher FED per cigarette pack. The informal sector had been alleged by the industry to have similar high market share in 2016, 2017 and 2018 as well. Going by industry data, the illicit sector may have maintained its high market share (34%) in 2019 as well; and that could mean there are other forces at work behind lower production and sales at the two tobacco majors in 2019.

Note that in the past, there has been an incidence of sudden fall in formal cigarette production one year (purportedly due to higher FED) and a sharp recovery the following year (purportedly due to relaxed FED). The situation behind this sudden slump and abrupt jump in formal production is something that needs to be analyzed closely by the revenue authorities, for 2019 was a year of massive production decline and 2020 may well be the year of significant growth. Where is the track and trace system?

Be that as it may, down the road, there will be tax impacts of declining cigarette production in the formal sector. During CY19, Pakistan Tobacco's tax contribution stood at over Rs102 billion, a 15 percent growth year-on-year. The tax tally for Philip Morris Pakistan is estimated to be above Rs25 billion for CY19, a strong double-digit growth over previous year. However, falling sales volumes will start hurting the tax revenues this year. All eyes are on the upcoming budget to see which way the FED will swing.

https://www.brecorder.com/2020/03/20/581808/up-in-smoke/