Philip Morris Pakistan Limited

Philip Morris Pakistan Limited (PMPKL), formally known as Lakson Tobacco Company is an affiliate of US-base Philip Morris International (PMI). Originally it was incorporated in 1969 as a public limited company, but the name changed in 2011 to Philip Morris Pakistan Limited as PMI became the majority shareholder of the Company back in 2007. Philip Morris Pakistan Limited along with Pakistan Tobacco are the two significant multinational cigarette companies exist in the country.

The maker of Marlboro currently operates three cigarette factories along with one tobacco leaf threshing plant, located in different areas of Pakistan. In KP it also runs a tobacco leaf agronomy programme in the tobacco growing areas. Currently, the Company offers ten brands of cigarettes. Of the main ones, it markets and sells both international brands like Marlboro and Red & White, and locally owned brands like Morven Gold, Diplomat, and K2.

Pakistan’s tobacco industry.

The domestic industry of tobacco in Pakistan sells close to 80.2 billion of cigarettes every year, and according to the industry calculation in rupee terms, this is estimated at Rs220.1 billion. Two companies Pakistan Tobacco Company Ltd. and Philip Morris (Pakistan) Limited account for 72.3 percent of the market. The remaining minimal share of volume sales is shared by other local manufacturing companies producing low-quality economy cigarettes targeted towards customers in rural areas.

The tobacco industry as a whole faces multiple challenges in Pakistan, but the huge challenge is the problem of illegal trade in cigarettes. According to the industry reports during 2015 the share of illegal cigarettes was 28 percent, which is among the highest in the region. Primarily, this duty evaded cigarettes largely get manufactured in Pakistan. These locally manufactured duty evaded cigarettes combined with billions of smuggled cigarettes brought into the country from bordering states create a non-level playing field for the tax paying companies. At the same time, they also dent the national revenue. As per the estimates are done by Pakistan Tobacco in 2015 alone, illegal cigarettes caused an estimated loss of more than Rs24 billion to the Government in duties and taxes.

The federal budget of 2016-17 and tobacco sector

In the recently announced budget 2016-17, the government has decided to introduce two slabs of cigarette products – upper and lower slabs. Cigarette with a retail price lower than Rs72 exclusive of GST are ranked within the lower slab, and products with a retail price higher than Rs72 are ranked within the upper slab. The increase in the federal excise duty cigarettes is proposed to be increased in two stages with the first stage ending on 30th November 2016. The increase in tax rate will be about 23 paisa per cigarette for lower slab cigarettes and about 55 paisa per cigarette for higher slab cigarettes.

Historical performance

Compare to its market leader Pakistan Tobacco Company; Philip Morris Pakistan has been struggling with profits since CY11. Although, the trade of illicit cigarettes has created a significant problem for the whole industry, but it has hit the Philip Morris quite hard. The struggle of the Company started in 2011 when its profits began to decline on the back of lower sales and since then the Company’s top line has remained under pressure. Unfortunately, the story remained same for next five years, and the bottom line of the Company stayed in red. In 2012 the challenges for the Company became more severe since its losses were increased by 26 percent year-on-year to Rs574 million.

The Company is facing higher tax and excise duties since it’s a cigarette manufacturer and an importer. In CY13 the sales tax and excise duty as a percentage of its gross turnover CY13 stood at almost 61 percent, and this share has remained fairly persistent over the years.

In 2014, the expenses were high mainly due to marketing and investment in support of Company’s brand portfolio. During the year PM also saw higher finance cost due to higher browning to meet the working capital requirement. However, it is interesting that their main competitor Pakistan Tobacco Company (PTC) in 2014 has reported the bottom line of 55.2 percent from year-on-year while Philip Morris recorded a significant loss. During the year 2014 PM closed its Mandra factory as part of a strategic review to optimise process efficiencies and operational effectiveness and to best position the Company for robust and viable future growth.

In 2015, the net turnover increased by 5 percent year-on-year, while the gross profit increased by 24 percent year-on-year primarily due to price increase in June 2015 and December 2015. However, the price increase has further widened the gap between the low priced legitimate brands and duty evaded products. It has once again hit the top line of the Cigarette Company. Expenses for the current year were higher as compared to 2014, mainly due to higher redundancy costs incurred including that of the closure of Mandra Factory. Higher spending along with an increase in finance cost has caused 11 percent year-on- year.

Snapshot of 2016

In 1QCY16, PMPKL net turnover increased by 13 percent year on year from Rs4,116 million in 1QCY15. The improvement during the major chunk of the year came from the company’s ongoing trade incentive programme and due to higher price.

Compared to top line growth, the cost of goods sold decline by 12 percent during the period under review, this has helped the Company to boost the gross profit by 53 percent. The operating expenses mostly stayed under control, but there is marginal increase in marketing and advertising regarding revenue. Healthy growth in revenues, cost control and higher other income helped the company record profit of Rs964 million compared to a loss of Rs18 million in the first quarter of 2015.

Outlook

For Philip Morris Pakistan to get back into profit, it will not only have to push its top line growth, but it also needs to rationalize its expenditures in line with its revenue growth. However, being a major player in a big market, prevailing business environment will continue to impact on PMPKL’s profit margins going forward.

In short, the company’s fortunes are dependent as much on government’s external policy interventions as on internal strategic reviews and cost-cutting measures. Nevertheless, the fortune of the company largely depends as much on government’s external policy interventions as on internal strategic reviews and cost-cutting measures.

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Philip Morris Pakistan


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Rs (mn)                          CY14       CY15      YoY


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Net turnover                   13,764     14,417       5%


Cost of Goods sold              9,853      9,562      -3%


Gross Profit                    3,911      4,855      24%


Marketing and Dist. Expenses    3,536      3,396      -4%


Administrative Expenses         1,235      1,448      17%


Operating Profit /(Loss)        (909)      (894)      -2%


Other Expenses                    220      1,119      N/A


Other Income                      172        214      25%


Finance Cost (RHS)                604        783      30%


Loss before Tax               (1,513)    (1,677)      11%


Taxation                         (31)      (362)      N/A


Loss after Tax                (1,482)    (1,315)     -11%


Loss per share                  24.07      21.35        -


Gross margin                      28%        34%        -


Operating Margin                  -7%        -6%        -


Net Margin                       -11%        -9%        -


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