Pakistan Tobacco Company
Pakistan Tobacco Company (PSX: PAKT) is the leading tobacco player in Pakistan. PAKT is an affiliate of the British American Tobacco Company. It happens to be the oldest multinational in Pakistan, having been incorporated in 1947 as the first foreign investment in Pakistan. PAKT is a successor to the Imperial Tobacco Company of British India, which had been operating in South Asia since 1905.
British American Tobacco Company, which is the world's second-largest tobacco group by global market share, is PAKT's parent company. As per recent information available, some 94 percent of PAKT is owned by British American Tobacco (Investments) Limited, while the rest of the shareholding is distributed among other stakeholders, such as investment companies, banks, insurance companies, mutual funds and employees.
Operations
Whereas PAKT's parent, the British American Tobacco Company, sells about 200 cigarette brands worldwide, PAKT makes and markets a selected few brands locally here in Pakistan. These include brands such as Gold Leaf, Capstan, Dunhill, Benson & Hedges, Gold Flake and Embassy. By some estimates, PAKT commands over 50 percent of the market share. This is followed by Philip Morris Pakistan Limited (PSX: PMPKL) with 15-20 percent market share. Illicit cigarettes' sales - counterfeit, smuggled, and duty-evasive products - share is said to be high in Pakistan, ranging above 20 percent, as per different estimates. Remaining market is served by many small players in the organised sector, such as Khyber Tobacco (PSX: KHTC).
PAKT is among the major taxpaying corporate in Pakistan. During CY16, the firm collected on behalf of the federal government Rs84.4 billion in excise duties and sales tax on tobacco sales. On top of that, it also paid Rs5 billion under the head of corporate income tax on a pre-tax profit of Rs15.38 billion in CY16. In total, between CY11 and CY16, PAKT has paid the government Rs404.17 billion in excise duties, sales tax, and corporate income tax.
Recent financial performance
It has been a great run for Pakistan Tobacco, especially in recent years. Between CY11 and CY16, the firm has almost doubled its gross turnover and net turnover. It must be noted, however, that CY16 was the first year in quite some time when PAKT didn't return a double-digit top line growth. That's because the growth in tobacco cigarette volumes has tapered off in recent years and now it is in the negative. Whatever little top line growth has come, it has been on the back of upward price adjustments.
Those price adjustments have been warranted mainly because of an increase in the excise duties on cigarette sales, after every new budget announcement by the federal government. It is, however, feared that continued price increments will continue to dampen cigarette volumes and hurt the formal sector producers such as PAKT as the market is deemed to be price-sensitive. Government revenues will also feel the pinch.
PAKT has consistently turned in healthy profits in recent years. There is a consistent growth trend in gross profits, operating profits, and net profits. But the scale of margin expansion is much wider than the top line growth over the years. For instance, while the revenues had doubled between CY11 and CY16, the EPS in the same period had jumped from Rs1.42 in CY11 to Rs40.55 in CY16. This shows that there is a tremendous level of operational efficiency put to work at PAKT in recent years.
Cost of sales, for instance, have increased in absolute terms, but have decreased as a percentage of gross turnovers in recent years. In CY11, cost of sales as a percentage of gross turnover was 24.8 percent. It dropped to 17.1 percent by CY16. Likewise, PAKT's selling and distributional expenses and the administrative expenses have also decreased as a percentage of gross turnover.
Despite the sluggish top line, CY16 was a spectacular year for the firm on many counts. The firm managed to expand its bottom-line by a massive 47 percent, and in the process, it crossed Rs10 billion net profit milestone. Much of the improvement is driven by cost-saving measures, sustainable techniques, modernization of tobacco-processing facilities, and steady consolidation of distribution channels over the years.
While the ride has been going good as of CY16, there is a concern for its sustainability. Given the slowdown in cigarette stick volumes, the operational efficiencies and cost savings can only do so much for a certain period of time. There will come a point where PAKT may find it difficult to continue to pass on the full impact of higher excise duties to price-conscious customers. The top line needs volumetric support, but such a cushion doesn't seem to be in the offing.
Outlook
After an excellent CY16, can the firm top such a performance this calendar year? To be sure, PAKT will continue to drive hard its operational efficiency and administrative cost-cutting measures. They will certainly result in margin expansion down the line. However, as identified earlier, top line growth also needs to revive from the CY16 level of 3 percent year-on-year growth in gross turnover. In that regard, the decline in cigarette stick volumes is concerning, even as illicit tobacco trade continues in the face of lax enforcement.
Formal sector companies such as PAKT and PMPKL are being hit on two fronts. One is where the federal government continues to hike taxes on tobacco products at the start of each fiscal. These firms then pass on the impact to consumer, who is largely price-sensitive. And two, illicit cigarette manufacturers and marketers take benefit of this situation and undercut the legitimate businesses by selling cheaper contraband and counterfeits. The government must tighten the noose on the illicit tobacco trade to provide the legitimate players a level-playing field.
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PAKT: Pattern of shareholding (as at Dec. 31, 2015)
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No of Shares % of total
shareholders held shares
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Directors, CEO and their spouse
and minor children 9 12,274 0.00%
Executives 3 34 0.00%
Associated Companies, Undertakings
and Related Parties 2 241,843,423 94.66%
British American Tobacco 1 241,045,141 94.34%
(Investments) Limited
Rothmans International 1 798,282 0.31%
Investment Companies 1 515 0.00%
Modarabas & Mutual Funds 6 1,923,153 0.80%
Insurance Companies 4 433,559 0.20%
Banks, Development and other
Financial Institutions 10 4,382 0.00%
Individuals 3,216 2,631,958 1.00%
Others 52 8,644,494 3.40%
Total 3,303 255,493,792 100%
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Source: Company accounts
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PAKT: Financial snapshot
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Rs (000) CY11 CY12 CY13 CY14 CY15 CY16
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Operating results
Gross turnover 67,491,816 75,531,228 89,928,975 107,217,617 125,012,583 129,278,304
Net turnover 22,949,974 25,880,309 30,622,803 36,619,077 42,907,191 44,866,504
Gross profit 6,240,701 8,445,519 10,610,216 13,847,393 18,555,200 22,773,668
Operating profit 660,654 2,728,512 4,602,437 7,087,062 10,335,069 14,999,834
Profit after tax 363,785 1,728,458 3,124,309 4,850,145 7,046,434 10,361,352
Earnings per share (Rs) 1.42 6.77 12.23 18.98 27.58 40.55
Financial ratios
(based on gross turnover)
Gross margin 9% 11% 12% 13% 15% 18%
Operating margin 1% 4% 5% 7% 8% 12%
Net margin 1% 2% 3% 5% 6% 8%
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Source: Company accounts
