Pakistan Tobacco Company

Pakistan Tobacco Company (PAKT) is an associate of a leading global tobacco group, the British American Tobacco Company (BATC), which has a legacy spreading over more than 100 years. The BATC has presence in more than 180 countries and is known for its high quality tobacco brands.

From crops to commercialisation, the company is involved in every aspect of the cigarette manufacturing. The product portfolio of PAKT is well-diversified. It has different varieties to offer to a wide range of smokers, from low-price to premium quality, high-priced cigarettes.

British American Tobacco Company started its operations here back in 1947 and is the first multinational to lay its foot on Pakistan. In 67 years since, it has grown from a company operating with a warehouse near Karachi Port to having two state-of-the-art facilities employing more than 1,700 employees today.

PAKT has products that cater to all markets and all consumer choices from low-income to prestige brands. It has six different brands to offer its consumers, Dunhill and Benson and Hedges are the premium quality brands. They were re-launched in Pakistan in the 2000's, and have since been performing well.

John Player Gold Leaf, the largest urban brand in Pakistan, is the most familiar brand. In the low range segment, Pakistan Tobacco Company offers Capstan by Pall Mall (CbPMO), Embassy and Gold Flake. Embassy is the leading volume brand, and the most popular brand in Punjab. It's locally tailor-made taste has enabled it to achieve high brand loyalty.

ANNUAL HIGHLIGHTS Even though the government undertook some significant crackdown drives during 2013, the year did not see any drastic change in the enforcement environment as the consumers continued to be attracted towards the cheaper, duty-evaded brands. Altogether, the legitimate tobacco industry has lost over Rs 80 billion to illicit trade during the last five years.

PAKT dominates with a significant market share in the industry. During CY13, the company's brands seemed to perform well against the competition. Net turnover increased by about 18 percent to reach Rs 30.6 billion in CY13. It seems that the industry registered sales growth in the last year in part due to speculative buying, and in part due to the price-hike following the government's FY14 budgetary increase in sales tax and excise duty.

The company had sold 40.6 billion cigarette sticks back in CY12. So while the CY13 volume figures are not available yet (PAKT is yet to release its 2013 annual report), one can assume that there would have been considerable growth in sales volume, as the company's gross turnover (a more accurate indication of sales volume) had grown by 19 percent year on year in CY13.

PAKT continues to face cost pressures. That was visible in an increase in cost of sales, which grew by 15 percent year on year in CY13. The growth could be attributed to inflation and higher sales volume. The company has multiple cost savings and productivity initiatives aimed at rationalising the cost base. As this growth was proportionately lower than the top line growth, the gross profit margin jumped to 34.6 percent in CY13, compared to 32.6 percent the previous year.

Meanwhile, PAKT's selling and distribution expenses increased by 14 percent, while the administrative expenses jumped by 24 percent. But the overall financials remained positive. Not only did 'other operating expenses' decline by 56 percent year on year, the 'other operating income' also offer support through its 43 percent growth during the year.

Thanks to healthy top line growth and reasonable increase in costs, the tobacco giant firmed up its profit margins in CY13. PAKT eventually closed CY13 with a massive 81 percent increase in its net profits, which reached Rs 3.12 billion. That threw up a net margin of 10.2 percent and an EPS of 12.23 rupees per share.

OUTLOOK Rising awareness among the masses, rising cost base, down-trading, the law-and-order situation and narrow product margins are expected to affect the volumetric sales of tobacco over CY14. In order to fill the shortfall in its revenue, the Federal Government is also expected to raise the federal excise tariff on cigarettes.

PAKT operates in a favourable demographic, is the market leader and the largest player. However, its improved margins are under threat from illegal cigarette market and cigarette smuggling from neighbouring countries like Iran and Afghanistan. It is said that nearly a quarter of cigarettes available in the market are sourced from illegal channels. That not only hurts legitimate tobacco industry, but also dents government's tax revenues to an extent. This trend is a market distorter and must be dealt with by the government through laws as well as enforcement drives.