PMPK: better margins

After suffering nearly two billion rupees in losses in CY19, the maker of Marlboro is reversing the tide this year. In the first half of the ongoing calendar year, Philip Morris (Pakistan) Limited (PSX: PMPK) returned to profits (Rs1.3 bn) as opposed to a loss of Rs0.6 billion in 1HCY19. The latest quarterly results have a big role in the ameliorating financials, despite the coronavirus-related lockdowns, of varying degrees, in that period.

Reviewing PMPK’s performance in the Apr-Jun 2020 quarter in particular, the recovery is real but it is rather mixed. It wasn’t a good sign that the second-ranked cigarette manufacturer underwent a sizable topline decline in 2QCY20. This revenue shrinkage occurred despite the increase in retail prices of PMPK products in the market. This points towards lower volumetric sales.

PMPK feels undercut by an “illicit cigarette sector,” which it claims to dominate about 35 percent of “total tobacco market”. However, it isn’t obvious that the rest of the tobacco industry also suffered as much in the quarter. Recall that Pakistan Tobacco, the market leader, had recorded a 12 percent year-on-year net turnover growth in the same quarter (Read: “Good quarter for PAKT,” published July 28, 2020). The top player kept its operations running through the so-called corona quarter.

This is in contrast with PMPK, which had to switch its operations on and off. In its notices to PSX during the pandemic, PMPK temporarily suspended its operations due to Covid-19 lockdowns on three occasions between March and June.

Still, the revenue drop didn’t stop the PMI subsidiary’s profit margins from visibly improving, as the company managed to bring down its core costs and operating expenses by a greater proportion than the revenue loss. PMPK reduced its cost of sales significantly, leading to a 10 percentage-points (pp) increase in gross profit margin over over 2QCY19 to reach 47 percent in the quarter under review.

The distribution expenses consumed 9 percent of topline, almost 2 pp less than same period last year. But this gain was wiped by growth in the administrative overheads, which also depleted 9 percent of net sales in 2QCY20. Besides, the unfavorable mix of lower ‘other income’ and high ‘other expenses’ resulted in a relatively lower, but still healthy, increase (5.5 pp) in operating profit margin, which stood at 28 percent in the quarter.

In the end, it was a lower tax bill, despite similar pre-tax profits over last year, that resulted in net profits growing by a third over same period last year. Net profit margin reached 19 percent, as opposed to 12 percent in 2QCY19. The second-half may bring more respite for the firm, given the anticipated economic recovery and the revenue-neutral implications of federal budget on cigarette sales in the country.