After posting impressive financials in CY16, the tobacco giant couldn’t repeat the feat in CY17. But Pakistan Tobacco (PSX: PAKT) should be happy that the roller-coaster year that was 2017 couldn’t inflict irreparable damage to its business. It’s essentially a tale of two halves, with each six-month period in 2017 undergoing dramatic changes on a year-on-year basis.
In 1HCY17, PAKT saw its financials stumble. Due to falling cigarette sales, gross revenues went down 39 percent and bottom line dipped 58 percent year-on-year. Cheap, illicit smokes hampered the company’s value-for-money (VFM) brands, as similar fate befell Philip Morris Pakistan (PSX: PMPK). As per PAKT management, illicit smokes had captured about 41 percent market share by volume as of June 2017, as the top two players struggled to compete against locally-produced, duty-non-paid (DNP) cigarettes.
In the second half, the fortunes of the two tobacco majors started taking a positive turn. In the FY18 budget, the federal government – which itself was alarmed by dwindling tobacco tax receipts – only nominally raised FED on two exiting pricing tiers. It also re-introduced a third, low-price tier, to enable tobacco firms to recoup market share in VFM segment (below Rs58/pack).
Suddenly, cheaper cigarettes arrived in the formal sector and started retaking market share, because of the reduced price differential with the illicit, DNP brands.
Those fiscal measures turned the tide for PAKT in 3QCY17 and 4QCY17. In 2HCY17, the market leader’s gross turnover expanded by 32 percent year-on-year and net profits jumped 101 percent year-on-year. As of September 2017, PAKT had previously stated, the illicit sector’s market share had come down to 35.5 percent. Judging by the juicy results of the fourth quarter, when PAKT bottom line grew by 35 percent year-on-year, formal market share would have come up even more by December end.
So, despite the CY17 financials showing year-on-year decline in both top-line and bottom-line, the tale of two halves suggests that PAKT is out of the woods now. The fiscal measures that boosted company performance are still in place, and will continue to aid the firm in 1HCY18. The management can breathe easy, at least until the next budget announcement.
The government, in its own self-interest, may stick to this FED regime as the sector’s tax contributions had also picked up in 2HCY17. So, the government will be happy. The sector is back in blue. But short of sustained enforcement, the DNP brands will continue to exist. Meanwhile, in this entire episode, public health may be the real casualty, as cheaper cigarettes are now available in the formal market.
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