PAKT weathering the storm?

Pakistan Tobacco Company (PSX: PAKT), the industry leader continues to post growth in earnings in double digits despite the economic headwinds and deteriorating industry dynamics post the successive FED hikes in the last year and a half. As per its latest earnings announcement sent via the bourse, Pakistan Tobacco Company (PSX: PAKT) closed the first half ended June 30, 2023, with double-digit growth in its net profits when compared with the same period last year. While the earnings growth momentum continues, the sales growth has seemingly come down.

PAKT’s gross turnover growth of 18 percent year-on-year to Rs133.4 billion during 1HCY23 owes mainly to the 18.3 percent increase in domestic turnover (which is 98% of the gross turnover). The export turnover, although only two percent of the turnover, slipped by 10.5 percent year-on-year, and this decline in export sales have come about from contraction in the export market. Export turnover slipped by 18 percent in 2022 due to losing certain export markets.

Amid the falling large scale manufacturing of tobacco industry and a continuous decline in cigarette manufacturing after 2021, the topline gains are likely driven by the increase in retail price of smokes. Despite the growth in gross turnover in 1HCY23, the net turnover was only up by 2 percent year-on-year. This was because of massive increase in federal excise duty (FED) and sales tax. Overall, sales volume massively declined in 1HCY23 for PAKT due to rise in the share of illicit tobacco as enhanced FED and sales tax forced the legitimate companies to drive the prices up.

The declining volumes were evident in the ‘cost of sales’ going down by 18 percent year-on-year to Rs19.5 billion. The decline in cost of sales came despite rising cost of core inputs, fuel, logistics and other services. As a result of the rising topline amid falling cost of sales, the gross profit for PAKT jumped 26 percent year-on-year to go over Rs26.6 billion in the analysis period.

PAKT witnessed higher selling and distribution expenses as well as a huge spike in the ‘other operating expenses - the latter was likely due to foreign-exchange-related losses. As a result, growth in PAKT’s operating profit was 32 percent year-on-year. The company also incurred strong gains on account of its ‘finance income’ growing by over four times in the first half of 2023, thanks mainly to higher profits on its investments following the successive policy rate hikes.

Overall, the company’s earnings for 1HCY23 were up by 30 percent year-on-year to Rs11 billion due to topline growth, cost savings and hike in finance income. While the tobacco giant has been able to weather the economic conditions and as well as industry abnormalities like the rising share of illicit cigarette trade, the reports of 80 percent factories’ shutdown and decline in production due to enhanced FED and an exponential increase in illicit cigarettes might make maintaining topline growth difficult.