Hats off to Pakistan Tobacco (PSX: PAKT). The tobacco major closed CY16 with a massive, 47 percent expansion to its bottomline. Its a big deal because the topline expansion, which was paltry at best, wasnt behind the record profits last year. Rather, tremendous savings in core costs, operating expenditures, and finances, have made CY16 PAKTs most profitable year yet.
Gross turnover marginally inched up, suggesting a saturated marketplace where the organised sector, which is operating in a price-competitive market, is under threat from cheaper, counterfeit and smuggled cigarette brands. Most likely the improvement in gross turnover was due to excise-driven price increments that have to be incorporated every July post-budget announcement.
It remains to be seen how many cigarette sticks PAKT actually sold in CY16. Most likely, it sold less than the previous year. Back in CY14, it had sold 44 billion sticks, but the following year, in CY15, 42.7 billion of its cigarettes, 3 percent lower, were taken off the shelves.
PAKT collected Rs84.4 billion during CY16 in terms of excise duties and sales tax, which is about 65.3 percent of gross turnover and 2.8 percent higher year-on-year. However, as a percentage of gross turnovers, those collections were 38 basis points lower in CY16. The remaining 34 percent of gross turnover, that is net turnover, is what the firm was left with for its own use.
The remaining portion of income statement, however, should be a treat for PAKTs thin-trading shareholders. Last year was among Pakistan Tobaccos most productive years in recent times. Thanks to lower volumes, cost of sales as a ratio of gross turnover had come down to 17.1 percent in CY16, nearly 2.5 percentage points lower than CY15. The improvement was visible in the 17.6 percent gross margin.
Then, the selling and distribution expenses and the administrative expenses also went down as a percentage of gross sales. That, and some support from other income, helped the firm achieve an operating margin of 11.6 percent, 3.3 percentage points higher than CY15. More help came from double-digit growth in finance income and a fall in finance costs.
In the end, PAKT scored a hefty net profit, crossing the Rs10 billion profitability mark. The EPS of Rs40.55, up from Rs27.58 the previous year, looks great. For now, despite a stagnant topline, the firm has prospered, thanks to manufacturing and distribution efficiencies. However, the declining cigarette volumes (and illicit sales thereof) remain a concern, as cost savings are bound to exhaust over time.
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