Doom again for PMPKL

While rest of the economy is picking up, Pakistan’s tobacco industry seems mired in recession this year. Last week, the tobacco major Pakistan Tobacco (PSX: PAKT) announced a massive drop in both top line (34%) and bottom-line (46%) for 1QCY17. Now it’s time for the second-ranked player, Philip Morris Pakistan (PSX: PMPKL) to show that it has also been beaten black and blue at the start of CY17.

Declining cigarette volumes are hurting formal sector players. PMPKL was affected much harder last quarter, as per company financials released yesterday. Net turnover took a nosedive, wiping away nearly three billion rupees from the top line. PMPKL doesn’t publish data on its cigarette volumes, but we know of PAKT’s double-digit declines in annual cigarette sales. PMPKL is sliding, too, perhaps faster.

As the firm’s net turnover crashed in 1QCY17, core costs also went down, albeit by a smaller proportion. Moreover, cost of sales consumed a bigger portion of the top line, 76 percent in the quarter under review, as opposed to 48 percent in the same period a year ago. That is why the firm’s gross profit went down by a higher, 83 percent year-on-year and its gross margin was more than halved to 24 percent.

Operating expenditures also declined, but not by enough. They also consumed comparatively more of the top line this quarter. So there was nothing to save the firm from posting an operating loss in the quarter. A massive fall in ‘other income’ didn’t help matters either. Savings in finance costs were timely, but couldn’t do much in the end.

Recall that PMPKL had returned to profitability only in CY16 (net profits: Rs575 mn) for the first time this decade, following five years of net losses. Now this first quarter business sends to waste all that optimism as the firm goes deeper into CY17. The Rs300million net loss – and a chastened, 17 percent negative net margin – would be difficult to wipe out in the coming quarters.

If the tobacco volumes keep going south, PMPKL will struggle to close the year on a note of profitable growth. Since the issue of illicit tobacco trade hurting formal sector volumes is industry-specific, there is little PMPKL can do about that on its own.

The industry will need to put together a joint front once more so that a meaningful crackdown could arrest the spread of duty-evasive, counterfeit and contraband smokes.

The excise-driven price increases in formal cigarette sales is not only hurting the players, but it is also coming down hard on the government, recent data show. Due to the receding fortunes of these two top tobacco players in just the first quarter this year, it is estimated that the government collected Rs13 billion+ less in terms of excise duties, sales tax, and corporate tax.

On an annualized basis, the tax loss may cross Rs50 billion this calendar year! One can only hope that the government is aware of this situation and is mulling a strategy. Without significant crackdown on illicit tobacco trade, any further hike in excise duty, which is expected in the coming budget, would make it even more difficult for the formal sector to compete.