Tobacco:- PAKISTAN TOBACCO COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2007
Pakistan Tobacco Company Limited is part of British American Tobacco, the world's most renowned tobacco group, with brands sold in 180 markets around the globe. The company produces high quality of tobacco products to meet the diverse preferences of millions of consumers, and it works in all areas of the business - from seed to smoke.
Pakistan Tobacco's operations in the country began in 1947, making it one of Pakistan's first foreign investments. It provides a number of reputed brands of cigarettes to its consumers in Pakistan, including Benson and Hedges, Embassy, Gold Flake, Capstan and Gold Leaf.
Recent results 1Q'08
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Rs In million
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Jan-Mar Jan-Mar
2008 2007
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Gross Turnover 11,835 10,106
Gross Profit 1,914 1,647
Operating Profit 1,390 1,175
Profit Before Tax PBT 1,275 1,087
Profit After Tax PAT 829 706
Earning Per Share - EPS (Rs) 3.24 2.76
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PTC sold 10.5 billion sticks in the first quarter 2008, 10% higher than the last year. Gold Flake remained the main volume growth driver, while Gold Leaf maintained its position as the value driver. The gross sales increased by 17.1% to Rs 11.8 billion in Jan-Mar'08 vis-a-vis Jan-Mar'07. In relation to the increase in sales, the cost of goods sold also increased by 17.3%. The gross profit increased by 16.2%, while PAT witnessed an increase of 17.4% to Rs 829 billion resulting in an EPS of Rs 3.24.
Administrative expenses showed an increase of 36%, due to inflationary pressures as well as refurbishment of the head office. For the year, the pressure is expected to be on cost of production, due to depreciation of the rupee and the inflationary pressures. Over the years, Pakistan Tobacco has shown a rising trend as evident from the impressive growth in gross, net and operating profits. The operating profits growing by 28% and net profit growing by 44% in 2006 compared to the previous year.
The strong financial performance is attributable to significantly higher sales volume, improved margins in all brands, and continued control on the cost with focus on operational efficiencies and other initiatives. The company maintained double digit volume growth in 2006 with a record sales volume of 34.5 billion sticks - 13% higher than the same period last year (SPLY). This is a remarkable performance keeping in view the overall industry growth, which is estimated at 3%. Gold Flake remained the volume leader in the portfolio and grew at a phenomenal rate of 27% compared to the SPLY, while Gold Leaf maintained its volume base.
In 2007, the company posted a record level of sales and profitability. Operating profit grew by 29% to Rs 3,973 million and profit after tax grew by 27% to Rs 2,413 million. Contribution to the government's revenue amounted to Rs 26 billion, an increase of approximately 15% over the last year. Underpinning this exceptional financial performance were the factors such as strong organic volume growth, efficient cost management, continued investment in brands and people, and most of all the consumers, who continually supported these brands.
Sales volume, at 37.2 billion sticks, grew by 8% during the year ahead of the industry growth that was estimated at 2%. Market share also grew by 1.7 percentage points, further strengthening our position as the market leader in the domestic tobacco industry. PTC further strengthened its brand portfolio with the launch of new variants, limited edition products and packaging, consumer promotions, and effective presence across key market segments.
Cost of sales increased by 14% in 2007 over last year and this was mainly due to higher production volumes and inflation. However, the Company was able to derive benefit from economies of scale (highest ever production) and various cost control initiatives in its supply chain. As a result, increase in cost per unit was contained at 6% over last year, which is well below inflation. Improved financial performance of the company translated into a significant increase in its operating cash flows. Though they were partially offset by higher dividend payments and investment in plant and equipment during the same period, yet it resulted in a net increase in cash amounting to Rs 358 million in comparison to a net decrease of Rs 887 million in 2006.
In line with its drive to invest in latest machinery and facilitate up-gradation in its technology footprint to meet the industry's increased demand, the company invested Rs 1.2 billion in tangible fixed assets in 2007. Moreover, various process optimization initiatives were undertaken at both the factories to further strengthen supply chain's competitive advantage. Dunhill: A high point of the year's activities was the Dunhill Centenary Celebration, which took place with a distinctive display of style and substance. In future, the brand will continue to leverage its international expertise to bring the best tobacco experience to premium segment smokers.
Benson & Hedges (B&H): B&H continued to be the largest brand in the premium segment and the company capitalized greatly on the packaging change done in 2006. The brand will continue to leverage its equity and will endeavor to consistently deliver the superior quality it promises to its consumers. John Player Gold Leaf (JPGL): 2007 has been a successful year for JPGL with the sales increasing by 8% and the brand growing both in terms of value and volume share. In this brand, which is part of the company's brand heritage, the company continues to bring innovation and improvement.
Capstan by Pall Mall: 2007 brought dramatic changes to Capstan - a year in which saw a major shift in the brand's essence and identity. True to its innovative and invigorating appeal, Capstan by Pall Mall was launched in a new modern pack, which offers smokers a unique opportunity to experience the same great taste with a fresh and exciting look. Capstan by Pall Mall is the leading offer in the medium segment. Gold Flake: Gold Flake further strengthened its position by achieving high levels of growth. It is the main volume driver in the company's portfolio. Brand building, targeted consumer promotion activities, and aggressive distribution drives have greatly contributed to Gold Flake's success.
The liquidity of Pakistan Tobacco has remained barely above 1 for the past couple of years, and actually fell in 2006 compared to 2005. This is because despite improved profitability on account of strong financial performance the company's cash outflow remained higher than inflow mainly due to higher income tax, dividend payment and capital expenditure. Consequently, there was not a significant increase in the current assets as opposed to the current liabilities.
Pakistan Tobacco's asset management ratios depict a healthy trend of improving inventory management and improved credit policies. Both the inventory turnover (days) and the days sales outstanding have decreased, indicating that the company has been able to utilize its inventory at an optimally better level each year, and has been able to receive cash from its debtors over shorter periods of time subsequently over the lapse of time. Even though the inventory turnover has increased in 2007 the overall operating cycle has improved tremendously, falling from around 57 days in 2003 to around 36 days in 2007. As far as the fixed assets are concerned, recently the Company spent Rs 1.2 billion (Rs 0.5 billion more than the previous year) for acquiring latest machinery to cater for increased demand and to facilitate up gradation in the technology footprint. With the phenomenal growth in sales over the past couple of years and efficient utilization of property plant and assets, the overall total asset turnover ratio has also shown a rising trend over the years.
The total asset turnover ratio exceeded 3 in all the five years, hence bearing substance to the efficient asset management practices of the company. The interest coverage ratio has improved phenomenally over the past couple of years. It has increased from 7.68 in 2003 to 74.8 in 2007, showing that over the years, the company, with improved operating margins, has improved on its ability to pay its financial costs pertaining to interest payments. However, the long term debt to equity ratio of the company increased over the years as well, primarily due to an increase in the deferred taxation of the company. However, the reliance of the company on long term debt is negligible, the only long term debt arising through taxation. Total dependency on debt financing is on average 50%, the main component of debt being the short term loans and payables.
The book value has improved over the years owing primarily to an increase in equity due to a rise in the revenues and reserves of the company. The dividends paid per share have also improved tremendously as the excellent performance of the company over the past couple of years allowed it to disburse dividends to its shareholders. Similarly, the earnings per share of the company also increased significantly, marinating a steeply rising trend since 2003.
This is due to an impressive growth in the net margin of the company over the course of the four years under consideration. The market price of the company has also improved significantly over the years. It was only Rs 29 in 2003, but soared up to Rs 68.35 in 2006, an increase of over 135% over a period of four years.
Considering the past performance of the company, the financial outlook for the future is quite positive for Pakistan Tobacco Company, and a healthy growth is expected over the years. However, the directors speculate that the profitability of the company for the coming time period may remain under pressure due to the cyclical nature of the business and the rising inflationary trend.
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PTC - Financial Highlights
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2003 2004 2005 2006 2007
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INCOME STATEMENT
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Turnover 22,572,247 25,452,634 30,615,062 35,715,451 40,889,275
Gross Profit 2,871,541 3,482,621 4,529,604 5,533,520 6,509,957
Operating Profit 1,010,268 1,444,628 2,377,663 3,048,201 3,972,632
Profit Before Tax 614,695 1,056,039 2,082,064 2,860,673 3,713,575
Net Profit 321,081 665,227 1,321,919 1,904,988 2,413,058
BALANCE SHEET 2003 2004 2005 2006 2007
Total Equity 2,853,090 3,262,823 3,639,414 4,139,187 4,022,857
Current Liabilities 4,075,034 3,137,467 3,604,366 3,750,209 4,822,940
Non-current Liabilities 370,632 624,475 724,673 845,004 980,000
Current Assets 3,859,453 3,434,601 4,136,116 4,172,950 4,641,368
Non-current Assets 3,439,303 3,590,164 3,832,337 4,561,450 5,184,864
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LIQUIDITY 2003 2004 2005 2006 2007
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Current Ratio 0.95 1.09 1.15 1.11 0.96
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ASSET MANAGEMENT 2003 2004 2005 2006 2007
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Inventory Turnover (days) 35.25 15.05 15.68 17.19 36.44
Days Sales Outstanding 25.63 26.88 29.34 31.26 0.02
Operating Cycle 60.88 41.93 45.02 48.45 36.46
Total Asset Turnover 3.09 3.62 3.84 4.09 4.16
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DEBT MANAGEMENT 2003 2004 2005 2006 2007
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Debt to Asset Ratio 0.61 0.54 0.54 0.53 0.59
Debt to Equity Ratio 1.56 1.15 1.19 1.11 1.44
Long Term Debt to Equity 0.13 0.19 0.20 0.20 0.24
Interest Coverage ratio 7.7 29.9 46.9 57 74.80
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PROFITABILITY 2003 2004 2005 2006 2007
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Gross Profit Margin 12.72% 13.68% 14.80% 15.49% 15.92%
Profit Margin 1.42% 2.61% 4.32% 5.33% 5.90%
Return on Assets 4.40% 9.47% 16.59% 21.81% 24.56%
Return on Equity 11.25% 20.39% 36.32% 46.02% 59.98%
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MARKET VALUE 2003 2004 2005 2006 2007
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Earnings per share 1.26 2.6 5.15 7.46 9.4
Price Earnings ratio 23.02 16.92 12.82 9.16 16.5
Dividend per share 0.1 1.2 2.5 7.4 7.9
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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