Losses deepen for PMPK

Marlboro Man is having a rough ride in Pakistan. As per a PSX notice released last Friday, Philip Morris (Pakistan) Limited (PSX: PMPK) has closed yet another quarter with a massive top-line slump. Progressively lower cigarette sales volumes this calendar year have resulted in a net turnover that was down 63 percent in 1QCY17, and now in 2QCY17 the fall is brutal again at 52 percent year-on-year.

The bottom-line for PMPK, whose famous brands include Morven Gold, Marlboro, Diplomat, K2, and Red and White, is screaming red again, after returning to profitability for the only time this decade in CY16 (see illustration). The shellacking has been less bad in 2QCY17. But it still doesn’t help things, perhaps foretelling an alarming trend.

At the close of half year, PMPK top-line is now down 57 percent year-on-year. The second-ranked tobacco player booked a net loss of Rs463 million in 1HCY17, compared to net profit of Rs1.54 billion in 1HCY16. But the PMI subsidiary isn’t alone in the suffering. The whole formal sector is imploding. For instance, net turnover was down 37 percent year-on-year for the industry leader, Pakistan Tobacco Limited (PSX: PAKT) in 1HCY17. (For more on PAKT’s woes, read “PAKT: it’s getting worse,” published July 28, 2017)

The fall in cigarette volumes is crushing the spirit of players like PAKT and PMPK. The duo’s cigarette sales volumes are declining in double-digits. Illicit tobacco trade has been a long-running issue in Pakistan, but only in recent quarters has it started to significantly impact the formal sector sales. Imposition of higher FEDs on the formal sector, in the absence of a meaningful crackdown on duty-non-paid, counterfeit and contraband smokes, has led to the formal sector losing its price competitiveness.

As formal sector cigarette volumes fade, the government also stands to potentially lose north of Rs50 billion annually in various levies (excise duties, sales tax, and corporate tax) from the sector. Seemingly alarmed, the recent federal budget had some respite for the sector. The finance ministry announced the return to a three-tier tobacco FED regime, with almost no increase in FED on top two tiers, besides a host of regulatory measures to check the proliferation of domestically-produced duty-evasive cigarettes.

The bottom tax slab, which has FED of Rs16 on cigarette brands retailing below Rs58.5 per pack, is expected to help the likes of PAKT and PMPK to take the fight to cheaper alternatives in the informal sector. Since the new FED regime kicked in from July 1, let’s see if 3QCY17 results in any turnaround for the sector. Meanwhile, the tobacco firms will do well look for more operational savings.