Tobacco: LAKSON TOBACCO COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003 - H 2001 2009

Introduction: The Lakson Tobacco Company is a part of the Lakson Group which was founded in 1954. The company's major activity is the manufacture and sale of cigarettes in Pakistan. It is a publicly listed corporation and is the largest tobacco exporter in Pakistan. The Company operates in five factories located in Karachi in the districts of Dadu, Sahiwal, Rawalpindi and Swabi.
Lakson tobacco's leading brands include Morven Gold along with Red and White. In March 2007, Phillip Morris International acquired an additional 50.21% stake in Lakson Tobacco Company to bring its share in the Tobacco Company to approximately 90%.
Lakson Tobacco Company has shown decent growth rates over the years. In 2005 the company performed exceedingly well and was able to achieve growth in all areas. Its operating profits were 32% higher than the Same Period Last Year (SPLY). This improved performance can be attributed to higher sales volume, improved margins, better brand mix and control over cost through focus on operational efficiencies. However the Company could not maintain its superb performance of 2005 in 2006 as the sales were the same as last year and operating profit declined by 7.4% over the Same Period Last Year (SPLY).
In 2007 the company improved its performance over the 2006 performance and increased Sales by 9%, Gross Profit 8% and operating profit 12% in spite of an 8% increase in the cost of sales due to a 15 % increase in the prices of tobacco. This is a decent performance keeping in view the overall industry growth which is estimated at 3% but it is lower than its major competitor Pakistan Tobacco Company.
RECENT RESULTS H1'09
Overall, during the first half of 2009, the Company's gross turnover increased by 30.7% to Rs 7.5 billion compared to the same period last year and the Company's gross profit increased by 29.3% to Rs 2.8 bn. Distribution and Marketing expenses increased by 93.7% due to increased marketing activities and expansion of the brand portfolio. The administrative expenses increased by 17.2% due to higher employee's compensation and donation for Internally Displaced People (IDP). By virtue of increased distribution, marketing and administrative expenses, operating profit decreased by 2.8% and profit before taxation by 4.6%. PAT was recorded at Rs 773.8 million. Company's earnings per share (EPS) decreased by Re. 0.32 per share to be Rs 12.57 as compared to the corresponding period last year.
FINANCIAL YEAR 2008
Note (The Company has changes its year end from June to December and therefore the comparison made at places will be of full year FY08 with six month period ending at December 31, 2008 as according to the financial statements released by the company and at some places according to full year FY07 which have been estimated by the six month figures given in the financial statements).
The company performance remained unsatisfactory in FY08 this because of a tough first and third quarter in the current year. The company had suffered huge losses due to the December 27, 2007 riots resulted in significant losses and damages to the Company's assets (both human and property) at Korangi Industrial Area. The company also eliminated the services of its employees on 4th April with one month pay as it was not in a position to resume its manufacturing operations which requires a significant investment for installing new plant, machinery, equipment and incurring costs relating to the civil works.
However the company which has been among the top 25 company's at the KSE in 2006 and 2007 could not maintain its 2007 performance as it faced difficult times due to sharp decline in the demand for tobacco which has decreased from 79 million kilograms in the year 2007 to 71 million kilograms currently which adversely affected the Companies profitability. Apart from this the deteriorating economic conditions, inflation, load shedding and the sharp rupee depreciation during the period had also added to the difficulties.
The net turnover of Lakson Tobacco Company was 16% more in FY08 as compared to the estimated FY07 figure. The company's Gross profit also rose by 18% over the same period last despite a 15% increase in the cost of sales. The company's cost of sales increased due to an increase in manufacturing expenses which increased due to an increase in the wages paid and also due to an increase in Purchases and redrying expenses which increased due to an increase in the cost of raw materials.
The cost of sales to net turnover ratio decreased by 0.97% as compared to the last period which reveals measures taken by the management to improve the efficiency in the business. The company also managed to keep a check on its expenses over the year despite a huge increase in its distribution and marketing expense and in the administrative expense in the 3rd quarter of the current fiscal year. The company's distribution and marketing expense increased by 8% as compared to the estimated FY07 expense. This was due to an increase in the cost of sponsorship and event marketing.
The company also had a 31% increase in its administrative expense due to an increase in the wages expense. The company had a 30% increase in it's before tax profit but due to a 60% increase in the taxes paid the company's after tax profit were limited to a 16% increase over the Same Period Last Year (SPLY). This year the Company contributed Rs 14.7 billion to the national exchequer in the form of Federal Excise Duty, Sales Tax, Custom Duties, and Income Tax etc. This was also due to an increase in GST to 16% during the year.
The Company maintained its gross profit in FY08 as compared to the last six months of FY07 with the Gross profit being close to 17.5%. The company could not increase its Gross Profit Margins due to increase in cost of sales due to rising inflation. The company's Gross Profit Margins were similar to its major competitor Pakistan Tobacco Company (PTC) which had Margins of approximately 18% during the 9MFY08.
The company's profitability margin declined slightly from 4.59% in the last six months of FY07 to 4.43% in FY08. The profitability margins were lower than its major competitor Pakistan Tobacco Company (PTC) which had a profitability margin of 6.8% which was due to higher distribution and marketing expenses. Thus, in spite of having the same gross profit as PTC the company's profit margin were lower which shows that there is a need to control its cost base. The company's return on assets (ROA) was 11.71% in FY08 as compared to 6.08% in the last six months of FY07 and the company's return on equity (ROE) improved to 18.44% from 8.55% in the last six months of FY07.
The company's liquidity position worsened slightly as its Current Ratio decreased from 2.56 in FY08 to 1.99 in the last six months FY07. This was due to a 64% growth in Current Liabilities on the back of increase in running finance under mark-up arrangement and an increase in trade and other payables as opposed to a 21% growth in Current Assets. However, in spite of this decline the company's liquidity position is still very good and is the best among the industry. Its Current Ratio was 1.99 in FY08 as compared to 0.95 for PTC during 9MFY08.
The company's interest coverage ratio declined from 80 in the last six months of FY07 to 39.24 in FY08 due to a 439% increase in the finance cost. The company's debt to assets ratio was 6.55% in FY08 as compared to 5.66% in FY07.
The company's earning per share is higher than that of other Tobacco company's in the industry. The company's earning per share was Rs 17.95 in FY08 as compared to Rs 7.65 in the last six months of FY07. The company's book value also improved from Rs 55.1 at the end of FY07 to Rs 60 at the end of FY08.
FUTURE OUTLOOK
Your Company is a fully integrated affiliate of Philip Morris International and wants to improve its utilisation of global resources to accelerate superior performance in all areas. The Management wants to bring an improvement in all areas of its operations through innovative marketing, upgrading of plant and machinery, development of human capital and continued emphasis on cost control especially its distribution and administrative cost.
The company however faces significant challenges which include the recommendation by the Senate body on March 9th 2009 to raise the prices of tobacco leaf (which cigarette manufacturers buy from growers) to Rs 150/kg. This was because the Senate body found the crop price to be grossly undervalued and agreed with the farmer's view of surge in their input cost like fertiliser and overall impact of double digit rise in inflation. If this is implemented this would mean an increase of 83% over the Rs 82 price suggested by the Pakistan tobacco board (PTB) and could significantly impact the profitability of the company which would further have to improve its cost control.
Moreover, the tobacco industry also faces serious threats of smuggled cigarettes from Afghanistan and Iran which are of poor quality and also decrease the sales of the company which could also affect government revenues. Apart from this, the government's ratification to the FCTC may be a source of concern for the company as they may no longer be able to advertise or carry their promotional activities which may adversely affect the sales and distribution of the company's products. The increase in federal excise duty (FED) by the government in February 2009 has also impacted the profitability of Tobacco Company's including LTC.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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