PMPK: topline is fine

The third quarter of the calendar year wasn’t as impressive for Philip Morris (Pakistan) Limited (PSX: PMPK) profitability as the first two. Whereas the second-largest cigarette manufacturer had scored a net profit growth of 99 percent year-on-year in 1QCY21 to Rs0.71 billion and 12 percent year-on-year growth in 2QCY21 to Rs1 billion, its latest financial results show that the bottomline had slumped by 39 percent year-on-year in 3QCY21 to Rs0.35 billion. Operating and financial factors were both at work.

The declining bottomline came about despite a strong, 15 percent yearly growth in net turnover for PMPK. As discussed earlier in this space, the post-budget quarter seems to have elevated production/sales volumes in the formal tobacco industry, as a result of the government keeping the FED regime unchanged in the FY22 budget. Recall that the Market leader, Pakistan Tobacco, has also done well in 3QCY21 from the topline standpoint. (For more on that, read “PAKT’s strong quarter”).

Better sales volumes in the formal industry are also supporting growth in government’s tax revenues. As per PMPK, the company’s exchequer collections – under the heads of FED, sales tax and sundry government levies – increased by 22 percent year-on-year to reach Rs6 billion in 3QCY21. The government’s decision not to raise the tobacco FED is apparently helping the legitimate firms fight unscrupulous brands as well as maintain prices for consumers in an inflationary environment.

Back to PMPK, the impact of healthy topline growth was nullified by out-of-proportion increase in cost of sales, distribution expenses and other operating expenses. Despite management initiatives on achieving savings in manufacturing operations, the cost of sales grew by 28 percent year-on-year in the quarter under review. These costs consumed 54 percent of net turnover, which is 5.5 percentage points higher than in 3QCY20. This impacted the gross margin, which stood at 45.7 percent, by the same magnitude.

Had it not been for the controlled growth in administrative expenses and the doubling in ‘other income,’ PMPK could have witnessed a large decline in its operating profits. Those two accounts more than offset the growth in distribution and other expenses and helped the operating profit to actually grow by 1 percent year-on-year, posting an operating margin of 19 percent (22.8% in 3QCY20).

In the end, it was the comparatively higher slice of pre-tax profits that was booked under income taxes (almost four times the level seen in 3QCY20) that impacted the net profits deeply. Overall, at the end of nine-month period in the year, PMPK net turnover had reached almost Rs13 billion, a growth of 7 percent year-on-year, whereas the net profits crossed Rs2 billion, an increase of 13 percent year-on-year.

At this rate, PMPK looks set to close CY21 on a high – already, during 9MCY21, the firm has crossed the net profits scored in entire CY20. However, the management seems concerned about cigarette consumers being impacted by volatile economic situation and potentially shifting to cheaper brands, thereby impacting the firm’s operations. Let’s see what the final quarter has in store.