Profitability boost for PMPK

Another cigarette-maker has closed 2021 on a strong note. As per its latest financial results posted to the bourse for the year ended December 31, 2021, Philip Morris (Pakistan) Limited (PSX: PMPK) managed to increase its bottomline significantly despite a nominal increase in topline. The credit goes, mainly, to operational efficiencies in core manufacturing costs and administrative overheads compared to last year.

At Rs2.3 billion, this is the highest amount of net profits that PMPK has scored in well over a decade. Having said that, the net turnover at Rs17.5 billion (growing 5 percent year-on-year in CY21) could receive a jolt, as this tally equates just 1.5 times the topline that was seen a decade ago. BR Research discussion with PMPK management after the results’ release revealed that the topline growth in CY21 was mostly volume-driven, with growth present across-the-board in different cigarette pricing tiers.

It helped that PMPK reduced its ‘cost of sales’ by 2 percent year-on-year in CY21 despite a growing topline. Those cost savings raised gross profit in double digits to Rs7.5 billion, even as the gross margin jumped to 43 percent (in terms of net turnover), compared to 39 percent in CY20. The second-ranked tobacco player spent significantly more on distribution and marketing expenses to grow its business, however the double-digit fall in administrative expenses that more than offset higher marketing spending.

Further help down the line came from ‘other income,’ where, as per the PMPK management, the 28 percent yearly increase materialized on the back of one-off events like sale of idle properties and exchange-related gains as well as higher profits on bank balances. This helped compensate a great degree for the unusually-large 76 percent bump in ‘other expenses,’ which were mostly on account of higher spending on worker profit participation fund and exchange losses.

As a result, PMPK’s operating profit in CY21 jumped 29 percent year-on-year to Rs3.4 billion, and the operating margin improved to 19.5 percent (CY20: 15.9%). In the end, after accounting for the 31 percent income tax rate on pre-tax profits of Rs3.3 billion, PMPK closed 2021 with net profit of Rs2.3 billion, showing annual growth of 31 percent. The net margin, where improvement was 258 basis points in the year under review, reached a level of 13.2 percent.

While operational efficiencies have provided a strong close to 2021, the onus is still on PMPK’s topline to start growing and help make profitability levels sustainable. In that respect, a lot depends on which way the federal government decides next budget on the issue of Federal Excise Duty on cigarette sales. Will the government raise the FED, lower it, or leave it unchanged as it did in FY22 budget? It remains to be seen. For now, PMPK has entered 2022 on a solid note. Let’s see what this year has in store for the firm.