Khyber Tobacco Company

Khyber Tobacco Company (PSX: KHTC) was incorporated in Pakistan as a public limited company in 1954. The company manufactures and sells cigarettes besides re-drying of tobacco. The company also has filter rods and other non-tobacco materials in its portfolio. Besides having a strong market presence in Pakistan, KHTC has expanded its distribution network in Eastern Europe, South & West Africa, Central & South Asia and Middle East.

Pattern of Shareholding

As of June 30, 2022, KHTC has a total of 4.8 million shares outstanding which are held by 1147 shareholders. Local general public has the highest shareholding of 93.91 percent in KHTC. This is followed by Insurance companies having a stake of 3.46 percent in the company. The remaining shares are held by other shareholders having an ownership of less than 1 percent shares of the company.

Historical Performance (2018-22)

The topline of KHTC has dipped twice since 2018 i.e. in 2019 and 2021. These were also the years where the company posted a negative bottomline. The margins of the company also stayed in the negative zone in 2019 and 2021 which although rebounded in the subsequent years but couldn’t attain the level seen in 2018.

In 2019, KHTC’s export sale boasted an astounding growth of over 42 times to clock in at Rs.244 million, however, local sale nosedived by 16 percent year-on-year to clock in at Rs2102 million. The drop in sale came on the back of low volumetric sales in the cut tobacco and cigarette category while re-dried tobacco sale stood at 1.42 million kilograms in 2019 compared to 0.166 million kilograms in 2018. However, re-dried tobacco category couldn’t offset the sluggish performance in the other two categories, culminating into a topline slide of 5 percent year-on-year in 2019. However, cost of sales continued to expand which squeezed the GP margin to 17 percent in 2019 from a whopping 44 percent in the previous year. Then distribution expense also grew by 33 percent year-on-year on 2019 due to extensive marketing of re-dried tobacco. To add to ado, finance cost blew up by around 4 times owing to high discount rate in 2019 coupled with increased borrowing to meet working capital requirements. The company recorded an operating loss margin of 3 percent in 2019 compared to an OP margin of 24 percent in 2018. In 2019, the company posted a net loss of Rs.38 million versus net profit of around Rs.200 million in the previous year.

In 2020, sales began to rebound with a year-on-year topline growth of 71 percent. This came on the back of high off-take in all three categories i.e. re-dried tobacco, cut tobacco and cigarette. Both local and export sales boasted a massive turnaround in 2020 despite COVID-19 which kept the economy subdued. The GP margin stayed intact at 17 percent despite a huge 69 percent growth in cost of sales because of substantial topline growth. The company booked an impairment loss on financial asset, which was over 6 times higher than what it did in 2019 due to expected credit losses.Low discount rate during the year played a pivotal role in lowering the finance cost despite an increase in the debt-to-equity ratio to 100 percent in 2020 from 48 percent in the previous year. NP margin stood at 2 percent in 2020 as against the net loss margin of 4 percent in the previous year.

After a year of respite, the topline once again took a hit in 2021 and dropped by an even greater magnitude i.e. 34 percent year-on-year. This was on the back of a massive drop of 3.04 million kilograms in the local sale of re-dried tobacco. While the sale of other two categories marginally increased but couldn’t create any impact on the topline amidst lackluster sale in the re-dried tobacco category. Export sale registered over 50 percent dip in 2021 due to low demand of Pakistani tobacco in the international market. GP margin plunged to 14 percent in 2021. Lesser export sales saved the company from customs, clearance and freight on export. This coupled with low advertisment and promotion activities resulted in a 46 percent year-on-year dip in the distribution expense. Administrative expenses also remained in check during the year. Then impairment loss on financial assets also considerably dropped. Despite undertaking concentrated efforts to keep the operating expenses in check, KHTC posted an operating loss worth Rs26.93 million in 2021. As if this was not enough for a miserable bottomline, finance cost grew by 172 percent year-on-year in 2021. While discount rate was riding a downward trajectory in 2021 to recover the sluggish economic activity after COVID-19, the debt-to-equity ratio grew to 177 percent which took its toll on the finance cost. This produced a major dent on the bottomline which posted a net loss of Rs68.65 million in 2021.

With over 100 percent growth in the topline in 2022, it seems like the harsh times are over for KHTC. The revenue growth mainly came on the heels of the sale of re-dried tobacco which stood at 1.6 million kilograms as against 45,416 kilograms in the previous year. The company also undertook rigorous export initiatives during the year which boosted its export sales. The devaluation of Pak Rupee also played its part in keeping the export sales robust. GP margin flew up to 33 percent in 2022 while gross profit multiplied by around 4 times of what KHTC achieved in 2021. Customs, clearance and freight on export sale expanded the distribution expense by over 100 percent year-on-year in 2022. Administrative expense also grew in line with inflation. However, all these expenses were absorbed by a magnificent topline growth, resulting in an OP margin of 22 percent in 2022. Finance cost also grew owing to higher borrowings as debt-to-equity ratio now stands at over 200 percent coupled with record high discount rate during the year. The net profit for the year stood at Rs.315 million culminating into an NP margin of 13 percent in 2022 compared to a net loss margin of 6 percent in the previous year.

Recent Performance (1HFY23)

The growth trajectory which KHTC began riding in 2022 continued in 1HFY23. The topline grew tremendously by over 300 percent. Export sales continued to remain the major growth driver. Not only did the export off-take grow but Pak Rupee devaluation also resulted in major exchange gain for KHTC. High cost of raw materials and packing materials as well as fuel and power cost resulted in over 200 percent year-on-year increase in the cost of sales, yet improved sales mix and better pricing resulted in GP margin of 37 percent in 1HFY23 as against 13 percent during the same period last year. Distribution expense kept growing on the back of higher export sales. Moreover, high finance cost also proved to be an off-putting factor. However, handsome growth in other income coupled with a stunning topline buttressed the bottomline. KHTC posted a net profit of Rs.639 million in 1HFY23, which is way up than the full-year bottomline ever posted by the company. The NP margin stood at 21 percent, never witnessed by the company since 2011.

Future Outlook

While the increase in sales tax and FED on cigarettes may put a dent on the demand, the tobacco companies have increased the prices to counterbalance. However, the increase in prices will create a room for growth of the illicit cigarettes. As KHTC draws its major revenue from cut and re-dried tobacco and is continuously expanding its international outreach, it appears to be largely unaffected by the recent scenario and is expected to stay strong in the coming times.