The tobacco duopoly is alive and well. After the market leader Pakistan Tobacco Company (PSX: PAKT) recently reported a turnaround in 2HCY17, it is time for the number two player to post a healthy switch. The latest full-year 2017 financials released by the Philip Morris (Pakistan) Limited (PSX: PMPK) show a massive profitability decline. But the real picture is different, and one of optimism for Marlboro maker.
Recall, PMPK lost a lot of business in the Jan-Jun period. Its 1HCY17 net turnover slumped 57 percent year-on-year to Rs4.2 billion. Thanks to stubborn opex, the bottom-line dropped by a higher 130 percent year-on-year, terminating into a net loss of Rs463 million in the half-yearly period. The company blamed duty-evading local cigarette manufacturers selling cheap and undercutting its legitimate business.
The second half, now fully reported, tells a different tale. In 2HCY17, PMPK top line has surged 123 percent year-on-year to reach Rs9.8 billion. And the company has also returned to profitability by scoring Rs654 million down the line, compared to a hefty net loss in the year-ago period. The two recent individual quarters yielded strong yearly growth (3QCY17: 288%; 4QCY17: 68%), with net profits growing by 161 percent year-on-year in each quarter.
The heavy fall in the first half and a sound recovery in the second half isn’t unique to PMPK alone. Much the same experience has been felt by PAKT, whose own tale of two halves – “PAKT: a roller-coaster ride” – was published February 22, 2018 in this space.
The period from July 2016 to June 2017 seemed to be a hard one for the formal players. As per industry estimates, illicit cigarettes had reached such a high level by mid-2017 that every two out of five cigarettes domestically sold were of illicit kind, resulting in massive business losses to the formal sector as well as government taxes.
The federal government’s decision in the FY18 budget to i) nominally raise FED on top-two pricing tiers and ii) introduce a low-price tier (where cigarettes could retail below Rs58 a pack) have helped the tobacco industry fight back against illicit cigarettes, which are mostly duty-non-paid, locally produced brands.
The fiscal moves have worked in favour of PAKT, PMPK, and of course the federal treasury. Tobacco majors are highly utilizing their production capacities. About 29 billion cigarette sticks were produced by the formal industry in the Jul-Dec 2017 period (up 70% year-on-year), the Pakistan Bureau of Statistics data show. Production is expected to continue this growth momentum in the Jan-Jun 2018 period. And PMPK, much like PAKT, is expected to post even solid results in the coming quarters.
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