Pakistan Tobacco Company Limited is part of British American Tobacco, the world's most famous tobacco group, its brands sold in 180 markets around the world. The company produces high quality tobacco products to meet the diverse preferences of millions of consumers, and it works in all the business areas - from seed to smoke. Pakistan Tobacco's operations in Pakistan began in 1947, making it one of Pakistan's first foreign investments. Pakistan Tobacco provides a number of reputed brands of cigarettes to consumers in Pakistan, including Benson and Hedges, Embassy, Gold Flake, Capstan and Gold Leaf.
Over the years, Pakistan Tobacco has shown a rising trend as evident from the impressive growth in gross, net and operating profits. Its operating profits grown by 28% and net profit by 44% in 2006 compared to the previous year. The strong financial performance is attributable to significantly higher sales volume, improved margins in all brands and continued control over the cost with a focus on operational efficiencies and other initiatives. The company maintained double digit volume growth in 2006 with a record sales volume of 34.5 billion sticks - 13% higher than the same period last year (SPLY). This is a remarkable performance keeping in view the overall industry growth, which is estimated at 3%. Gold Flake remained the volume leader in the portfolio and grew at a phenomenal rate of 27% vs. the SPLY, whereas Gold Leaf maintained its volume base.
JAN-SEPT 2008 (Q3FY08)
In spite of the deteriorating economic conditions of the economy, Pakistan Tobacco Company saw a moderate growth in the first three quarters of the current financial year. Although it has been hit by inflation, acute power shortages, rupee devaluation and higher costs in 2008, but it has managed to earn profits, although with smaller margins than the ones present before. Its main brand, Gold Flake, held its position of being the main volume contributor to the company's sales, while Gold Leaf also performed very well since December 2007, adding two brands to its portfolio: Gold Leaf Menthol and Gold Leaf Light. Furthermore, the demand for tobacco has seen a sharp decline from 79 million kilogrammes in 2007 to 71 million kilogrammes at present. Keeping these factors in mind, the performance of PTC has been good.
Net sales from January to September 2008 was Rs. 30.63 billion, a jump of 17% from Rs. 26.21 billion seen in the same period of last year. Out of this increase, 9.3% was attributed to increased sales volume while the rest was a result of rising prices prevalent in the country. The gross profit for the period reached Rs. 5.45 billion, which is 11% higher than the last year's figure of Rs. 4.92 billion. But the profit after tax did not witness such a high growth rate. It increased by 4.5% to Rs. 2.08 billion from Rs. 1.99 billion in 9MFY07.
A certain amount of activity is seen on the balance sheet of PTC. On the fixed assets side, we see a rise of 5.5% in property, plant and equipment. A portion of this increase was due to the relocation and setup of PTC's head office facilities after it was damaged in the Marriott bomb blast.
PTC's current assets grew by 16.3% in the first nine months of the fiscal year, mainly driven by increases in its inventory stock. The stock-in-trade rose by around 18%, while its stores and spares jumped over 66% of FY07 figures. The company has also offered more loans to its employees, which caused a 44% increase in its loans and advances head till September 2008. The current assets growth were somewhat curtailed by a 28% decline in the company's other receivables which it is supposed to receive from associated companies, subsidiary companies and employees' benefit funds. Thus, the overall increase in total assets of the company was nearly 11% since the last year-end in December 2007.
The current liabilities grew at a rate that was 1.1% more than the current assets growth rate. The growth of current liabilities was fuelled by nearly a 29% rise in its head called trade and other payables, which includes a vast amount that has to be paid by the company to its associated companies and the employees' benefit fund. On the other hand, short term finances were nearly halved compared to their levels at the end of the last financial year. Furthermore, the income tax payable by the company has increased by about 1.5 times than its figure at December 2007. Thus, not only the company's current assets fail to cover its current liabilities just like in FY07, the difference between the two increased by 43.9% in the last 9 months.
PTC has virtually no long-term liabilities that finance its assets. Rather, about 55% of its assets are financed by its current liabilities, while the remaining portion is made up by shareholders' equity, which increased by 3.2% since December 2007. This was primarily due to 8.7% increased revenue reserves, the company had for the current time period.
Gross profit margin for the current year's first nine months declined by a percentage compared to the same period last year. This was because the growth in taxes and cost of sales outpaced the growth in net sales. The cost of sales increased by 18% on the back of higher purchase costs (up by 24%) due to inflation along with higher taxation. This resulted in a current gross profit margin of 17.8%, a decline from previous year's figure of 18.8%. Note that the issue of higher taxation would be magnified in the last quarter of the financial year, as the government has announced an increase in the federal excise duty on cigarettes from February 2009.
In 9MFY08, the profit margin declined to 6.8% from 7.6% compared to the same period last year. Primarily, the reason for this trend can be explained by a rise in the expenditure. The company saw a substantial rise of 42.2% in its administrative expenses while an increase of 38% in other expenses. Aside from the effect of inflation, these increases were the result of relocation and renovation costs incurred by the PTC after the Marriott bomb blast incident which damaged the company's head office in Islamabad. Increased operational expenditure combined with greater taxes paid resulted in a lesser growth in net income compared to the net sales, i.e. lower profit margin. Despite these factors, the market value of the company was favourable, with an Earnings Per Share of Rs. 8.15 in 9MFY08, a rise of 4.5% from Rs. 7.80 in the same period last year.
The liquidity prospects of the company worsened slightly after the passing of current year's three quarters. Current ratio has shown a nominal decrease from 0.96 by the end of the last financial year to 0.95 in 9MFY08. This was evident considering the relatively greater growth in current liabilities of the company, at 17.4% on the back of the growing trade and other payables of the company, compared to growth in current assets, at 16.3%.
The times interest earned ratio for 9MFY08 has improved to 86.75 from 74.84 in 9MFY07. This was the outcome of over 10% decrease in the financial costs incurred by the company in current period. This reflects a better debt managed position enjoyed by the company at present.
FY03-FY07
In 2007, the company posted a record volume of sales and profitability. Operating profit grew by 29% to Rs 3,973 million and profit after tax grew by 27% to Rs 2,413 million. Contribution to the Government's revenue amounted to Rs 26 billion, an increase of approximately 15% over the last year. Underpinning this exceptional financial performance were the factors such as strong organic volume growth, efficient cost management, continued investment in the company's brands, and most of all the consumers who continue to support our brands. Sales volume, at 37.2 billion sticks, grew by 8% during the year ahead of the industry growth that was estimated at 2%. Market share also grew by 1.7 percentage points, further strengthening the company's position as the market leader in the domestic tobacco industry. PTC further strengthened its brand portfolio with the launch of new variants, limited edition products and packaging, consumer promotions, and effective presence across key market segments.
Cost of sales increased by 14% in 2007 over last year and this was mainly due to higher production volumes and inflation. However, the company was able to derive benefit from economies of scale (highest ever production) and various cost control initiatives in its supply chain. As a result, increase in cost per unit was contained at 6% over last year, which is well below inflation.
Improved financial performance of the company translated into a significant increase in its operating cash flows. Though they were partially offset by higher dividend payments and investment in plant and equipment during the same period, yet it resulted in a net increase in cash amounting to Rs 358 million in comparison to a net decrease of Rs 887 million in 2006.
In line with its drive to invest in latest machinery and facilitate up-gradation in its technology footprint to meet the industry's increased demand, the Company invested Rs 1.2 billion in tangible fixed assets in 2007. Moreover, various process optimisation initiatives were undertaken at both the factories to further strengthen supply chain's competitive advantage.
Dunhill: A high point of the year's activities was the Dunhill Centenary Celebration, which took place with a distinctive display of style and substance. In future, the brand will continue to leverage its international expertise to bring the best tobacco experience to premium segment smokers.
Benson & Hedges: B&H continued to be the largest brand in the premium segment and the company capitalized greatly on the packaging change done in 2006. The brand will continue to leverage its equity and will endeavor to consistently deliver the superior quality it promises to its consumers.
John Player Gold Leaf: 2007 has been a successful year for JPGL with the sales increasing by 8% and the brand growing both in terms of value and volume share. In this brand, which is part of the company's brand heritage, the company continues to bring innovation and improvement.
Capstan by Pall Mall: 2007 brought dramatic changes to capstan - a year in which saw a major shift in the brand's essence and identity. True to its innovative and invigorating appeal, Capstan by Pall Mall was launched in a new modern pack, which offers smokers a unique opportunity to experience the same great taste with a fresh and exciting look. Capstan is the leading offer in the medium segment.
Gold Flake: Gold Flake further strengthened its position by achieving high levels of growth. It is the main volume driver in the company's portfolio. Brand building, targeted consumer promotion activities, and aggressive distribution drives have greatly contributed to Gold Flake's success.
Liquidity of Pakistan Tobacco has remained barely above 1 for the past couple of years, and actually fell in 2006 compared to 2005. This is because despite improved profitability on account of strong financial performance the company's cash outflow remained higher than inflow mainly due to higher income tax, dividend payment and capital expenditure. Consequently, there was not a significant increase in the current assets as opposed to the current liabilities.
Pakistan Tobacco's asset management ratios depict a healthy trend of improving inventory management and improved credit policies. Both the inventory turnover (days) and the days sales outstanding decreased, indicating that the company has been able to utilise its inventory at an optimally better level each year, and has been able to receive cash from its debtors over shorter periods of time subsequently over the lapse of time. Even though the inventory turnover has increased in 2007 the overall operating cycle has improved tremendously, falling from around 57 days in 2003 to around 36 days in 2007. As far as the fixed assets are concerned, recently the company spent Rs 1.2 billion (Rs 0.5 billion more than the previous year) for acquiring latest machinery to cater for increased demand and to facilitate up gradation in the technology footprint. With the phenomenal growth in sales over the past couple of years and efficient utilization of property plant and assets, the overall total asset turnover ratio has also shown a rising trend over the years. The total asset turnover ratio exceeded 3 in all the five years, hence bearing substance to the efficient asset management practices of the company.
The interest coverage ratio has improved phenomenally over the past couple of years. It has increased from 7.68 in 2003 to 74.8 in 2007, showing that over the years, the company, with improved operating margins, has improved on its ability to pay its financial costs pertaining to interest payments. However, the long-term debt to equity ratio of the company increased over the years as well, primarily due to an increase in the deferred taxation of the company. However, the reliance of the company on long-term debt is negligible, the only long-term debt arising through taxation. Total dependency on debt financing is on average 50%, the main component of debt being the short-term loans and payables.
The book value of Pakistan Tobacco has improved over the years owing primarily to an increase in equity due to a rise in the revenues and reserves of the company. The dividends paid per share have also improved tremendously as the excellent performance of the company over the past couple of years allowed it to disburse dividends to its shareholders. Similarly, the earnings per share of the company also increased significantly, marinating a steeply rising trend since 2003. This is due to an impressive growth in the net margin of the company over the course of the four years under consideration. The market price of the company has also improved significantly over the years. It was only Rs. 29 in 2003, but soared up to Rs. 68.35 in 2006, an increase of over 135% over a period of four years.
Considering the past performance of the company, the financial outlook for the future is quite positive for Pakistan Tobacco Company, and a healthy growth is expected over the years. However, the directors speculate that the profitability of the company for the coming time period may remain under pressure due to the cyclical nature of the business and the rising inflationary trend.
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PTC - FINANCIAL HIGHLIGHTS
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2003 2004 2005 2006 2007
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INCOME STATEMENT
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Turnover 22,572,247 25,452,634 30,615,062 35,715,451 40,889,275
Gross Profit 2,871,541 3,482,621 4,529,604 5,533,520 6,509,957
Operating Profit 1,010,268 1,444,628 2,377,663 3,048,201 3,972,632
Profit Before Tax 614,695 1,056,039 2,082,064 2,860,673 3,713,575
Net Profit 321,081 665,227 1,321,919 1,904,988 2,413,058
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BALANCE SHEET 2003 2004 2005 2006 2007
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Total Equity 2,853,090 3,262,823 3,639,414 4,139,187 4,022,857
Current Liabilities 4,075,034 3,137,467 3,604,366 3,750,209 4,822,940
Non-current Liabilities 370,632 624,475 724,673 845,004 980,000
Current Assets 3,859,453 3,434,601 4,136,116 4,172,950 4,641,368
Non-current Assets 3,439,303 3,590,164 3,832,337 4,561,450 5,184,864
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LIQUIDITY 2003 2004 2005 2006 2007
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Current Ratio 0.95 1.09 1.15 1.11 0.96
ASSET MANAGEMENT 2003 2004 2005 2006 2007
Inventory Turnover (days) 35.25 15.05 15.68 17.19 36.44
Days Sales Outstanding 25.63 26.88 29.34 31.26 0.02
Operating Cycle 60.88 41.93 45.02 48.45 36.46
Total Asset Turnover 3.09 3.62 3.84 4.09 4.16
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DEBT MANAGEMENT 2003 2004 2005 2006 2007
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Debt to Asset Ratio 0.61 0.54 0.54 0.53 0.59
Debt to Equity Ratio 1.56 1.15 1.19 1.11 1.44
Long Term Debt to Equity 0.13 0.19 0.20 0.20 0.24
Interest Coverage ratio 7.7 29.9 46.9 57 74.80
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PROFITABILITY 2003 2004 2005 2006 2007
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Gross Profit Margin 12.72% 13.68% 14.80% 15.49% 15.92%
Profit Margin 1.42% 2.61% 4.32% 5.33% 5.90%
Return on Assets 4.40% 9.47% 16.59% 21.81% 24.56%
Return on Equity 11.25% 20.39% 36.32% 46.02% 59.98%
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MARKET VALUE 2003 2004 2005 2006 2007
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Earnings per share 1.26 2.6 5.15 7.46 9.4
Price Earnings ratio 23.02 16.92 12.82 9.16 16.5
Dividend per share 0.1 1.2 2.5 7.4 7.9
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