The Lakson Tobacco Company is a part of the Lakson Group, which was established in 1954. The company's major activity is to manufacture and sale of cigarettes in Pakistan.
It is a publicly listed company and is the largest tobacco exporter in Pakistan. The company operates in five factories located in Karachi, Dadu, Sahiwal, Rawalpindi and Swabi. Lakson Tobacco's leading brands include Morven Gold along with Red and White. In March 2007, Phillip Morris International acquired an additional 50.21% stake in Lakson Tobacco Company to bring its share in the tobacco company to approximately 90%.
ANALYSIS OF FY09
In FY09, company's gross turnover increased by 22.2% to Rs 30.48 billion as compared to Rs 24.94 billion, similar to the rate of increase of PTC, its main competitor. The net turnover of Lakson Tobacco Company was 18.62% more in FY09 as compared to FY08 figure and the company generated this increase in revenue despite the 20% increase in cost of sales for the period.
These strong results were achieved despite adverse economic factors weighting on income per capita, pressure on manufacturing costs and steep increases in tax and excise duty rates. Company invested significantly in marketing and distribution expenses in FY09, up 37.9%, primarily to expand its brand portfolio and support sales at retail segment as prices of its products considerably increased driven by the two tax and excise duty rates increased by the government in February and June 2009. Heavy marketing expenditure mainly due to selling expenses and new market offerings for the consumer segment is meant to counteract the decline in sales caused by the increase in prices of its product. This increase in cost of sales resulted in a decline in operating profit by 13.01% or 13.3% on after tax basis.
For FY09, company's cost of sales increased (20.78%) due to increase in manufacturing expenses on aggregate level compared as to last year. Higher wages expenses (manufacturing) 28.6% more than FY08 accompanied by a small increase in purchases and redrying expenses raised the overall cost of sales for FY09. Cost of sales for PTC also increased approximately by 16% which shows that some portion of increase is shared by the industry due to the high inflation in the country.
The cost of sales to net turnover ratio also increased by 1.125% as compared to the last year, showing that the company was able to curtail some effect of inflationary pressures prevailing in the economy.
Administrative expenses of the company for FY09 have also jumped from Rs 530,091 million to Rs 701,145 million; this is an increase of 32.26% when as against the figures of last year is due to the higher employees' compensation and donation for internally displaced persons (IDPs).
Above mentioned increases in costs of the company along with the massive increase in financing cost 95.74% from Rs 456,39 million to Rs 893,36 million reduced the before tax profit of the company for FY09. Profit before tax decreased by 14.05% in 2009 as compared FY08. This increase in financing is due to the huge amount paid as mark-up to the lenders for providing the company with running finance facility under mark-up arrangements.
Company witnessed the same negative pressure on profit after tax, which decreased by 13.30% from Rs 1,105,400 million in FY08 to Rs 958,384 million in FY09.
It is important to note here that other income from miscellaneous sources registered a handsome rise of 35% to stand at Rs 103.111 million in 2009.
The company's gross profit stood at 16.31% in FY09 lower than FY08; however, it is also much less than the company's past five years average (from FY07 to FY03) which comes to be 19.24%. The main pressure on the profitability was put on by the seasonal fluctuations in tobacco farming and purchase of stocks, however due to the previously accumulated stocks, the impact of these fluctuations were not colossal. Furthermore, increase in cost of sales due to inflation and higher wages expense also had negative bottom line impact.
The company's gross profit margins were higher to its major competitor Pakistan Tobacco Company (PTC) which had approximately 14.3% margins during FY09. The company's profitability margin declined from 4.43% of FY08 to 3.14% in FY09. The profitability margins were lower than its major competitor Pakistan Tobacco Company (PTC) which had a profitability margin of 5.9% in the same year. Escalating distribution and marketing expenses along with substantial financing cost trim down the profitability margin of Lakson Tobacco Company Ltd Thus, in spite of having the same higher gross profit as PTC the company's profit margin were lower which shows that there is a need to control its cost base. The company's return on assets (ROA) was 9.05% in FY09 lower than 11.71% in FY07 and the company's return on equity (ROE) also declined to 14.05 % from 18.44% FY07. Company is way behind its main competitor PTC in term of return of asset and return on equity.
The company's liquidity position remained stable and similar to FY08, as its current ratio decreased from 1.99 in FY09 to 1.98 in FY08. On the aggregate level company's current asset increased by 10.29% against an increase of 10.77% in current liabilities in FY09. In current assets, company's trade debt and other receivables along with cash, registered an impressive growth this year. In FY08 company's liquidity position worsened due to a 64% growth in current liabilities on the back of increase in running finance under mark-up arrangement and an increase in trade and other payables as opposed to marginal growth in current assets. This year, running finance increased only by 2.45% compared to FY08. However, aftermath of this running finance liabilities is accrued mark-up which has escalated tremendously, growing by 56.6 % in FY09. Furthermore, trade and other payables have decreased marginally owing to the reduction in the claims of the creditors, which declined by 21% in FY09 as compared to FY08. Company's liquidity position is still very good and is the best among the industry. The current ratio for its main competitor PTC was 0.91 in FY09 as compared to 1.98 for LTC during FY09.
The company's interest coverage ratio declined from 39.24 in FY08 to 17.34 due to a 95.74% increase in the finance cost. PTC, main competitor of Lakson Tobacco has interest coverage ratio of 107.2 in FY09, which is far better than Lakson Tobacco. The main reason for this sharp contrast in the figures of two companies is the minimum reliance of PTC on external financing.
The company's long debt to equity ratio also decreased from 6.55% in FY08 as to 5.73 in FY09.
The company's earning per share is higher than the other tobacco companies in the industry. The company's earning per share was Rs 15.56 in FY09 as compared to Rs 17.95 in FY08. The company's book value also improved from Rs 60 at the end of FY08 to Rs 69 at the end of FY09. However, FY09 did not prove rewarding for the investors, as the company's reduced its cash dividends significantly from Rs 6.5 in FY08 to 2.5 in FY09. The dividend payout ratio is approximately 25.70% of the net profit after tax. The reduction in cash dividends improved the cash positions of the company. Decline in stock prices due to depressed economy and bearish stock market caused the price to earning ratio of the company to decline from 18.19 in FY08 to 17.10 in FY09, thus making the stock available at cheaper prices.
FUTURE OUTLOOK
Lakson Tobacco Company Limited is a fully integrated affiliate of Phillip Morris International Inc and as such benefits from global resources and expertise to help further improve its effectiveness and long term sustainability and profitability.
The company also continued to actively invest in its operational capabilities and, as such increased its investment in property, plant and equipment to Rs 1.044 billion in 2009 or an increase of 9.6% versus prior year. These investments are primarily made under the umbrella of a comprehensive project of modernizing manufacturing facilities and equipments, safeguarding assets though warehousing upgrades and achieving overall improvements. This shows company's management optimistic view of the company's future and of the industry as whole.
Company suspended its present dividend of the FY09 for the future gains of the investors. Investment in human resources through increased expenditure on salaries and training and physical assets make the future prospects favorable, however company's need to focus on cost cutting in order to realize the gains from such investment and benefit the investors, otherwise increased earnings and profits will be eaten up by the lenders and expenses.
The company, however, faces significant challenges, which include the recommendation by the Senate body on March 9th 2009 to raise the prices of tobacco leaf (which cigarette manufacturers buy from growers) to Rs 150/kg. This was because the Senate body found the crop price to be grossly undervalued and agreed with the farmers' view of surge in their input cost like fertilizer and overall impact of double-digit rise in inflation. If this is implemented this would mean an increase of 83% over the Rs 82 price suggested by the Pakistan Tobacco Board (PTB) and could significantly impact the profitability of the company which would further have to improve its cost control.
Moreover, the tobacco industry also faces some challenges from the government. Continuous enhancement of federal excise duty on cigarettes with the aim to increase its revenue however, it attempts to decrease the demand of the product in this industry, which can be considered to have negative effect on the revenue of the companies including the LTC.
Lakson is striving to gain volume of sales and controlling costs to compete in an increasingly difficult market which is marred by foreign imported products and serious threats of smuggled cigarettes from Afghanistan and Iran which are of poor quality decrease the sales of the company which could also affect government revenues. Apart from this, the government's ratification to the FCTC may be a source of concern for the company as they may no longer be able to advertise or carry their promotional activities which may adversely affect the sales and distribution of the company's products. Enhancement of FED on advertisements will increase the cost of advertising for the companies.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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