Pakistan Tobacco Company is an associate of one of the world's leading tobacco groups, "British American Tobacco Company" (BATC), which has a legacy spreading over more than 100 years. The BATC has presence in more than 180 countries and is known for its high quality tobacco brands.
The Company started its operations in Pakistan in 1947 and is the first multinational to lay feet in Pakistan. In 62 years it has grown from a company operating from a warehouse near Karachi port to having state-of-the-art two facilities employing more than 1,700 people.
The Company is involved in each and every aspect of the cigarette production from crops to consumers. The product portfolio of PTC is well diversified as it has different varieties to offer a wide range of smokers from low price to premium quality, high-priced cigarettes. Pakistan is the 6th most populous country on the globe with more than 60 percent population below the age of 30; this population bulge assures good future for PTC.
Brand portfolio PTC aims to offer everyone something; it invests in understanding the consumer choices which in turn helps PTC develop products. In Pakistan PTC has 6 different brands to offer its consumers, "Dunhill" and "Benson and Hedges" are the premium quality brands they were re-launched in Pakistan in 2007 and 2003, respectively. Both the brands are showing good year-on-year growth. "John Player Gold Leaf" is the largest urban brand in Pakistan as it thrashed all other FMCG products to become the most familiar brand in Pakistan.
In the low range segment, the company offers "Capstan", "Embassy" and "Gold Flake". "Embassy" is the most popular brand in Punjab in terms of sales volume. Its locally tailor-made taste has enabled it to achieve high brand royalty.
Highlights Overall the Company was able to sell roughly 30 billion cigarette sticks in the first 9 months of 2011, representing an increase of 9.6 percent over the same period of last year. The Company's market share grew slightly to almost 50 percent; while the recently re-launched Capstan brand alone has raked in a whopping 14 percent of the local cigarette market (January-September 2011).
Eyeing the weak economic situation of households and the worsening law-and-order environment of the country, the Company launched "Capstan" in second half of 2010. The brand which aimed to give consumers an even more affordable choice became a huge success and enabled the company to compete with the cheaper, illicit brands.
The scene for PTC is not different from other FMCG's. The Company enjoyed good top-line growth in 2011 but this couldn't be carried down as the increase in cost of sales and other expenditures trimmed down the returns.
Power outages and inflation fuelled the costs of sales. Adding to the brunt, the company also had to increase prices due to increase in the excise duty, last year. The unfavourable economic environment had already eaten away the purchasing power of the consumers, hence the excise led increase in prices forced them to switch to cheaper illicit sector brands which evade taxes and hence have become highly price competitive.
Profitability The trend of falling margins continued in the first 9MCY11. The gross profit as a percentage of net sales fell to 26.9 percent in 9MCY11from 31.2 percent during the same period of last year. This trend of lower margins despite healthy revenues is owed to power shortages and inflation.
The Company was badly hit by the increase in prices of its brands, brought about mainly by the increase in excise duty; which is imposed as a penalty on items that are discouraged. Government increased the excise duty in 2010 to Re.1 per stick on average, from 75 paisa in previous years.
Consequently people switched to cheaper illicit brands which according to an estimate have taken a large chunk of the market share. Almost 20 percent of the cigarettes available in the market are coming from illegal sources. The main sources of this illicit sector are Afghanistan and Iran. Industry members see this illicit sector as the biggest long-term threat to the organised sector.
PTC managed its selling, distribution and administrative expenses efficiently and is able to bring down its operating expenses by roughly 2 percent from close to 20 percent to 18 percent. This provided a small cushion to the stakeholders who faced a lot of brunt in terms of the cost of sales. The net effect of the price increase is reflected by the earnings after tax which fell by 11.5 percent in 9MCY11 over the same period of last year.
Short-term solvency and long-term liability position The debt to equity ratio which in the previous year had worsened, improved this year, As compared to the first 9MCY10 (when the ratio stood at 2.51), the long-term solvency of the Company improved as was reflected by the decline in the debt to equity ratio to 2.33. This decline in the ratio is mainly owed to a 40 percent reduction in the short-term running finance.
The short-term solvency position of the company in the 9MCY11 improved slightly but still PTC is not able to achieve the level it enjoyed in 9MCY09. The current ratio in 9MCY09 stood slightly above one, since then the current ratio is below 1, depicting a relatively tampered solvency position.
Operations The Company's performance has been relatively consistent despite the hurdles that the industry faced in recent times due to the worsened law-and-order situation and devastations caused by floods. PTC has managed to keep its operating cycle close to 150 days.
The total asset turnover and the fixed asset turnover both increased this year, mainly owed to the increase in sales showing better utilisation of its machinery. The accounts payable turnover continued upward move as the payables increased. The most alarming sign is the steep decline in the companies' coverage ratio that fell from 104.78 in CY09 to 10.23 in CY11. The Company despite somewhat difficult year continued investment in employees' training as it believes that such training would make the operations more efficient and would ensure a better financial position in times to come.
Outlook Despite the favourable demographics that PTC enjoys, it has not been able to generate decent returns in recent times. Since PTC has had to face a relatively tough economic environment in the form of unfavourable government taxes and illegal cigarette smuggling.
Industry members are not that positive about the future of the tobacco industry as they believe that government is not doing much to stem the undocumented illegal sector. To compete with this segment of the market which is growing rapidly PTC has to focus on more economical brands such as "Capstan".
Besides the efforts taken by the Company itself, the government too, should take the matter of illicit sector more seriously and give everyone a common ground or else the woes of PTC would come back to haunt the government as the company is one of the biggest contributors to the national exchequer.
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Pakistan Tobacco Company
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9MCY09 9MCY10 9MCY11
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Gross turnover 42202 44458 49944
Excise duty 20114 22347 25769
Net turnover 16059 15696 16839
Profitability
Gross profit margin 39% 31% 27%
ROE 57.40% 29.40% 24.77%
ROA 19.24% 8.30% 7.40%
solvency
Current ratio 1 0.91 0.93
D/E 1.98 2.51 2.33
D/A 0.66 0.71 0.7
Turnover
Total asset turnover 1.22 1.15 1.23
Fixed asset turnover 2.82 2.74 2.98
Market
EPS(Rs) 9.89 4.47 3.96
Market price Jan 1st (Rs) 106 105 110
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