The maker of Marlboro in Pakistan has had a good run last year, despite the challenging nature of a pandemic year that has disrupted quite a few supply chains. In its annual results reported last week to the bourse, Philip Morris (Pakistan) Limited (PSX: PMPK) has shown a remarkable turnaround in its topline for the year ended December 31, 2020, with a juicy bottomline comparing well to the loss-making 2019.

(The market leader Pakistan Tobacco Company (PSX: PAKT) also did well in 2020. For more on that, please read “PAKT: record profits,” published February 24, 2021).

At the top, the net turnover expanding by nearly a quarter over the previous year is where the amelioration began for PMPK in what was an unprecedented year all around. As per the PMPK management, the domestic net turnover had increased by 7 percent over CY19 to reach Rs13.98 billion. (The remaining 16 percent of the net turnover is attributable to exports of Rs2.61 billion in this period).

PMPK maintains that there was a 20 percent annual decline in volume of cigarettes sold during the year. It pins the blame on “illicit” cigarette trade, whose market share, as per PMPK claim, increased from 33 percent in 2019 to 37 percent in 2020. Hikes in federal excise duty (FED) during 2018 and 2019 budgets are, in turn, cited by PMPK for the competitiveness of shady manufacturers that avoid duties and taxes.

The recent trend, however, suggests improved volumes. In the Oct-Dec quarter of 2020, calculations show that PMPK’s net turnover had grown by 105 percent year-on-year to reach Rs4.69 billion. Had prices of best-selling PMPK brands also doubled in this period, one could acknowledge the argument about volumes continuing to struggle. But they didn’t! It was volumes that seem to have come back, just as they did in the Jul-Sep quarter.

On top of strong revenues, favorable movements on the spending front helped PMPK to more than double its operating profits. Cost of sales grew in double digits, but not as much as revenues. These costs, therefore, consumed 61 percent of net turnover in CY20, as opposed to 69 percent in CY19. Relatively less was spent also on distribution & marketing expenses (16% of net sales) and administrative expenses (10% of sales). Spending efficiencies are good – they need to be maintained for normal times.

The other big factor that turned an operating loss in CY19 into an operating profit in CY20 was the massive decline in ‘other expenses’. Recall that back in CY19, PMPK had to spend a good deal on expenses (e.g. employee separation scheme and impairment in asset values) related to the closure of its factory in Kotri. But in CY20, the ‘other expense’ head saw rather normal spending, resulting in the yearly impact of such favorable significance.

Hauling a decent amount of net profits into 2021, PMPK’s future profitability is riding on the sustainability of its topline growth. After instituting a pause in FY21 budget to its previous streak of raising FED, the federal government may go for a FED raise hike this time in FY22 budget. The industry is arguing that previous FED increases are still hurting, even as a track and trace system is in the works. Let’s see which way the smoke billows.