After reporting strong double-digit expansion in turnover and profitability in the first quarter of the ongoing calendar year, the tobacco giant looked comparatively relaxed in the second quarter ended June 30, 2021. Latest financial results posted to the bourse by Pakistan Tobacco Company (PSX: PAKT) show that the company’s gross turnover had increased during 2QCY21 by a meager 7 percent year-on-year (1QCY21: 27% yearly growth) and net profits by 3 percent year-on-year (1QCY21: 59% yearly growth).

Breaking it down, PAKT’s domestic turnover – which accounts for 97 percent of the overall gross revenues – had increased by 7 percent year-on-year to reach Rs49.4 billion in the second quarter. Meanwhile, the export revenues – from sales of raw tobacco and cigarettes – grew by a higher 14 percent year-on-year to clock Rs1.4 billion. The slowdown in domestic volumetric sales is noticeable.

The slowdown in domestic sales occurred in the quarter coinciding with preparation and announcement of federal budget. However, the government did not make material changes to fiscal regime affecting tobacco industry. As per data from Pakistan Bureau of Statistics, the country’s cigarette production had totaled 48.8 billion sticks in Jul-May FY21 (18% year-on-year growth; averaging 4.4 billion sticks per month). During May 2021, cigarette output had been 4.29 billion sticks, the same level as May 2020. It remains to be seen if cigarette production has picked up pace following budget announcement.

Back to PAKT, out of its total gross turnover of roughly Rs51 billion in 2QCY21, the company collected Rs19 billion as net turnover, up 9 percent year-on-year. The rest of the gross sales was deposited in the federal kitty as excise duties (47.8% of gross turnover) and sales tax (14.7% of gross turnover). Still, PAKT managed to slightly increase its share of net turnover, which equaled 37.5 percent of gross turnover, up from 36.9 percent in 2QCY20.

The net turnover gain, however, was neutralized, thanks to 21 percent increase in cost of sales, resulting in a 1 percent drop in gross profit. During the quarter, cost of sales exhausted 19.5 percent of gross turnover, a ratio that is about 2 percentage points higher compared to the same period last year. If sales volumes have indeed lacked vigor in the quarter, the out-of-proportion growth in cost of sales relative to gross turnover would suggest that the firm is facing pressure to keep its manufacturing costs down.

It didn’t help that PAKT’s administrative expenses also grew by double digits during the quarter under review. However, it was the lower spending on ‘selling and distribution costs’ as well as the significant jump in ‘other income’ that helped PAKT show a marginal increase in operating profitability during the quarter. In the end, PAKT scored a net profit of nearly Rs5 billion, up 3 percent over same period last year.

Looking at the half-yearly figures, the gross turnover had reached Rs99.8 billion (up 16% over 1HCY20), net turnover Rs37.1 billion (up 18%), operating profit Rs12.7 billion (up 27%) and net profit Rs9.4 billion (up 24%). The healthy growth in financials during 1HCY21 owes mostly to the gains scored in the first quarter this calendar year. The subsequent quarters will have to do some heavy lifting if PAKT is to cross the massive bottomline of Rs16.5 billion that it had recorded for CY20.