Half-yearly results have closed on a good note for the country’s second-ranked cigarette manufacturer. Corporate announcement to the bourse last Friday showed that Philip Morris (Pakistan) Limited (PSX: PMPK) had achieved 37 percent expansion in bottomline during the six-month period ended June 30, 2021, on the back of modest topline growth, cost savings, and significant jump in non-core income.

The gross turnover had reached Rs24 billion in the six-month period, a growth of 9 percent over last year. Usually about 60 percent of the gross turnover goes to excise duties and sales tax and the rest is maintained as net turnover by tobacco companies in Pakistan. PMPK’s net turnover reached Rs9.2 billion in 1HCY21, a growth of 5 percent year-on-year. PMPK management told BR Research that the marginal topline growth was mostly due to stable volume growth as the firm did not increase prices of its brands.

The main impact on profitability came from favorable movements on the cost side. The cost of sales declined by 8 percent year-on-year to Rs4.7 billion for PMPK in the six-month period. These costs consumed 52 percent of net turnover, down from 59 percent in 1HCY20. PMPK has ongoing initiatives that continue to help it bring about cost efficiencies in its manufacturing operations.

Meanwhile, assistance also also came from the administrative expenses, which declined by 5 percent year-on-year to reach Rs734 million in the period. These costs thus depleted 8 percent of net sales, a ratio that is one percentage lower than what was seen on this count in 1HCY20.

Distribution and marketing expenses are on the rise, growing by 50 percent in the analysis period to reach Rs1.4 billion. These overheads exhausted 16 percent of net sales, a ratio which is five percentage points more than same period last year. These expenses, which include investments in brand building and channel development for cigarette brands, are comparatively higher this year because of the low base effect from 2QCY20, a period associated with Covid-19-related lockdowns.

Some help came from ‘other income,’ which had more than doubled in 1HCY21. This non-core gain accounted for 4.5 percent of net turnover, which is over 2 percentage points more than 1HCY20. The management told BR Research that it was mostly due to gains from significant increase in bank balances, and partly due to sales of some idle, legacy properties. In the end, there was a solid net profit growth.

PMPK still maintains that illicit cigarettes maintain a market share of about 40 percent in the overall cigarette market of about 80 billion sticks per annum. The last federal budget did not raise tobacco FED, so the illicit market has no ground to further undercut legitimate players like PMPK. However, the government has its work cut out to clean the market by implementing solutions like track & trace system.