Pakistan’s market leader in cigarette production has had another impressive year. As per the latest financial results posted to the bourse for the year ended December 31, 2021, Pakistan Tobacco Company (PSX: PAKT) scored strong double-digit gains in both its topline and bottomline, reaching an all-time high net profit of almost Rs19 billion last year.

At the top, the 20 percent year-on-year growth in gross turnover to Rs199 billion suggests that PAKT managed to grow its volumetric sales in CY21. It was a tough operating year for consumer-facing firms, as inflation hit people hard on multiple fronts. It helped the formal manufacturers that the government did not raise the FED on cigarettes in its June 2021 budget – otherwise cigarettes would have become costlier.

The rise in cigarette sales can be correlated with increasing production levels in the post-budget period. Latest data from the Pakistan Bureau of Statistics show that formal players made a total of 30.55 billion cigarettes in Jul-Dec period of 2021, which is a growth of 22 percent compared to the same period in the previous year. As there is little prospect for FED change on the horizon right now, it appears that the 5 billion per month output level may sustain in the coming months.

On top of topline growth, PAKT managed to retain more of its gross sales post-sales tax and excise duty. The net turnover ratio – the portion of gross turnover that remains after deducting sales tax and FED – for PAKT came in at 38 percent in CY21, which is about a percentage point higher than 37 percent in CY20. This is mainly because the FED rate – which is the FED actually paid on gross turnover – reduced from 49 percent in CY20 to 48 percent in CY21. It looks like small change, but it has good profitability impact.

The core costs, however, slipped a little, leading to slight dilution in profit margins down the line. For instance, PAKT spent 20 percent of its gross turnover on ‘cost of sales’ – up from 18 percent in CY20. As a result, gross margin slightly declined to 18 percent. While selling expenses were controlled under 3 percent of gross turnover, administrative expenses grew in double digits (albeit still exhausting the same 2 percent of gross sales). As a result, PAKT posted operating margin of 12.8 percent (CY20: 13.1%).

In the end, PAKT’s net profit was boosted by 14 percent (on a high base!) to close at Rs18.8 billion in CY21, with a net margin of 9.5 percent (CY20: 9.9%). Sustaining such high profitability will be quite a feat in 2022. Now all eyes will be on the FY23 budget (expected in June 2022), to see if the government keeps the FED rates (and slabs) at the same level. Right now, the likelihood for an upward rate revision seems low.