So far as the topline is concerned, Pakistan’s tobacco giant seemed to be doing fine around the midpoint of the year; but in terms of net profits, not that much. As per the latest financials sent to the bourse for the half-year ended June 30, 2022, Pakistan Tobacco Company (PSX: PAKT)managed to have a 14 percent yearly growth in gross turnover to reach Rs113.44 billion, but it saw a 10 percent year-on-year drop in net profits to Rs8.5 billion during the same 1HCY22, despite solid growth in operating and pre-tax profits.

Having a double-digit topline growth, on a large base, and in current economic circumstances, is something for PAKT to cheer about. Being the market leader in cigarettes by some distance, PAKT drives industry performance. In fact, latest available data from the Pakistan Bureau of Statistics shows that the overall cigarette production in the country averaged nearly 5 billion sticks in the first five months of CY22, a double-digit increase over the same period last year. This is as good as it gets vis-à-vis output.

On top of a decent topline expansion, what further helped PAKT’s profit margins down the line was the retention of a higher share of gross turnover as net turnover. The net turnover growth during 1HCY22 was 21 percent year-on-year (hitting Rs45 billion), much higher than gross turnover gain in this period. This was mainly due to the fact that the effective FED rate (which is ‘FED’ paid on cigarette sales divided by gross turnover) declined from 48 percent in 1HCY21 to 45.5 percent in 1HCY22.

That relative gain of 250 basis points is directly reflected in net turnover, which improved from 37.2 percent of gross turnover in 1HCY21 to 39.7 of gross turnover in 1HCY22. The reason for lower effective FED rate (and corresponding improvement in net turnover) appears to be the firm presumably selling more of its cigarette output during the half-year in lower pricing tiers that carry relatively lower FED per cigarette pack.

That being said, the inflationary environment took its toll in terms of higher costs and expenses for the tobacco market leader. The growth in cost of sales, administrative expenses and other operating expenses was more than the topline growth achieved in the half year. Still, PAKT managed to growth its operating profits by 18 percent year-on-year to Rs15 billion, with an operating margin of 13.3 (in terms of gross turnover), up almost 50 basis points compared to the same period last year.

While pre-tax profits down the line were helped by higher ‘finance income,’ it didn’t help PAKT’s net profits when the ‘income tax expense’ during 1HCY22 was booked at 46 percent of pre-tax profits, compared to 28 percent back in 1HCY21. Even after that accounting treatment, the Rs8.5 billion bottomline (albeit down 9.9% on a yearly basis) is competitive enough to bring to latter half of an increasingly challenging year for the economy. Let’s see if the tobacco giant is able to further improve its operating performance in 2HCY22 and beat the Rs19 billion in net profits that it scored during CY21.