At the close of the half year, Pakistan’s second-ranked cigarette manufacturer seems to have attained a mixed scorecard. As per latest financial results posted to the bourse by Philip Morris (Pakistan) Limited (PSX: PMPK) for the six-month period ended June 30, 2022, its net turnover had increased by 10 percent year-on-year to reach Rs10.16 billion in 1HCY22. The topline gains, however were diluted on the way down to the bottomline, as profit after tax declined by 11 percent year-on-year to reach Rs1.53 billion.

The double-digit growth in topline is significant in a price-sensitive market where formal players like PMPK are competing with cheaper brands in the grey market. Still, the sales growth is rendered negative in real terms, as inflationary pressures have been prevailing in high double-digits.Once PMPK releases detailed half-yearly report, it will become clear how much was the growth in its gross turnover and how much share of that turnover was retained post-FED and post-sales tax as net turnover.

The inflationary pressures during the period were visible in ‘cost of sales,’ which grew 16 percent year-on-year to reach Rs5.51 billion. These costs exhausted 54.3 percent of net turnover in 1HCY22, as opposed to 51.6 percent in 1HCY21. This affected gross profit growth and the gross margin, which dropped to 45.7 percent in the analysis period. Still, considering the sharp escalation in utility and fuel prices, this slippage seems contained. Spending control was also visible in declining administrative and selling expenses.

Down the line, operating profit was supported by strong growth in ‘other income’ more than compensating the spike in ‘other expenses.’ The 15 percent growth in operating profits to Rs2.82 billion, however, couldn’t seep into the bottomline, which dropped in double digits, as highlighted earlier. The main reason for the fall is that PMPK booked corporate income tax during 1HCY22 at a rate of ~45 percent of pre-tax profits, compared to ~29 percent of pre-tax profits in the same period last year.

PMPK’s half-yearly performance was affected by 2QCY22 not being able to build on the gains made during 1QCY22. What will the remaining quarters hold for the Marlboro maker? Moving forward, topline growth looks uncertain for the whole tobacco industry in a challenging operating environment. There are now reports that the government intends to raise taxes (FED) on cigarettes to meet tax-related demands of the IMF.If that happened, it will affect sales volumes, and in turn, profitability of the formal industry.