While manufacturing sectors reel under weight of demand slowdown and rising costs, it appears that the tobaccos are weathering the storm comparatively better. Or at least that is what is reflected in the operating profitability of the tobacco giant, Pakistan Tobacco Company (PSX: PAKT), as per the firm’s latest financials posted to the bourse last week for the nine-month period ended September 30, 2022.

The topline growth at 17 percent year-on-year to almost Rs174 billion during 9MCY22 billion is solid, as the gross turnover responded well in difficult operating conditions. There is even higher topline growth that is visible for PAKT in the post-budget quarter (3QCY22), after the government increased FED on the two pricing tiers for cigarette manufacturers. The gain appears to be driven by both price increase (mainly due to the impact of the higher FED passed on to consumers) and higher sales volume.

Comparatively higher boost to operating profits came as PAKT retained a higher portion of its gross turnover as ‘net turnover’. During 9MCY22, the net turnover stood at 41 percent of gross turnover, significantly higher than 37 percent in 9MCY21. PAKT kept roughlyRs71 billion as net turnover, growing this figure 27 percent year-on-year (proportionally higher than gross turnover growth).

The improvement in net turnover owes mainly to the fact that the slice of FED in gross turnover reduced from 48 percent in 9MCY21 to 45 percent in 9MCY22. In turn, this was presumably due to the topline growth in this period being driven mainly by affordable/low-value cigarette brands that attract lower FED rate than the top pricing tier.

While PAKT’s selling and distribution expenses were restrained in the analysis period, the inflationary pressures were still evident in 23 percent increase in ‘cost of sales’ (exhausting a fifth of gross turnover), 20 percent growth in administrative expenses and 49 percent jump in ‘other expenses’. Still, operating profits surged by 36 percent year-on-year to reach nearly Rs27 billion in 9MCY22, with an operating margin of 15 percent (up more than 2 percentage points compared to the same period last year).

The Jan-Sep operating profit this calendar year exceeded the operating profit scored by PAKT in entire CY21, thus setting up the firm strongly for another good year despite the challenging economic conditions. Towards the bottom of the P&L, pre-tax profits were also helped by ‘finance income’ nearly doubling to Rs1.5 billion due to better returns on interest-bearing deposits and investments, while the finance costs remained in check. As a result, profit before tax yielded 39 percent yearly gain to reach almost Rs28 billion in the nine-month period.

The firm’s net profits, however, could only increase by 18 percent year-on-year to reach nearly Rs17 billion, as the income-tax bill almost doubled to Rs11 billion. During 9MCY22, PAKT booked 40 percent income tax on its pre-tax profits (reflecting the impact of the 10% ‘super tax’ levied earlier), as opposed to 29 percent seen during 9MCY21. Still, the overall financials results so far, especially in 3QCY22, suggest that PAKT may easily surpass its all-time-high net profitlevel of roughly Rs19 billion seen during CY21.