Pakistan Tobacco Company Limited (PSX: PAKT) was incorporated in Pakistan as a public limited company in 1947. The company is a subsidiary of British American Tobacco (Investments) Limited, UK while British American Tobacco p.l.c, UK is the ultimate parent company of PAKT. The principal activity of the company is the manufacturing and sale of cigarettes/tobacco.

Pattern of Shareholding

As of December 31, 2022, PAKT has a total of 255.49 million shares outstanding which are held by 3306 shareholders. Associated companies, undertakings and related parties which comprise of British American Tobacco (Investments) Limited and Rothmans International are the major shareholders of PAKT with a stake of 94.7 percent in the company, however, the later accounts for about 0.3 percent shares. General public accounts for 0.9 percent shares of PAKT while Modarabas and Mutual funds hold 0.7 percent shares. Insurance companies account for 0.2 percent of the outstanding shares of PAKT. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-22)

With the exception of 2019, PAKT’s topline posted growth in all the years under consideration. Its bottomline has also been smoothly riding a growth trajectory. Conversely, its margins which had been enjoying an upsurge until 2020 started tapering off thereafter. Operating margin posted a marginal improvement in 2022, while gross and net margins continued to be on the skids. The detailed performance review of each of the years under consideration is given below.

In 2019, PAKT’s net sales dropped by 2 percent year-on-year. While gross turnover in 2019 was 8.7 percent higher than the previous year, higher sales tax and excise duty culminated into a fall in net sales. In 2019, the company exported for the very first time in its history. PAKT exported 0.19 billion plus cigarettes and 3 million kilograms of raw tobacco with a collective worth of $11 million to GCC and other Middle Eastern countries in 2019. The overall sales volume of PAKT dropped by 15 percent year-on-year in 2019 to clock in at 39.14 billion sticks. This was on the back of two excise led price hikes – in September 2018 and in June 2019 which led customers to switch to illicit products which are cheaper due to non-payment of duties and taxes. Cost of sales nosedived by 14 percent year-on-year in 2019 due to lower production while cost base continued to remain under pressure owing to Pak Rupee depreciation, inflation and regulatory duties. Gross profit grew by 13 percent year-on-year in 2019 with GP margin jumping up from 43.8 percent in 2018 to 50.4 percent in 2019. Distribution expense inched down by 6 percent year-on-year in 2019 owing to lower sales volume. Administrative expense grew by 9 percent year-on-year mainly on account of expenses incurred in information technology. Other expense posted a significant 35 percent year-on-year rise in 2019 due to higher provisioning against WWF and WPPF as well as higher exchange loss due to depreciation in the value of local currency. Other income also posted a robust growth of 350 percent year-on-year in 2019 on account of gain on the disposal of property, plant and equipment and recharges/other payments to associated companies written back during the year. This resulted in a 21 percent year-on-year growth in operating profit of PATK in 2019 with OP margin climbing up to 34 percent from 27.4 percent in 2018. The company’s capital structure mainly comprises of equity with a small portion of non-current liabilities. Moreover, the company is actively engaged in efficient working capital management and investment of surplus funds which culminated into a net finance income in all the years under consideration. While net finance income dropped by 14 percent year-on-year due to increase in lease liabilities, yet bottomline grew by 25 percent year-on-year in 2019 to clock in at Rs.12.9 billion with an NP margin of 24.8 percent versus 19.5 percent in 2018. EPS also grew from Rs.40.46 in 2018 to Rs.50.45 in 2019.

In 2020, PAKT’s net sales grew by 17 percent year-on-year. This was despite 7 percent decline in the sales volume of the company to clock in at 38.504 billion sticks. 93 percent increase in the excise duty in the last two budgets had created wider difference between the prices of legal brands and duty not paid (DNP) brands. DNP brands further reduced their prices by 25 percent after 2020-21 budget, incentivizing consumers to switch to cheaper alternatives. The increase in net sales in 2020 was the result of price increase and also because the company exported 2.3 billion cigarette sticks and 4.1 million kilograms of raw tobacco in 2020, which translated into export revenue of $31.1 million. Despite 7 percent drop in overall sales volume, cost of sales surged by 14 percent year-on-year in 2020 due to inflation, Pak Rupee depreciation and supply chain malfunction owing to COVID-19. Higher export sales and upward price revisions resulted in a 20 percent year-on-year growth in gross profit with GP margin rising up to 51.8 percent in 2020. The company launched VELO nicotine pouches and VELO sound station which resulted in a 7 percent increase in distribution cost in 2020. Administrative expense grew by 21 percent year-on-year on the back of an increase in information technology expense in 2020. Other expense rose by 12 percent year-on-year in 2020 due to higher WWF and WPPF. Conversely, other income plunged by 4 percent year-on-year due to a dip in the recharges/other payments to associated companies written back in 2020 and a one-off gain on the disposal of property, plant and equipment in 2019. Operating profit grew by 24 percent year-on-year in 2020 with OP margin escalating to 35.9 percent. Net finance income tumbled by 11 percent year-on-year due to increase in lease liabilities in 2020. Net profit grew by 28 percent year-on-year in 2020 to clock in at Rs16.5 billion with an NP margin of 27.1 percent. EPS also inched up to Rs64.55 in 2020.

In 2021, PAKT’s net sales mustered 23 percent growth which came on the back of a 19 percent year-on-year rise in sales volume to clock in at 43 billion sticks on the back of excise stability in 2021-22 budget which allowed price stability to the legitimate brands. During 2020, the company exported 1.6 billion cigarette sticks and 6.4 million kilograms of raw tobacco in 2020, culminating into export revenue of $38.4 million.Cost of sales grew by 33 percent year-on-year in 2021 which pushed the GP margin down to 47.9 percent in 2021. Distribution expense remained largely stable in 2021 despite increased volume as the company incurred increased selling expense in the previous year owing to the launch of VELO. Administrative expense multiplied by 19 percent year-on-year in 2021 due to increased spending on automation which drove up the IT cost. Other expense posted a marginal 2 percent year-on-year uptick as WPPF and WWF grew while foreign exchange loss slid during 2021. Other income slashed by 3 percent year-on-year in 2021 as there were lesser recharges to associated companies that were written off during the year. Operating profit grew by 17 percent year-on-year in 2021 but OP margin fell to 34 percent. Net finance income grew by 30 percent year-on-year in 2021 as the company had better liquidity position in 2021 and more funds available to be invested in Treasury bills. Net profit climbed up by 14 percent year-on-year in 2021 but NP margin ticked down to 25.2 percent in 2021. EPS ascended to Rs.73.83 in 2021.

The growth trajectory continued in 2022 with 27 percent year-on-year growth in PAKT’s topline in 2022. This was on account of multiple price hikes on the back of increase in excise duty, inflation as well as Pak Rupee depreciation. Sales volume shrank by 1 percent year-on-year to clock in at 42.5 billion sticks as the price increase of the legitimate brands further incentivized the DNP brands. Export turnover slipped by 18 percent in 2022 due to losing certain export markets. Export volume stood at 1.4 billion cigarette sticks and 4.4 kilograms of tobacco in 2022 which resulted in a turnover of $27.6 million. Besides, PAKT also exported human resource services of $1.5 million in 2022. Cost of sales soared by 27 percent year-on-year, taking its toll on the GP margin which slipped to 47.6 percent in 2022. Distribution expense grew by 14 percent year-on-year in 2022 on the back of higher payroll expense and selling expense. Administrative expense largely remained in check and posted a meager 1 percent hike in 2022. Other expense magnified by 55 percent year-on-year which was the result of a massive surge in foreign exchange loss on account of local currency depreciation coupled with higher WWF and WPPF in 2022. Conversely, other income sank by 8 percent year-on-year due to lower write offs of payables to associated companies in 2022. Operating profit ascended by 29 percent year-on-year in 2022 with a slight increase in the OP margin which stood at 34.6 percent in 2022. Net finance income posted a staggering growth of 175 percent in 2022 due to better cash position and high discount rates. While profit before tax grew by 33 percent year-on-year in 2022, the imposition of 3.87 percent super tax diluted the bottomline growth. Net profit grew by 13 percent year-on-year in 2022 to clock in at Rs21.3 billion with an NP margin of 22.5 percent. EPS grew to Rs.83.45 in 2022.

Recent Performance (1HCY23)

In 1HCY23, PAKT’s net sales grew by 2 percent. While gross turnover of domestic market posted a reasonable 18 percent year-on-year rise in 1HCY23, gross export turnover dived by 10.5 percent during the period. Reportedly, sales volume massively declined in 1HCY23 due to rise in the share of illicit tobacco products as enhanced FED and sales tax forced the legitimate companies to drive the prices up. Cost of sales inched down by 18 percent year-on-year in 1HCY23 as the company already shutdown 8 out of its 10 production lines in May 2023 due to demand contraction. Distribution expense grew by 32 percent year-on-year in 1HCY23 while administrative expense posted a 4 percent growth during the period. Other expense multiplied by 78 percent year-on-year in 1HCY23 on account of massive exchange loss coupled with higher WWF and WPPF. Other income toppled by 71 percent year-on-year in 1HCY23. Operating profit grew by 21 percent year-on-year in 1HCY23 with OP margin growing from 33.5 percent in 1HCY22 to 39.5 percent in 1HCY23. Finance income posted a handsome 349 percent year-on-year growth in 1HCY23 due to higher discount rate. Net profit grew by 30 percent year-on-year in 1HCY23 to clock in at Rs11.04 billion with an NP margin of 24 percent versus 18.9 percent during the same period last year. EPS grew from Rs.33.32 in 1HCY22 to Rs.43.22 in 1HCY23.

Future Outlook

The mounting share of illicit tobacco in the domestic market is swallowing the share of the legitimate tobacco industry leading to layoffs and plant shutdowns. The inefficient implementation of track and trace system is doing no favor either. Three hikes in FED in 2022 and 2023 has rendered the legal tobacco industry uncompetitive and cutting their contribution to the national exchequer.