Khyber Tobacco Company (PSX: KHTC) was incorporated in Pakistan as a public limited company in 1954. The company manufactures and sells cigarettes besides re-drying of tobacco. The company also has filter rods and other non-tobacco materials in its portfolio. KHTC has a strong market presence in Pakistan and it has also expanded its distribution network in Eastern Europe, South & West Africa, Central & South Asia and Middle East.
Pattern of Shareholding
As of June 30, 2023, KHTC has a total of 6.92 million shares outstanding which are held by 1178 shareholders. Local general public has the highest shareholding of 91 percent in KHTC, followed by Insurance companies having a stake of 3.46 percent in the company. Foreign public accounts for 3 percent shares of KHTC while Directors, their spouse and minor children hold 1.11 percent shares. The remaining ownership is distributed among other categories of shareholders.
Historical Performance (2018-22)
Since 2018, KHTC’s topline has plunged twicei.e., in 2019 and 2021. These were the years where the company also posted a negative bottomline. The remaining years are characterized by staggering topline and bottomline growth.The margins of the company witnessed a drastic slump in 2019 followed by a recovery in 2020. However, in 2021, the margins again dwindled. The subsequent two years mark the period of financial vividness and exuberance for KHTC where it illustrated staggering recovery in its margins. The detailed performance review of each of the years under consideration is given below.
In 2019, KHTC’s net sales slumped by 5 percent year-on-year. While export sales boasted an astounding growth of over 42 times to clock in at Rs.235.76 million, local sales nosedived by 16 percent year-on-year to clock in at Rs2102 million. The drop in sale came on the back of low volumetric sales in the cut tobacco and cigarette categories while off-take of re-dried tobacco grew to 1.42 million kilograms in 2019 compared to 0.166 million kilograms in 2018, up 754 percent year-on-year (see the table of sales volume). Cost of sales continued to expand which not only lowered the gross profit by 64 percent in 2019 but also squeezed the GP margin to 17 percent in 2019 from 44 percent in the previous year. Administrative expense slid by 26 percent year-on-year mainly on account of lower trade debts written off during the year and lower rent expense. Conversely, distribution expense grew by 33 percent year-on-year on 2019 due to extensive marketing of re-dried tobacco, custom, clearance and freight on export sales as well as training of sales staff. This culminated into operating loss of Rs.29.47 million in 2019 versus operating profit of Rs.268.47 million in 2018. Finance cost surged by 382 percent in 2019 owing to high discount rate coupled with increased borrowing to meet working capital requirements. As a consequence, KHTC posted a net loss of Rs.38.27 million in 2019 versus net profit of Rs.199.87 million in the previous year. The company recorded loss per share of Rs.7.96 in 2019 versus EPS of Rs.41.57 in 2018.
In 2020, KHTC registered a year-on-year topline growth of 71 percent. This came on the back of high off-take in all three categories i.e., re-dried tobacco, cut tobacco and cigarette (see the table of sales volume). Both local and export sales boasted a massive turnaround in 2020 despite the eruption of COVID-19. The GP margin stayed intact at 17 percent. Administrative expense hiked by 13 percent year-on-year in 2020 mainly on account of higher payroll expense. Distribution expense also escalated by 21 percent year-on-year in 2020 due to higher custom, clearance & freight on export and training of sales staff during the year. This translated into operating profit of Rs. 62.74 million in 2020 and OP margin of 3 percent. Finance cost slid by 57 percent in 2020. KHTC registered net profit of Rs.38.54 million in 2020 with NP margin of 2 percent and EPS of Rs.8.02.
After a year of respite, the topline once again took a hit in 2021 and dropped by 34 percent year-on-year. This was on the back of a massive drop in the off-take of re-dried tobacco. The dispatches of other two categories marginally increased but couldn’t create any impact on the topline (see the table of sales volume).
Export sale also registered over 50 percent dip in 2021 due to low demand of Pakistani tobacco in the international market. Cost of sales nosedived by 30 percent year-on-year resulting in 48 percent thinner gross profit in 2021. GP margin shrank to 14 percent in 2021. Lesser export sales saved the company from customs, clearance and freight on export. This coupled with low advertisement and promotion activities resulted in a 46 percent year-on-year dip in the distribution expense. Administrative expenses also slipped by 8 percent year-on-year in 2021. Despite undertaking concentrated efforts to keep the operating expenses in check, KHTC posted an operating loss worth Rs26.93 million in 2021. Finance cost spiked by 172 percent year-on-year in 2021 despite low discount rate during the year. This was the result of a massive hike in current liabilities during the year. This produced a major dent on the bottomline which posted a net loss of Rs68.65 million in 2021 with loss per share of Rs.14.28.
KHTC posted a staggering 103 percent year-on-year growth in its topline in 2022 on the back of increase in off-take across categories particularly re-dried tobacco (see the table of sales volume). The company also undertook rigorous initiatives during the year which boosted its export sales. The depreciation of Pak Rupee also played its part in keeping the net sales robust. GP margin flew up to 33 percent in 2022 while gross profit multiplied by 388 percent. Customs, clearance and freight on export sale expanded the distribution expense by 115 percent year-on-year in 2022. Administrative expense also grew in line with inflation and also because the workforce grew from 372 employees in 2021 to 460 employees in 2022 which drove up the payroll expense. KHTC posted operating profit of Rs.532.76 million in 2022 which translated into OP margin of 22 percent. Finance cost also grew owing to higher borrowings and record high discount rate during the year. The net profit for the year stood at Rs.315 million culminating into NP margin of 13 percent and EPS of Rs.65.62 in 2022.
2023 stands out among all the years under consideration on account of a splendid 202 percent year-on-year growth in net sales and over 500 percent year-on-year growth in net profit. This was the result of a staggering increase in sales volume across categories particularly re-dried tobacco (see the table of sales volume).
Export sales registered a whopping increase over 400 percent and stood at 55 percent of KHTC’s gross sales in 2023 versus 27.6 percent in 2022. Higher proportion of export sales also buttressed the GP margin amid Pak Rupee depreciation. KHTC’s GP margin climbed to 37 percent in 2023. Administrative expense hiked by 59 percent year-on-year in 2023 mainly on account of higher payroll expense as the number of employees grew to 598 in 2023. Distribution expense surged by 149 percent in 2023 primarily due to higher custom, clearance and freight on export sales. Research expense and promotion expense also spiked in 2023.
There was a significant rise in impairment loss on trade debts in 2023 which clocked in at Rs.61.96 million, up over 22.5 times year-on-year. Operating profit widened by 309 percent in 2023 with OP margin rising up to 29 percent. Other expense escalated by 484 percent in 2023 on account of profit related provisioning, FED and sales tax written offduring the year. However, other expense was absorbed by hefty other income which grew by 940 percent in 2023 on account of exchange gain. Finance cost mounted by 112 percent in 2023 on account of higher discount rate although borrowings notably dived down in 2023 as evident in KHTC’s debt-to-equity ratio (see the graph). The company posted 534 percent year-on-year growth in its net profit which stood at Rs.1998.40 million in 2023 with EPS of Rs.288.68 and NP margin of 27 percent – the highest among all the years under consideration.
Recent Performance (1QFY24)
KHTC didn’t kick start FY24 on a good note as its net sales drastically plunged by 68 percent year-on-year in 1QFY24. The company blames the inefficient implementation of Track & Trace system to be one of the core reasons of decline in sales as it gives room to illicit and counterfeit cigarette market to flourish at the expense of lawful market players. Export sales also greatly dwindled in 1QFY24 resulting in gross loss of Rs.47.35 million versus gross profit of Rs.633.55 million during the similar period last year. Administrative and distribution expense hiked by 14 percent and 9 percent respectively on account of inflation as well as due to marketing efforts to boost local sales amid lackluster export sales. KHTC incurred operating loss of Rs.188.83 million in 1QF24 versus operating profit of Rs.507.37 million in 1QFY23. Finance cost slumped by 68 percent year-on-year in 1QFY24. The company recorded net loss of Rs.249.76 million in 1QFY24 versus net profit of Rs.405.55 million during the same period last year. Loss per share stood at Rs. 36.08 in 1QFY24 versus EPS of Rs.84.36 in 1QFY23.
Future Outlook
While the increase in sales tax and FED on cigarettes may put a dent on the net revenues of the tobacco industry, the market players have significantly increased the prices to counterbalance. However, the increase in prices will create room for growth of the illicit cigarettes.The complete implementation of Track & Trace system is likely to result in increase in local sales. However, the company has remained highly reliant on its export sales off-late and if the downward trend doesn’t reverse, the company’s liquidity position may be at risk.