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 the 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. The 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 (2019-24)

Since 2019, KHTC’s topline has plunged thrice i.e. in 2019, 2021 and 2024. These were the years when the company also posted a negative bottom line. The remaining years are characterized by staggering topline and bottom-line growth. The margins of the company witnessed a drastic slump in 2019 followed by a recovery in 2020. However, in 2021, the margins dwindled yet again. The subsequent two years mark the period of financial vividness and exuberance for KHTC where it illustrated staggering recovery in its margins. In 2023, KHTC’s margins portrayed their lowest-ever value (see the graphs of profitability ratios). The detailed performance review of the period under consideration is given below.

In 2019, KHTC’s net sales slumped by 4.93 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 net sales 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 in 2019 which not only lowered the gross profit by 64.12 percent in 2019 but also squeezed the GP margin to 16.59 percent in 2019 fromGP margin of 43.96 percent in the previous year. Administrative expenses slid by 25.94 percent year-on-year in 2019 mainly on account of lower trade debts written off during the year and lower rent expenses. Conversely, distribution expense grew by 32.92 percent year-on-year in 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 in an operating loss of Rs.29.47 million in 2019 versus an operating profit of Rs.268.47 million posted in 2018. Finance cost surged by 381.92 percent in 2019 owing to a 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 a net profit of Rs.199.87 million registered in the previous year. The company recorded a loss per share of Rs.7.96 in 2019 versus an EPS of Rs.41.57 recorded in 2018.

In 2020, KHTC registered year-on-year topline growth of 70.88 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. GP margin increased to 17.39 percent in 2020 with gross profit strengthening by 79.12 percent in absolute terms. Administrative expenses hiked by 13.20 percent year-on-year in 2020 mainly on account of higher payroll expenses. Distribution expense also escalated by 21.36 percent year-on-year in 2020 due to higher customs, clearance & freight on export, and training of sales staff during the year. This translated into an operating profit of Rs. 62.74 million in 2020 and an OP margin of 3.43 percent. Finance costs slid by 56.83 percent in 2020. KHTC registered a net profit of Rs.38.54 million in 2020 with an NP margin of 2.11 percent and EPS of Rs.8.02.

KHTC’s topline once again took a hit in 2021 and dropped by 33.5 percent year-on-year. This was on the back of a massive drop in the off-take of re-dried tobacco. The dispatches of the other two categories marginally increased but couldn’t create any impact on the topline (see the table of sales volume). The export sales also registered over 50 percent dip in 2021 due to the low demand for Pakistani tobacco in the international market. Cost of sales nosedived by 30.38 percent year-on-year in 2021 resulting in 48.32 percent thinner gross profit in 2021. GP margin shrank to 13.52 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 46.21 percent year-on-year dip in the distribution expense in 2021. Administrative expenses also slipped by 7.68 percent year-on-year in 2021. Despite keeping the operating expenses in check, KHTC posted an operating loss worth Rs26.93 million in 2021. Finance costs spiked by 171.62 percent year-on-year in 2021 despite a 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 in the bottom line resulting in a net loss of Rs68.65 million in 2021 with a loss per share of Rs.14.28.

KHTC posted a staggering 102.68 percent year-on-year growth in its topline in 2022 on the back of an increase in off-take across categories particularly re-dried tobacco (see the table of sales volume). The company also undertook rigorous marketing initiatives during the year which boosted its export sales. The depreciation of the Pak Rupee also played its part in keeping the net sales robust. GP margin flew up to 32.55 percent in 2022 while gross profit multiplied by 388.15 percent. Customs, clearance, and freight on export sales expanded the distribution expense by 114.80 percent year-on-year in 2022. Administrative expenses 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 an operating profit of Rs.532.76 million in 2022 which translated into OP margin of 21.62 percent. Finance cost grew by 140.91 percent in 2022 owing to higher borrowings and a record-high discount rate during the year. The net profit stood at Rs.315.45 million in 2022 culminating in an NP margin of 12.8 percent and EPS of Rs.65.62.

2023 stands out among all the years under consideration on account of a splendid 201.64 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 of over 400 percent and stood at 55 percent of KHTC’s gross sales in 2023 versus a share of 27.6 percent in 2022. A higher proportion of export sales also buttressed the GP margin amid the Pak Rupee depreciation. KHTC’s GP margin climbed to 37.28 percent in 2023. Administrative expenses hiked by 58.91 percent year-on-year in 2023 mainly on account of higher payroll expenses as the number of employees grew to 598 in 2023. Distribution expense surged by 149.25 percent in 2023 primarily due to higher customs, clearance, and freight on export sales. Research expenses and promotion expenses 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 2245 percent year-on-year. Operating profit widened by 309 percent in 2023 with OP margin rising up to 29.32 percent. Other expenses escalated by 483.83 percent in 2023 on account of increased profit-related provisioning, FED, and sales tax written off during the year. However, other expense was absorbed by hefty other income which grew by 940.33 percent in 2023 on account of robust exchange gain. Finance cost mounted by 112.30 percent in 2023 on account of higher discount rates although borrowings notably dived down in 2023. The company posted 533.50 percent year-on-year growth in its net profit which stood at an unprecedented level of Rs.1998.40 million in 2023 with EPS of Rs.288.68 and NP margin of 26.88 percent – the highest among all the years under consideration.

KHTC’s net sales slumped by 58.12 percent in 2024. This was on account of a massive decline in sales volumes across categories. Both local and export sales declined during the year. KHTC made no sales to the African and European region in 2024 and sales to the Middle East region also enormously deteriorated. Out of the total capacity of 9288 million cigarettes, the company utilized 6.8 percent capacity in 2024 and produced 631 million cigarettes. This was in line with lackluster demand. KHTC’s capacity utilization was recorded at 10 percent in 2023. Cost of sales dropped by 36.57 percent in 2024 resulting in 94.37 percent thinner gross profit recorded during the year. GP margin also drastically fell to its lowest level of 5 percent in 2024. Administrative expenses heightened by 73.4 percent in 2024 mainly on account of higher payroll as well as fuel & power expenses incurred during the year. Distribution expenses went down by 29.63 percent in 2024 due to lower customs, clearance, and freight charges on account of petite sales volume. KHTC recorded an operating loss of Rs.539.08 million in 2024. Other income eroded by 99.19 percent in 2024 due to the absence of exchange gain as well as lesser write-back of accrued liabilities. Other expenses also tapered off by 5.65 percent in 2024 as the company didn’t provision for WWF and WPPF. Despite the high discount rate, finance costs ticked down by 2.41 percent in 2024 due to lower interest paid on loans by sponsors. This was regardless of the fact that outstanding loans from sponsors massively grew from Rs.101.036 million in 2023 to Rs.901.036 million in 2024. The company recorded a net loss of Rs.1021.997 million in 2024 with a loss per share of Rs.147.63.

Future Outlook

The increase in sales tax and FED on cigarettes has put a severe dent in the net revenues of the tobacco industry. The complete implementation of the Track & Trace system is likely to result in an increase in local sales. The company has also remained highly reliant on its export sales of late and is planning to further expand its footprint in the international market to offset the effect of pitiable demand in the home market.