A tobacco giant is now fully awake. The Pakistan Tobacco Company Limited (PSX: PAKT) is now back to its winning ways. As per latest financials released to the bourse, PAKT has more than doubled its bottom-line in the six-month period ended June 30, 2018. This sets the market leader firmly on course to end the year on a high note and even beat its peak profits of Rs10 billion posted back in 2016.

At work is the continued recovery in gross turnover seen since 3QCY17. PAKT has been reclaiming its market share by selling billions of sticks more, apparently more so in the value-for-money (VFM) segment. As per the latest PBS data, overall local cigarette production touched a recent high of 57.47 billion sticks in Jul-May FY18, up 90 percent year-on-year.

Compared to PAKT’s gross turnover, its net turnover has grown by a bigger percentage on a year-on-year basis. Net turnover accounted for 41 percent of gross turnover in 1HCY18, as opposed to 35 percent in same period last year. This gain has come mostly on account of lower excise-duty collection (as percentage of gross turnover), indicating that growth has mostly come from higher sales volume of cheaper cigarettes, which carry a lower FED per pack.

This is where thins get controversial. The hand of the government has been working to beef up its tobacco billions, and with it, the fortunes of tobacco majors. Recall, to stall the trend of falling revenues in the formal tobacco sector seen in early 2017, the federal government had, through the FY18 budget, introduced a third tobacco tier, while shying from a major FED increase on the top two tiers. Thanks to the tier-3, tobacco players could sell a cigarette pack below Rs58, with an FED of Rs16 per pack.

The third-tier had the effect of making cigarettes cheaper overall, as bulk of cigarette sales are said to take place in the affordable, VFM segment. To illustrate, as per the latest CPI reading, the average price of K2, a low-end brand, had dropped 9.45 percent year-on-year to Rs51.18 per pack in June 2018.

In the recent, FY19 budget, the government continued the tobacco-sector relief and announced a mere 6 percent FED increment – which seems more “inflationary” than “punitive” in nature – on each of the three pricing tiers. The FED increase on the bottom tier was less than one rupee, barely noticeable. (For more on that, read ‘Big tobacco wins, again,’ published May 2, 2018).

Proliferation of cheaper cigarettes in the formal market raises serious concerns for public health. (For more on that, read ‘Illicit cigarettes: a smokescreen?’ published April 13, 2018). That’s something the new government should take into account. Meanwhile, the taxes and duties’ collection rising in absolute numbers gives a misleading picture. For instance, the share of excise duty in PAKT’s gross turnover reduced to 44 percent in 1HCY18 – down from the average of 51 percent seen between CY11 and CY16.

While the next lot of fiscal planners must ponder those questions, PAKT has decisively turned things around for itself after a year of fiscal relief. The company has ably kept its cost of sales and selling, administrative & other operating expenses steady at 20 percent and 6 percent of gross turnover, respectively – those percentages rose only marginally over 1HCY17. If PAKT continues this run, it is expected to post an even better net margin at year-end than the ten percent posted in 1HCY18.