The tobacco fortunes have indeed turned. In fact, the second-ranked tobacco player is on a roll this year. During the half-yearly period ended June 30, 2018, Philip Morris (Pakistan) Limited (PSX: PMPK) has undergone a massive expansion in its top-line and bottom-line on a year-on-year basis.

As work are rising cigarette volumes pushing gross turnover higher. But this is not unique to PMPK. The market leader Pakistan Tobacco Limited (PSX: PAKT) is also charting a similar growth trajectory. (During 1HCY18, PAKT’s net turnover jumped 50 percent year-on-year to Rs26.3 billion and its net profits surged 113 percent year-on-year to Rs6.3 billion).

As previously pointed out in this space, it is the fiscal relief that has been working in favour of tobacco firms. It won’t be a stretch to dub last two federal budgets – FY18 and FY19 – as tobacco-friendly in nature. The re-introduction last year of third tobacco tier – which helped cigarettes to retail below Rs58 for a 20-cigarette pack – had the effect of making cigarettes cheaper.

Since this market is price-sensitive, lower-priced cigarettes by the likes PAKT and PSX, it seems, have been enjoying a field-day in the formal market. Previously, illicit cigarettes would use the tax arbitrage to gain edge in the economical segment. The federal government, in order to preserve its tobacco billions, helped the tobacco majors to become competitive in this market, with possibly negative effects for public health.

Meanwhile, PMPK looks en route to post later this year its best profitability in almost a decade. Having made a net loss in the years CY11 to CY15, the firm had returned to profits in CY16, only to see the bottom-line decline more than two-thirds in CY17 as the informal segment hit the volumes hard earlier that year. But things are looking different in CY18.

Besides significant up tick in net turnover, costs and expenses have also come under discipline. For instance, cost of sales depleted 54 percent of net turnover in 1HCY18, down from 68 percent in the same period last year. Similarly, marketing expenses and administrative expenses both came down roughly six percentage points each over 1HCY17 to exhaust 22 percent and 9 percent of sales, respectively.

For the rest of this calendar year, PMPK’s top-line is expected to continue posting double-digit growth. But as the low-base effect will disappear in the following quarters, PMPK is expected to consolidate gains and start posting stable growth next year onwards. After that, a lot will depend on whether the PTI-led federal government adopts a revenue-mobilization approach or a public-health approach while taxing tobacco.