It’s not the financial start a tobacco company would have wanted to start off a tough business year. As per a company notice sent to the bourse yesterday, Philip Morris (Pakistan) Limited (PSX: PMPK) scored a massive pre-tax loss in for the quarter ended March 31, 2019 – despite a decent growth in the top line. There are three major factors that might explain why the PMI’s local subsidiary is back to losses this year.

Chief among them is the more than two and a half billion rupees expensed in the quarter under the head of ‘other expenses’. That colossal sum is presumably contributed by the restructuring costs at PMPK, which had announced the closure of its Kotri cigarette factory earlier this year. It is unclear if subsequent quarters will book more of such restructuring costs.

Second, despite attaining cuts in marketing and admin overheads during 1QCY19, PMPK couldn’t control its cost of sales. These core costs consumed 57 percent on net turnover in the quarter, significantly up from 50 percent in 1QCY18. Manufacturing costs are going north, thanks to the double whammy of rising utility costs and higher cost of imported materials and machines as PKR has weakened in the last year.

The third factor belongs to the top. Though net turnover grew by 8 percent year-on-year, the dynamics prevalent in the formal tobacco industry suggest that growth in gross turnover would have been in double-digits for PMPK in the quarter under review. Most likely, the firm retained less of gross turnover as net turnover, courtesy the twin hikes in FED after the Jan-Mar quarter in 2018 raising the effective FED rate.

(The top-line of Pakistan Tobacco (PSX: PAKT) has suffered from a similar hike in FED rate in 1QCY19. For more on that, read: “Pakistan Tobacco: FED hurts,” published April 24, 2019)

What next for the firm that had only started returning some profits this decade since CY16? For its part, PMPK is trimming its manufacturing footprint and operating spending to get in line with the times. But a lot is still riding on the FED hike that is expected in the budget a month from now. As identified earlier, an FED hike beyond inflationary expectations may affect the financials of tobacco majors, including PMPK.