After having a somewhat muted performance in the first quarter this year, the leading cigarette manufacturer has made a comeback in the second quarter. As a result, Pakistan Tobacco Company (PSX: PAKT) has closed the first-half with a double-digit growth in profitability. It has come about thanks to a mix of top line growth, cost control and some non-core gains.

Operating in a heavily-taxed industry, PAKT’s profitability is directly affected by the effective FED rate – which is calculated as excise duties as a percentage of gross turnover. This year, the FED rate has jumped to 50 percent, from 44 percent in the same period last year. This directly affects net turnover, as lower retention of revenues leads to a ripple effect down the income statement.

The 2QCY19 was impressive in the sense that PAKT managed to significantly grow its profitability despite high FED. The FED rate was still 50 percent in the quarter – but it was neutralized by the company’s gross turnover that jumped by a solid 38 percent over previous year. The industry’s production data indicate a slowdown in cigarette production during the first half; therefore, it is likely that higher pack prices were responsible for most of the top line gain in the quarter under review.

This top line growth helped the company’s net turnover to also grow by a lower, but still healthy 20 percent. The firm’s profitability in the quarter also saw significant boost in the end, helped by a near freeze in cost of sales and higher finance income. With the half-yearly performance behind it, can the tobacco leader expect the coming quarters to be as good as the last one?

In the latest federal budget, the industry was able to avoid the Rs10 healthy levy per pack; but the federal government has abolished the three-tier system and raised the effective FED on the bottom tier. (For more on budgetary implications for tobaccos, read “Budget: a win for tobaccos?” published June 13, 2019). While the net impact on tobacco majors’ profitability looks uncertain at this point, what can be said with more certainty is that the government looks set to grow its revenues from the tobacco industry.