The times they are a changin’ for Marlboro Man in Pakistan! Philip Morris (Pakistan) Limited (PSX: PMPK) has broken the run of loss-making quarters in the three-month period ended September 30, 2017. Looking at the firm’s latest financial announcement to PSX, the fillip to PMPK fortunes has come from a resurgent top line, which had undergone severe downturn in the first two quarters this calendar year.
For PMPK, pressure on the sales volumes – number of cigarettes sold locally – had become pronounced in the second half last year. Cheap, duty-non-paid (DNP) smokes in the illicit market – which, by one estimate, had risen to 40 percent of the market’s total volumetric earlier this year – burned not just PMPK, but also other players in the formal market. In 1HCY17, PMPK top line had declined 57 percent year-on-year, way more than the 37 percent top line drop for Pakistan Tobacco Limited (PSX: PAKT).
Now in 3QCY17, the PMPK net turnover equates nearly four times the level seen in the year-ago period. What is going on? Between price and volume, the latter must have provided a breather. From what it looks, the volume of cigarettes sold during the quarter rose in triple digits year-on-year.
The pricing factor in the revenue equation likely didn’t play much role in top line expansion last quarter. Recall that the FY18 federal budget didn’t impose higher FEDs on the top two cigarette tiers. Hence, the hitherto-regular FED-driven price increases were largely absent in 3QCY17.
In fact, the main reason for 3QCY17 gains, as per the management, was the introduction in the budget of a third tobacco FED tier at the bottom, which carried Rs16 FED on brands retailing below Rs58. Now, it is becoming clear that fiscal measure allowed formal players some breathing space in the affordable segment. That segment was the most hard-hit by the mushrooming DNP brands.
The government, of course, acted in self-interest. Status quo would have led to tobacco majors losing their revenues even more, depriving the federal kitty over Rs50 billion p.a. from levies of excise duties, sales tax, and corporate tax.
Given the nature of measures announced by the government, this column had earlier predicted that 3QCY17 might help the major tobacco players strike back and reclaim some of their market share. And the latest quarter has done just that. From now on, it’s about sustaining the momentum of top line growth. But can the maker of Morven Gold, Marlboro, Diplomat, K2, and Red and White, really rest easy?
On their own, the 9MCY17 financials tell that PMPK is not out of the woods yet. Its revenues, operating profits, and net profit are, respectively, down 23 percent, 77 percent, and 88 percent year-on-year. But if the fourth quarter ends up imitating the third quarter – 3QCY17 revenues were more than the first two quarters put together – PMPK will most likely close the year on a note of profitable growth. It will still take some time to recoup the lost market share, but PMPK now has some momentum to take forward into CY18.
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