Its a job well done at Pakistan Tobacco Company (KSE: PAKT). The tobacco giant saw massive boost to both its top line and bottom line during the six months ended June 30, 2014, thanks to the firms two factories in Nowshera and Jhelum that appear to be producing cigarette sticks at top speed.
The firms net turnover grew by nearly 23 percent to reach close to Rs20 billion in 1H CY14. It seems that volumetric growth has continued to take place in budget cigarette packs like Capstan and Gold Flake, and in medium brand, Gold Leaf. The top line performance so far looks great when compared to an 18 percent growth in the firms net turnover in CY13.
Despite expansion at the top, core costs remained in check. Cost of sales increased by nearly 20 percent. But, as a percentage of net turnover, it declined by 167 basis points. The amelioration is reflected in strengthening of the gross margin, which perched high at 35.59 percent for the period under review.
Normally, top line growth is accompanied by corresponding increases in selling and distribution expenses. But for PAKT, these expenses have noticeably declined in 1H CY14. Efficiencies in this area pushed selling and distribution expenses to 7.46 percent of net turnover, a good 224 bps lower over 1H CY13. Further support came from administrative expenses, which grew by a modest 2.6 percent year on year, and consumed just 3.86 percent of revenues, 76 bps lower over previous year.
However, these operating gains were largely sapped by a 232 percent increase in other operating expenses and about four percent decline in other operating income. Thus operating margin could only improve over the gross margin level by a paltry 19 bps. Even then, the operating margin of 20.54 percent looks decent over previous year, thanks to the 35 percent year-on-year growth in operating profit.
PAKT eventually closed the first half with a hefty net profit of Rs2.85 billion and an impressive EPS of Rs11.14, showing great improvement over the same period of last year. The 36 percent bottom line growth must cheer up the shareholders, who, six months ago, saw the firm register a whopping 81 percent profitability growth in CY13.
In a market where an estimated 20 percent cigarettes sold are in illicit trade (smuggled, counterfeited, duty-evasive), PAKT has had to deal with other major issues like security situation, inflation and the utilities crisis. But, the firm has endured all that and still comes on top. The strong financial results are a consequence of PAKTs efforts to improve its businesses from supply-chain to branding to distribution network.
Continuation of those efforts would ensure that the firm remains in good operational and financial health. Meanwhile, government crackdown on illicit cigarette trade would benefit the formal sector firms like PAKT, besides raising more revenues for the national kitty.
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Pakistan Tobacco Co. Ltd.
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Rs (mn) 1HCY14 1HCY13 Chg
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Net turnover 19,940 16,226 22.9%
Cost of sales (12,843) (10,722) 19.8%
Gross margin 35.6% 33.9% -
Selling & distribution expenses (1,488) (1,574) -5.5%
Operating margin 20.5% 18.7% -
Profit for the period 2,848 2,091 36.2%
Net margin 14.3% 12.9% -
EPS - Rs 11.14 8.18 -
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Source: KSE announcement
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