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Whether or not folks smoked a whole lot more during the height of coronavirus is unclear. But the latest financials of the tobacco giant, Pakistan Tobacco Company (PSX: PAKT), tell an upbeat story in a challenging time. In the so-called corona quarter (Apr-Jun), the leading cigarette manufacturer scored a handsome net turnover gain of 12 percent year-on-year for the three-month period ended June 30, 2020.

The growth in gross turnover could do better. There was 4 percent yearly increase in domestic sales, which accounted for 97 percent of PAKT revenues in 2QCY20. This low growth seems price-driven, as cigarette sales volumes have been under pressure owing to allegedly rising sale of tax-evading cigarettes and counterfeits. As a result, factories have been producing comparatively less sticks this year.

The decline in country’s cigarette production, a pre-Covid phenomenon, continued amid Covid as well. As per latest PBS data, between January and May 2020, the tobacco industry produced 19 billion sticks in total, down by a third vis-à-vis same period last year. Roughly 4 billion sticks were produced on average per month in the year thus far, down from around 6 billion sticks produced per month in recent years.

While domestic turnover couldn’t grow by a lot in the quarter under review, it certainly helped PAKT that the export revenues turned juicy. Overseas sales of raw tobacco and finished product totaled Rs1.2 billion in the quarter, which is about a billion bucks more than what the firm shipped out in the same period last year.

That the net turnover growth is higher than gross turnover growth owes mainly to the slight decline in FED as a function of gross sales (FED rate). Compared to 49.8 percent in 2QCY19, the FED rate came down to 48.4 percent in the latest quarter. Some of this decline owes to higher export proceeds this year – but even that suggests a steady FED rate, as opposed to a rising one in recent times. Good for profits!

Higher revenue retention helped PAKT maintain its profit margins at similar level as last year – with gross margin at 20 percent, operating margin at 13 percent and net margin at 10 percent. Some cost slippages are prominent, still. For instance, cost of sales grew by 22 percent year-on-year in the quarter, equating 17 percent of topline (2 percentage points more than 2QCY19). This is explained by PKR depreciation relative to same period last year, increase in import-related duties and the broader inflationary impact.

While the administrative expenses were drastically reined in during lockdowns, the selling and distribution expenses shot up massively in the quarter by 66 percent year-on-year, depleting 4 percent of gross sales (2% in 2QCY19). Meanwhile, ‘other income’ visibly tanked, suggesting limited gains on any asset disposal. But that was more than compensated by the reduced ‘other operating expenses,’ perhaps due to lower foreign exchange losses.

In the end, it was a lower booking of income tax liability (despite higher pre-tax profits) that helped the tobacco major to post a double-digit growth in profits down the line. The second quarter helped PAKT close the half year with a topline of Rs85.9 billion (7% yearly growth) and a bottomline of Rs7.6 billion (8% yearly growth). With no major FED surprise in the budget, expect subsequent quarters this year to be more sanguine.