PMPK: volumes recovering?

The stars are getting aligned for tobacco manufacturers, so far as financial results for the Jul-Sep quarter are concerned. First, there was a strong topline show by the market leader Pakistan Tobacco (PSX: PAKT). For more on that, read “PAKT: topline is strong,” published October 26, 2020. But it is the maker of Marlboro, Philip Morris (Pakistan) Limited (PSX: PMPK), that has posted even exceptional growth.

After seeing a yearly drop in its topline in the so-called corona quarter (Apr-Jun), PMPK witnessed its quarterly net turnover more than double on a yearly basis, albeit the topline is just two-thirds of the previous quarter. This solid rate of yearly growth handily beats net turnover growth for PAKT in the same quarter. After considerable decline, the country’s cigarette production has staged a recovery since June.

The topline growth seems to be driven mostly by recovery in cigarette sticks sold, which wasn't the case in the prior quarters when the firm reported a decline in volumetric sales. In the quarter under review, price increase seems to be less of a reason behind topline growth as there was no FED-related price increase in the period. Recall that the federal budget did not announce any change in FED structure or rates. The blockbuster topline growth among legitimate players is also good for tax revenue growth.

Curiously, the cost of sales grew by only 4 percent year-on-year in the quarter under review, despite a gushing topline. This turns the financials on their head, as it meant that the cost of sales was equal to 49 percent of net turnover, almost half of the 96 percent seen in 3QCY19. As a result, quarterly gross margin had a big jump from 4 percent last year to 51 percent this year. The restructuring efforts are paying off.

The savings or efficiencies, which are really visible this year, are also reported in operating expenditures. Despite the topline doubling in number, distribution/marketing expenses as well as administrative expenses showed double-digit yearly declines in the quarter. As a result, these two expense heads collectively consumed 28 percent of net turnover in 3QCY20, down from 77 percent in 3QCY19.

In the end, thanks to robust topline growth and sharp efficiencies scored under manufacturing costs and opex, PMPK scored a profitable bottomline in excess of half a billion rupees, as opposed to a significant net loss in 3QCY19. With a quarter to go, the 9MCY20 net profits stood at Rs1.8 billion (as opposed to a loss of Rs1.4 billion), thanks mainly to the operational efficiencies that have kicked in this year. After a difficult period, PMPK can now breathe easy and hope to close the year on a highly profitable note.