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Business is good at a tobacco major. Yesterday, Pakistan Tobacco Company (PSX: PAKT) announced some impressive financial results for the year ended December 31, 2020. Among the things that really catches one’s attention is the all-time high profitability of Rs16 billion at the leading tobacco player. This has come despite the travails of operating in a tough pandemic year, amid industry claims of continuing threat to the formal sector from illicit players indulging in tax evasion and counterfeiting.

At the top, the gross turnover showed a decent 12 percent yearly expansion in CY20. Recall that the federal budget FY21 was tobacco-neutral, in that the federal excise duty (FED) was kept at the same level. Consequently, there was no FED-driven price increase last year. Hence, higher volumes are expected to have played a prominent role in this double-digit topline growth, especially during the latter half of the year. Revenues are also helped by robust PAKT exports of raw tobacco and cigarettes.

Data from Pakistan Bureau of Statistics also show an uptick in cigarette manufacturing in 2HCY20. In the first half of the year ended June 2020, output had averaged 4 billion sticks per month, which was a significant decline of 20 percent year-on-year. However, during second half ended December 2020, average monthly production had grown by 15 percent year-on-year to 4.2 billion sticks.

Back to PAKT, there was a higher 17 percent annual growth in net turnover. This is attributable to slightly lower effective FED rate (which is measured here as excise duties divided by gross turnover). During CY20, effective FED rate stood at 48.7 percent, down 150 basis points (bps) from 50.2 percent in CY19. It appears that majority of incremental sales during 2020 was concentrated in lower FED tier. This is lent credence by the fact that FED collection had lower growth (8%) compared to gross turnover (12%).

As a result, PAKT retained 37 percent of its gross sales during 2020, as opposed to 35 percent in the previous year. This may seem like a small change – but au contraire, the nearly 2 percentage point amelioration in net turnover makes a large, favorable difference for profit margins down the line. And down the line, the tobacco leader did improve its profit margins, despite some slippage on spending front.

The cost of sales and admin expenses grew out of step with gross turnover growth, exhausting 18 percent and 2 percent of the topline, respectively. Going forward, there is higher energy and fuel prices to contend with. Selling expenses had a controlled increase, consuming a stable 3 percent of gross sales. This helped operating margin to rise by 128 bps to record a figure of 13 percent for the year.

In the end, after-tax profits posted Rs16.5 billion for the year, a solid 28 percent annual increase. While the credit goes to a fine operating performance during the year, some of the bottomline gain is also owed to the relatively lower amount of income tax expense booked for 2020. The income tax tab was recorded at 26.3 percent of pre-tax profits during CY20, down from 29.5 percent of pre-tax profits in CY19.

Now into a new decade, how does the big picture look for the market leader? Grossing some Rs166 billion in sales last year, PAKT has managed to double its topline in a matter of seven to eight years. Under gradually tightening regulations, the firm’s ability to double the latest revenue tally in the years ahead is something that is dependent on how far the federal government is willing and able to go in raising the FED to levels that effectively penalize cigarette consumption.