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The good run continues for Marlboro maker in Pakistan. As per latest financials shared with the bourse for the quarter ended March 31, 2021, Philip Morris (Pakistan) Limited (PSX: PMPK) doubled its profitability earlier this year despite a nominal uptick in topline. The strong quarterly performance, built on spending efficiencies, is followed after PMPK nearly doubled its bottomline to Rs1.8 billion during CY20.

PMPK’s net turnover grew by 6 percent year-on-year to reach Rs4.4 billion in 1QCY21. The management continues to highlight its claim that “illicit sector” – a term used for those manufacturers that evade taxes and duties to undercut genuine players – has been growing. PMPK claims that illicit cigarettes now have a 40 percent market share – which would be astounding if it is indeed the case. Excise-driven price increases and lax enforcement against illicit sector are cited as main causes of the rising phenomenon.

Those concerns are voiced now as a matter of routine, albeit there is no credible, independent study that can gauge the true scale of the problem. But the formal market has been doing well lately. Market leader Pakistan Tobacco has also had a good quarter, after having an impressive 2020. (Read: “PAKT: soaring profits,” published April 28, 2021). The government has been trying to launch a track-and-trace system to curb illicit practices in the sector, but the system’s implementation under FBR remains in limbo.

Back to PMPK, despite the single-digit topline growth, the firm’s cost of sales decreased by 16 percent compared to same period last year. The closure of the Kotri factory, among other cost-saving measures, is presumably paying off. As a result, these costs consumed about 52 percent of net turnover, which is significantly lower than 65 percent under this head witnessed in the same period last year.

While PMPK managed to cut back on administrative expenses, its distribution & marketing expenses shot up by an unusually-high 63 percent year-on-year, thereby eroding some of the profitability gains scored up the line. Consequently, these expenses exhausted 19 percent of the topline in the quarter, up by almost 7 percentage points relative to the same period last year.

This aggressive spending is aimed at “commercial initiatives” that can beef up the topline and provide better returns. Higher proceeds under ‘other income’ offset about half of the marketing spending increase. The ‘other expenses’ booked by PMPK in the quarter saw normal growth, after seeing an abrupt rise in CY19 owing to employee separation scheme and asset impairments related to the Kotri factory closure.

As a result of favorable factors mentioned above, PMPK managed to nearly double both its operating profits to Rs1 billion and its net profits to Rs0.7 billion. This marks one of the best quarters for the second-ranked cigarette maker in recent history. Whether the profitability continues to improve depends on how the federal government goes about tinkering with the tobacco FED rates in the upcoming budget.

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