On cigarettes output

The country’s cigarette output has been gradually picking up this year, but it may not be enough to offset the impact from the challenging operating environment and higher taxes and duties. Based on latest data from Pakistan Bureau of Statistics (PBS), the cigarette production (in the formal industry) stood at 29.15 billion sticks in the Jan-Jun period of 2022, showing growth of 10 percent year-on-year. The growth trend has continued since CY21, when annual output had hit 57 billion sticks, rising by 16 percent year-on-year.

Based on the PBS data, the average cigarette production in the latest half-yearly period stood at 4.86 billion sticks per month, which is higher than 4.4 billion sticks per month seen in 1HCY21. Output is slowly reaching closer to the previous peak of 5.1 billion sticks per month produced on average during CY18. On a monthly basis, the highest monthly production was recorded at 6.27 billion sticks back in April 2018.

The 10 percent output growth in the cigarette manufacturing industry during 1HCY22 is reflected in the financials of the top two tobacco companies, where volumetric growth has been visible. For instance, at Philip Morris (Pakistan) Limited (PSX: PMPK), the net turnover grew by 10 percent year-on-year to reach Rs10.16 billion. And at Pakistan Tobacco Company Limited (PSX: PAKT), the net turnover grew by a bigger 21 percent year-on-year.

While the topline growth helped propel the operating profitability of both firms by double-digits in the analysis period, the duo’s bottomline /net profits still underwent double-digit contraction. For PAKT, net profits reduced by 10 percent year-on-year to Rs8.51 billion, and at PMPK, the net profits went down by 11 percent year-on-year to Rs1.53 billion. This decline could be attributed to proportionally much higher booking of income-tax expense during 1HCY22.Recall the federal government had levied a 10 percent ‘super tax’ on a number of industries, including tobaccos, in June 2022.

Going forward, the cigarette output may come under pressure. Recall that the latest federal budget had also raised the FED on cigarettes. This may render cigarette output in the formal industry more expensive than the informal sector alternatives that are cheaper due to evading taxes and duties. The cheaper, non-duty-paid cigarettes are cited by PAKT and PMPK as a major challenge to the viability of the formal sector as well as government’s tax revenues. Let’s see how things unfold in the second half of the year.