PAKT in CY22

While things may look gloomy for the formal tobacco industry after the massive FED hike on both value and premium cigarette price tiers under the recent mini budget, the industry leader’s strong financial performance lately may help it navigate challenging operating conditions better than the rest. As per latest financials posted to the bourse by Pakistan Tobacco Company (PSX: PAKT), the leading tobacco player achieved more than 25 percent year-on-year growth in its net turnover and operating profits during CY22.

At the top, the gross turnover for PAKT in the twelve-month period ended December 31, 2022 reached an all-time high of Rs232.6 billion, signifying 17 percent year-on-year growth, mainly on account of FED-driven price increases, with some growth also coming from the volume side, along with higher exports. Two back-to-back FED hikes took place in mid-CY22 – first in June with FY23 budget announcement, and subsequently in August when the stalled IMF program was being revived by the current government.

Interestingly, the 8 percent yearly growth rate in FED to Rs103.2 billion was less than half compared to the topline growth. This suggests that PAKT had most of its topline growth in the value/affordable pricing tier (which carries lower FED per cigarette) than the premium/expensive one (which carries higher FED per cigarette). As a result, FED’s share in gross turnover declined from 47.7 percent in CY21 to 44.4 percent in CY22. (GST’s share was almost the same at 14.8 percent of gross turnover).

The FED variance directly benefitted net turnover, which grew higher to equate 40.8 percent of gross turnover in CY22 (higher than 37.6% in CY21). Consequently, the net turnover grew out-of-step with the topline growth, expanding by 27 percent year-on-year to score Rs94.8 billion in CY22.Meanwhile, the core ‘cost of services’ also grew by 27 percent year-on-year to Rs49.7 billion, equivalent to 21.4 percent of gross turnover (CY21: 19.6%). Gross margin stood at 19.4 percent, compared to 18 percent in CY21.

Down the line, the topline-related gains helped PAKT to protect its profit margins in a difficult year. Operating profitability was up by 29 percent year-on-year to Rs32.7 billion, helped in part by controlled selling and distribution expenses and very small growth in administrative expenses. Had it not been for a spike in ‘other operating expenses’ (in part due to foreign exchange-related losses), the operating margin would have been higher than the 14.1 percent reported in CY22 (CY21: 12.8%).

In the end, there was higher pre-tax profit growth of 33 percent year-on-year to Rs34.7 billion, thanks to huge increase in ‘finance income’ (as there were higher returns on interest-bearing deposits and investments after successive discount rate hikes during 2022). The after-tax profit growth, however, was limited to 13 percent year-on-year, to reach Rs21.3 billion (still all-time high for PAKT), as the company booked a higher share of its pre-tax profits as ‘income tax expense’ (38.6% in CY22 vs. 28% in CY21), reflecting ‘super tax’ impact during the year. Let’s see what CY23 has in store for the top tobacco player.