PMPK in CY22

Despite witnessing three FED rate hikes on cigarettes in less than a year, it may not all be up in smoke for the tobacco industry yet. Just as the market leader before it, the second-largest cigarette manufacturer in the country also closed the year ended December 31, 2022 on a note of profitable, double-digit growth. As per its latest earnings filing with the bourse last week, Philip Morris (Pakistan) Limited (PSX: PMPK) achieved net turnover of roughly Rs20 billion in CY22, showing growth of 14 percent year-on-year. That’s the highest net revenues recorded by PMPK so far, and that, too, in a challenging year for the economy.

The net turnover growth seems to be driven primarily by higher retail price of cigarettes during 2022 (as the FED was raised twice last year) and the company being able to retain more of its gross sales as net turnover (a result of sales growth taking place mostly in value/affordable tier). Volume growth seems non-existent in the industry. Based on data from Pakistan Bureau of Statistics, the cigaretteoutput totaled 52 billion sticks in CY22, showing decline of 8 percent year-on-year compared to 57 billion sticks in CY21.

Checked growth in ‘cost of sales’ – which went up by a comparatively lower rate of 10 percent year-on-year to nearly Rs11 billion – helped set the stage for improved profit margins down the line for PMPK. Equating 55 percent of net turnover in CY22, the ‘cost of sales’ consumed 2 percentage points less of the topline than in CY21. The fourth quarter of CY22 year was really helpful in this regard, as ‘cost of sales’ in the quarter declined by 13 percent year-on-year despite net turnover growth of 4 percent year-on-year.

The operating profit improved by 27 percent year-on-year to Rs4.3 billion, thanks to controlled growth in ‘distribution and marketing expenses,’ even as ‘administrative expenses’ grew at a rate below the average inflation during 2022. The spike in ‘other expenses’ (mainly due to exchange-related losses) was neutralized by strong growth in ‘other income’ (helped by saving accounts gathering bigger profits after multiple rate hikes). As a result, operating margin rose to 22 percent, from 19.5 percent in CY21.

Despite booking a much higher income-tax bill (equating 34.2% of pre-tax profits in CY22, versus 31% in CY21) due to the impact of the ‘super tax,’ in the end PMPK scored Rs2.8 billion in net profits, at a significant yearly growth of 22 percent. That’s a new peak for the firm’s bottomline. After the imposition of even higher FED on cigarettes earlier this year, it remains to be seen if the profitability can be maintained in what looks like another year awash with challenges for the tobacco industry and the economy at large.