PMPK in 9MCY23

While CY22 was better for the tobacco industry in terms of profitability despite the three FED hikes, the ongoing CY23 has seen earnings falling for the listed regulated sector. The second-largest cigarette manufacturer in the country, Philip Morris (Pakistan) Limited (PSX: PMPK) recently announced the financial performance for the nine months of CY23 with a significant decline in net profits for the period. Earnings for the tobacco company were seen falling from Rs2.4 billion in 9MCY22 to Rs660 million in 9MCY23. The 72 percent year-on-year decline in profitability was driven by declining topline, while the rising costs further supported the fall.

The net turnover decline of 9 percent year-on-year in 9MCY23 was primarily driven by falling volumes of cigarettes sales. The tobacco industry volumes in 9MCY23 have been affected by the February FED hike. The second quarter report for 2023 shows that the volumes for PMPK were down by 50 percent year-on-year in 1HCY23, while the same are down by 44 percent in the nine-month period. Volume growth was also affected in 2022 where the PBS data showed a decline of 8 percent year-on-year in cigarette sticks sales.

And with increase in cost of sales – albeit only three percent year-on-year – the gross profit for the company slipped by 22 percent in 9MCY23, equating 61 percent of net turnover in 9MCY23, the ‘cost of sales’ consumed more than 6 percentage points of the topline than in 9MCY23. This resulted in a significant decline in gross margins. The operating margins were down to half of what they were in 9MCY22 with growth in costs despite the support provided by the other income. This trickled down to the net margins that were down from 15.87 percent in 9MCY22 to 4.83 percent in 9MCY23.

The key challenge of the regulated tobacco industry remains there. The cumulative excise increases of over 200 percent in 2022-23 that includes150 percent excise hike in February 2023 has impacted volumetric sales of the sector. At the same time, these measures have further spurred growth of illicit tobacco and non-tax paying tobacco players.