Pakistan Tobacco Company Limited (PSX: PAKT) was incorporated in Pakistan as a public limited company in 1947. The company is a subsidiary of British American Tobacco (Investments) Limited, UK while British American Tobacco p.l.c, UK is the ultimate parent company of PAKT. The principal activity of the company is the manufacturing and sale of cigarettes/tobacco.

Pattern of Shareholding

As of December 31, 2023, PAKT has 255.494 million shares outstanding held by 3292 shareholders. Associated companies, undertakings, and related parties (which comprise British American Tobacco (Investments) Limited and Rothmans International) are the major shareholders of PAKT with a stake of 94.7 percent in the company. The general public accounts for 0.9 percent of PAKT shares, while Modarabas and Mutual funds hold 0.7 percent of the shares. Around 0.5 percent of PAKT’s shares are held by Banks, DFIs, and NBFIs, and 0.2 percent by Insurance companies. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

Except for 2019, PAKT’s topline has posted growth in all the years under consideration. Its bottom line has also been smoothly riding a growth trajectory over the period. Conversely, its margins which had been enjoying an upsurge until 2020 tapered off for the subsequent two years barring operating margin which posted a marginal improvement in 2022. In 2023, PAKT’s margins reached their highest level. The detailed performance review of the period under consideration is given below.

In 2019, PAKT’s net sales dropped by 2.14 percent year-on-year. While gross turnover in 2019 was 8.7 percent higher than the previous year, higher sales tax and excise duty culminated in a fall in net sales. In 2019, the company exported for the very first time in its history. PAKT exported 0.19 billion-plus cigarettes and 3 million kilograms of raw tobacco with a collective worth of $11 million to GCC and other Middle Eastern countries in 2019. Despite embarking on its export journey in 2019, PAKT’s overall sales volume dropped by 15 percent year-on-year in 2019 to clock in at 39.14 billion sticks. This was on the back of two excise-led price hikes – in September 2018 and in June 2019 which led customers to switch to illicit products which were much cheaper due to non-payment of duties and taxes. Cost of sales nosedived by 13.62 percent year-on-year in 2019. Gross profit grew by 12.57 percent year-on-year in 2019 with GP margin jumping up from 43.8 percent in 2018 to 50.4 percent in 2019. This was the result of a higher margin on export sales due to the depreciated local currency. Distribution expenses inched down by 5.74 percent year-on-year in 2019 owing to lower sales volume. Administrative expenses grew by 8.69 percent year-on-year in 2019 mainly on account of expenses incurred in information technology. Other expenses posted a significant 35.47 percent year-on-year rise in 2019 due to higher provisioning against WWF and WPPF as well as higher exchange loss due to depreciation in the value of local currency. Other income also posted a robust growth of 340.66 percent year-on-year in 2019 on account of gain on the disposal of property, plant, and equipment and recharges/other payments to associated companies written back during the year. This resulted in 21.3 percent year-on-year growth in the operating profit of PATK in 2019 with OP margin climbing up to 34 percent from 27.43 percent in 2018. The company’s capital structure mainly comprised of equity with a small portion of non-current liabilities. Moreover, the company was actively engaged in efficient working capital management and investment of surplus funds which culminated in net finance income in all the years under consideration. While net finance income dropped by 13.94 percent year-on-year due to an increase in lease liabilities, the bottom line grew by 24.68 percent year-on-year in 2019 to clock in at Rs.12899.23 million with an NP margin of 24.8 percent versus 19.46 percent in 2018. EPS also grew from Rs.40.46 in 2018 to Rs.50.45 in 2019.

In 2020, PAKT’s net sales grew by 17.15 percent year-on-year. This was despite a 7 percent decline in the sales volume of the company, which clocked in at 38.504 billion sticks. A 93 percent increase in excise duty in the last two budgets had created a wider difference between the prices of legal brands and duty-not-paid (DNP) brands. DNP brands further reduced their prices by 25 percent after the 2020-21 budget, incentivizing consumers to switch to cheaper alternatives. The increase in net sales in 2020 was due to price increases and the company exported 2.3 billion cigarette sticks and 4.1 million kilograms of raw tobacco in 2020, which translated into export revenue of $31.1 million. Despite a 7 percent drop in overall sales volume, the cost of sales surged by 13.83 percent year-on-year in 2020 due to inflation, the Pak Rupee depreciation, and supply chain malfunction owing to COVID-19. Higher export sales and upward price revisions resulted in a 20.42 percent year-on-year growth in gross profit with GP margin rising to 51.83 percent in 2020. The company launched VELO nicotine pouches and VELO sound station which resulted in a 7.49 percent increase in distribution cost in 2020. Administrative expenses also grew by 20.78 percent year-on-year on the back of an increase in information technology expenses in 2020. Other expenses rose by 11.71 percent year-on-year in 2020 due to higher provisioning for WWF and WPPF. Conversely, other income plunged by 4.42 percent in 2020 due to a dip in the recharges/other payments to associated companies written back in 2020 and a one-off gain on the disposal of property, plant, and equipment recorded in 2019. Operating profit grew by 23.6 percent year-on-year in 2020 with OP margin escalating to 35.88 percent. Net finance income tumbled by 11.12 percent year-on-year due to an increase in lease liabilities in 2020. Net profit grew by 27.96 percent year-on-year in 2020 to clock in at Rs16492.49 million with an NP margin of 27 percent. EPS also inched up to Rs64.55 in 2020.

In 2021, PAKT’s net sales mustered 23.15 percent growth which came on the back of 19 percent year-on-year rise in sales volume which clocked in at 43 billion sticks. This was on the back of excise stability in the 2021-22 budgets which allowed price stability to the legitimate brands. During 2021, the company exported 1.6 billion cigarette sticks and 6.4 million kilograms of raw tobacco, culminating in export revenue of $38.4 million. Cost of sales grew by 33 percent year-on-year in 2021 which pushed the GP margin down to 47.87 percent in 2021. Distribution expenses remained largely stable in 2021 despite increased volume as the company incurred increased selling expenses in the previous year owing to the launch of VELO. Administrative expenses multiplied by 18.79 percent year-on-year in 2021 due to increased spending on automation which drove up the IT cost. Other expenses posted a marginal 1.81 percent year-on-year uptick as provisioning for WPPF and WWF grew while foreign exchange loss slid during 2021. Other income was slashed by 3.27 percent year-on-year in 2021 as there were fewer recharges to associated companies that were written off during the year. Operating profit grew by 16.73 percent year-on-year in 2021 but OP margin fell to 34 percent. Net finance income grew by 30.43 percent year-on-year in 2021 as the company had a better liquidity position in 2021 and more funds available to be invested in Treasury bills. Net profit climbed up by 14.37 percent year-on-year in 2021 but NP margin ticked down to 25.15 percent. EPS ascended to Rs.73.83 in 2021.

The growth trajectory continued in 2022 with 26.5 percent year-on-year growth in PAKT’s topline in 2022. This was due to multiple price hikes due to increases in excise duty, inflation, and Pak Rupee depreciation. Sales volume shrank by 1 percent year-on-year to clock in at 42.5 billion sticks as the price increase of the legitimate brands further incentivized the DNP brands. Export turnover slipped by 18 percent in 2022 due to losing certain export markets. Export volume stood at 1.4 billion cigarette sticks and 4.4 kilograms of tobacco in 2022 which resulted in a turnover of $27.6 million. Besides, PAKT also exported human resource services of $1.5 million in 2022. Cost of sales soared by 27.15 percent year-on-year, taking its toll on the GP margin which slipped to 47.6 percent in 2022. Distribution expenses grew by 14.12 percent year-on-year in 2022 on the back of higher payroll expenses and selling expenses. Administrative expenses largely remained in check and posted a meager 0.95 percent hike in 2022. Other expenses magnified by 54.9 percent year-on-year which was the result of a massive surge in foreign exchange loss on account of local currency depreciation coupled with higher provisioning for WWF and WPPF in 2022. Conversely, other income sank by 8.32 percent year-on-year due to lower write-offs of payables to associated companies in 2022. Operating profit ascended by 28.58 percent year-on-year in 2022 with a slight increase in the OP margin which stood at 34.56 percent in 2022. Net finance income posted a staggering growth of 175.25 percent in 2022 due to better cash position and high discount rates. While profit before tax grew by 32.54 percent year-on-year in 2022, the imposition of a 3.87 percent super tax diluted the bottom line growth. Net profit grew by 13 percent year-on-year in 2022 to clock in at Rs21320.93 million with an NP margin of 22.48 percent. EPS grew to Rs.83.45 in 2022.

In 2023, PAKT registered 15.89 percent year-on-year growth in its net revenues. This was the result of an over 100 percent price hike due to an increase of over 200 percent in FED. This further created a disparity between the prices of duty paid and DNP brands leading to a 32 percent decline in PAKT’s sales volume in 2023. However, the company improved its export revenue by 74 percent during 2023 by exporting 1.3 billion cigarette sticks, 2.9 million kgs of cut-rag tobacco, and 6 million kgs of unmanufactured tobacco. Moreover, PAKT also exported human resource services worth $1.3 million in 2023. High inflation, Pak Rupee depreciation, a spike in energy tariff, and a severe shortage of tobacco leaf sought to drive the cost up, however, curtailed capacity utilization of 50 percent due to depressed demand of the legitimate brands coupled with no royalty paid during the year and provision for severance benefits resulted in 31.72 percent improved gross profit recorded by PAKT in 2023. GP margin climbed to its highest level of 54.10 percent in 2023. Distribution expenses mounted by 20.3 percent in 2023 due to increased salaries and selling expenses incurred during the year. PAKT introduced Capstan International, a value-for-money brand in 2023. 42.40 percent higher administrative expenses incurred by PAKT in 2023 were due to higher IT expenses and payroll expenses incurred during the year. Higher profit-related provisioning and exchange loss resulted in 68.35 percent higher other expenses in 2023. Other expenses were partially offset by 219.58 percent higher other income recorded during the year on the back of reimbursement of expenses by associated companies. Operating profit improved by 32.51 percent in 2023, resulting in an OP margin of 39.52 percent. PAKT was able to expand its finance income by 237.34 percent in 2023 due to increased Treasury bill investments and higher discount rates. Net profit built up by 35.83 percent year-on-year to clock in at Rs.28959.66 million with EPS of Rs.113.35 and NP margin of 26.34 percent.

Recent Performance (1QCY24)

PAKT’s net sales grew by a paltry 5.85 percent in 1QCY24 mainly on account of a price increase while domestic sales volume tumbled by 23 percent year-on-year during the period. The cost of sales hiked by 36.87 percent during 1QCY24 due to unprecedented levels of inflation and currency depreciation. This translated into a 17.22 percent lower gross profit recorded by PAKT in 1QCY24 with the GP margin falling to 44.8 percent versus the GP margin of 57.3 percent recorded in 1QCY23. Distribution expense grew by 11.21 percent due to higher salaries and selling charges as the company continued to increase its investment in low-risk products, VELO and Vuse. 4.11 percent higher administrative expense recorded during the period appears to be the effect of inflation which particularly drove up IT and payroll expenses during the year. Considerably lower provisioning for WWF, WPPF, and reduced exchange loss resulted in 62.3 percent lesser other expenses incurred during 1QCY24. Other income also slid by 5.78 percent during the period due to lower gains registered on the disposal of property, plant & equipment. PAKT posted a 16 percent thinner operating profit in 1QCY24, with OP margin falling to 30.5 percent from 38.4 percent in the same period last year. Finance income grew by 35.66 percent in 1QCY24 from placements in bank accounts and Treasury bills amid high discount rates. PAKT’s net profit nosedived by 23.82 percent year-on-year to clock in at Rs.5137.84 million with EPS of Rs.20.11 versus EPS of Rs.26.4 recorded in 1QCY23. NP margin also plunged from 29.9 percent in 1QCY23 to 21.5 percent in 1QCY24.

Outlook

The swelling share of illicit tobacco in the domestic market is swallowing the share of the legitimate tobacco industry leading to layoffs and plant shutdowns. The inefficient implementation of the track and trace system is doing no favor either. Three hikes in FED in 2022 and 2023 have rendered the legal tobacco industry uncompetitive and cut their contribution to the national exchequer. PAKT is striving to reverse the impact of sluggish domestic sales by exploring export avenues and investing in reduced risk product portfolio in line with its parent company’s agenda.

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