PMPK: deep into red

The Marlboro Man isn’t known to cope well with a declining market in Pakistan. As per its latest financial results for the year ended December 31, 2019, Philip Morris (Pakistan) Limited (PSX: PMPK) has closed 2019 with hefty net losses, a first since 2015.  While the core business has been under pressure, closure of company’s Kotri factory in Sindh exacerbated the situation due to one-time expenses.

PMPK’s CY19 gross turnover figure isn’t available yet, but the double-digit decline in net turnover indicates a sizable decline in gross sales. Topline woes are affecting the whole formal industry, as the FED incidence has been increasing on formal sector since the current government took over. The two industry majors maintain that the FED-driven price increases are making their cigarettes uncompetitive in the face of significantly-lower prices offered by the “illicit sector” that evades duties and taxes.

As a result, the effective FED rate – the share of federal excise duties (FED) in gross turnover – has been increasing. For industry leader Pakistan Tobacco Company (PSX: PAKT), effective FED had increased to 50 percent in CY19, from 46 percent in CY18. As for PMPK, the effective FED rate stood at 52 percent in 3QCY19, up from 38 percent in 3QCY18. The CY19 rate is expected to be around 50 percent. Simply put, formal sector companies are able to retain less of their sales amid rising prices of inputs and utilities.

It helped PMPK that its manufacturing costs and distribution expenses declined on a yearly basis and the administrative expenses had a rather controlled growth in line with inflationary trends. But the massive increase in ‘other expenses’ – mainly due to internal restructuring related to Kotri factory closure that cost the company in terms of impairment and employee separation expenses – was enough to plunge the company into a large operating loss and net loss in the end.

Between PAKT and PMPK, the latter has clearly suffered a great deal in 2019. During last year, PAKT saw its net turnover decline by 2 percent to Rs52 billion, and yet it managed to grow its net profits by 25 percent to almost Rs13 billion. This is the benefit of production and marketing scale. However, PMPK has fared rather worse.

Meanwhile, PMPK has been at work trying to “re-organize” its operational footprint to become leaner for times like these. And try it must, for the 2019 financials take the company several years back. Given the current government’s track-record on tobacco taxation and the fiscal imperative to raise more revenues, a further FED hike on tobacco products cannot be ruled out in the upcoming budget.