Amongst the two multinational tobacco companies in Pakistan, Philip Morris Pakistan Limited (formerly known as Lakson Tobacco) stands at number two to Pakistan Tobacco Company. Philip Morris Pakistan Limited is a public listed company on the Karachi and Lahore Stock Exchanges and is an affiliate of Philip Morris International Inc (PMI).
The company is involved in the manufacture and sale of cigarettes for Pakistan's domestic market. It currently operates three cigarette factories with primary and secondary facilities and one tobacco leaf threshing plant, all located in various parts of the country. It also runs an extensive tobacco leaf agronomy program in the tobacco growing areas of Khyber Pakhtoonkhwa.
The company is also involved in CSR where it is engaged in undertaking various initiatives in the education, environmental sustainability and disaster relief sectors to give back to the community it operates in.
Brand Portfolio Philip Morris Pakistan has a portfolio of ten brands for the domestic market. Of the main ones, it markets and sells both international brands like Marlboro and Red & White, and locally owned brands like Morven Gold, Diplomat, K2.
Highlights 2011 has been a challenging year for Philip Morris so far like the rest of the FMCGs due to the weakening economic situation fuelled by power crisis and rising inflation. Moreover, the performance of the company is highly affected by the illicit cigarette market that accounts for almost a 20 to 25 percent market share.
The detrimental impact of the non-tax paid industry extends to not only the company but to the legitimate industry as a whole and also the government as it reduces government revenue.
Being a cigarette manufacturer and importer, the company has high taxes and duties expenditure. The company's sales tax and excise duty as a percentage of its gross turnover for the 9MCY11 stood at a little above 61 percent as compared to 60 percent same period CY10.
The company saw weaker sales of 2,847 million cigarettes mainly attributed to the adverse impact of the non-tax paid tobacco industry. Overall, compared to 9MCY10, the nine months ending September CY11 has shown declined profitability. Its contribution to the national exchequer went down from 16,330 for 9MCY10 to 16,178 million for 9MCY11.
The company faces tough competition from not only the unaccounted for sector but also its peer and the biggest rival in the industry, Pakistan Tobacco Company, an associate of British American Tobacco Company
Profitability Gross turnover experienced a decline of 3.9 percent from Rs 25.7 billion for 9MCY10 to Rs 24.7 billion in 9MCY11. The decline in gross revenue is not only due to the tough economic environment, high government taxes and illicit trade but also due to the successful launch by PTC of its brand, Capstan which alone has a market share of 14 percent.
Though the sales tax and excise duty were considerably less for the nine months CY11, the gross profit was seriously injured by a surge in the cost of sales by 9.8 percent for the 9MCY11 compared to the same period CY10. This is mainly because of rising energy costs, security related expenses and high inflation.
GP margins had a steep decline to 23.7 percent for the 9 months of 2011 compared to 35.5 percent for same period CY10. As if to compensate to some extent, the distribution and marketing expenses demonstrated a fall of approximately 12 percent for periods in comparison.
The company recorded a loss after tax of Rs 284 million with an NP margin of -2.8 percent compared to the profit after tax Rs 767 million for the same period in 2010. This was primarily due to an increase in the finance costs by approximately 270 percent.
The earnings after tax for PTC for the same period in consideration also registered a fall of 11.5 percent, showing that the trend of falling margins and profits continue to plague the industry as the illicit sector attracts consumer attention.
Liquidity Position Current ratio of less than 1 is obviously not attractive as it is a clear picture of a company's poor short term solvency. However, a very high current ratio might be indicative that company is not investing excess assets. The current ratio of 1.6 for the company has improved for the 9MCY11 compared to 1.8 the same period CY10.
The debt to equity position of the company has worsened to 89 percent for the nine months for CY11 from 79 percent for the same period CY10.
Operations PTC again outshines its rival Philip Morris Pakistan Limited in its efficiency at using its assets in generating sales revenue. The fixed asset turnover for 9MCY11 for PMPKL stood at 2.6 compared to 2.63 for the same period CY10 and 2.7 for the same period CY09.
Hence total asset turnover also experienced a decline for the three consecutive periods aforementioned. In contrast, the fixed asset turnover and total asset turnover for PTC has experienced an upward movement with 1.15 and 1.23 for 9MCY10 and 9MCY11 respectively.
Outlook The year was marked by one of the worst catastrophes in the history of the country as the floods inundated a large portion of the country once again. Deteriorating macroeconomic health and erosion of consumer purchasing power will continue to plague the company's as hence the industry's sales and operations.
The continuing growth of the illicit tobacco industry has put the legitimate sector at perils and has served to be a great threat to the income stream of the government by the tobacco industry- the highest tax paying sector.
The non-tax paid sector will continue to threaten the long term viability of the tobacco industry as new and stringent tobacco regulation and higher taxes are introduced by the government with no efforts to control the illicit sector and the widespread distribution of smuggled cigarettes.
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Phillip Morris (Pakistan) Limited
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(Rs mn) 9MCY09 9MCY10 9MCY11
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Gross turnover 22,427 25,706 24,692
Excise duty 9,241 11,725 11,631
Net turnover 10,014 10,274 9,534
Profitability
GP margin 37% 36% 24%
NP margin 9% 7% -3%
ROE 13% 11% -4%
ROA 8% 6% -2%
solvency
Current ratio 1.85 1.72 1.60
D/E 0.63 0.79 0.89
D/A 0.39 0.44 0.47
Turnover
Total asset turnover 0.92 0.80 0.75
Fixed asset turnover 2.70 2.63 2.60
Market
EPS(Rs) 14.01 12.46 -4.61
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Source: Company accounts
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