A tobacco giant continues to post strong financial results despite the challenging business conditions. The topline was bound to get better after the coronavirus-related quarter, but the gains at Pakistan Tobacco Company (PSX: PAKT) in the quarter ended September 30, 2020 have been superb, with the net turnover growing 41 percent year-on-year.

The firm’s domestic sales – which accounted for about 96 percent of gross turnover in the quarter – have shown a strong growth of 27 percent year-on-year in 3QCY20. There has been no FED-driven price increase in cigarette packs lately, for there have been no revisions in FED in 2020. The growth, therefore, is presumably coming mainly from higher volumetric sales, with the market-driven price increases also playing some role.

Data from the Pakistan Bureau of Statistics show that the country’s cigarette manufacturing had picked up pace June onwards. The budget was fiscally neutral for the sector (no FED increase), since then there has been notable growth in cigarette production. How will PAKT square recent growth in turnover with their claims that the market shares of duty-non-paid and counterfeit cigarettes are growing?

Meanwhile, export revenues have also been growing for PAKT, at a much faster pace given the low-base effect. In the quarter under review, export turnover stood at Rs1.4 billion, which is 157 percent higher year-on-year. Overall, in the nine months so far this year, PAKT export revenues had reached Rs3.8 billion, which is nearly five times the revenues in the same period last year. The company has been exporting both raw tobacco and finished product (cigarette sticks).

The manufacturer lost some of effect of the topline gains as its cost of sales grew out of proportion in the quarter under review. Cost of sales showed a growth of 49 percent year-on-year, thereby exhausting 19 percent of gross turnover in 3QCY20, up from 16 percent in same period last year. As a result, the gross margin stood steady at 18 percent. The savings from lower selling/distribution expenses were nearly offset by the extraordinary hike in administrative expenses.

Adding to that, an unusual growth in ‘other expenses’ and marginal negative count under ‘other income’ rounded off a nearly one percentage drop in operating margin to 13 percent for the quarter. In the end, it was a lower tax bill (relative to pre-tax profits in same period last year) that helped the net margin to remain stable at 10 percent in the quarter. But the 27 percent hike in 3QCY20 net profits sets the firm up pretty well to score an all-time high profitability at the end of this calendar year.