Philip Morris (Pakistan) Limited

Philip Morris (Pakistan) Limited is one of the two leading tobacco manufacturers in Pakistan. An affiliate of the Philip Morris International Inc (PMI), it ranks second in terms of market share based on annual volume of cigarette sticks sold in the country. The firm is listed on the Pakistan Stock Exchange (PSX) under the moniker, PMPKL.
In 2007, PMI formally made its entry into the Pakistani market after its acquisition of a local tobacco firm, Lakson Tobacco. Philip Morris Investments B.V. (incorporated in the Netherlands) is PMPKL's holding company, with a 77.65 percent stake as of December end 2015. Philip Morris Brands SARL is the associate company, which holds 20 percent shares of PMPKL. The firm's last-available overall shareholding pattern is provided below:
Operations Available company information shows that PMPKL has been operating one tobacco-leaf threshing plant in Mardan, Khyber Pakhtunkhwa. It is also running two cigarette-manufacturing facilities: one in Sahiwal, Punjab and the other in Kotri, Sindh. Back in 2015, the company had closed its Mandra factory to streamline its manufacturing process.
As a maker and marketer in Pakistan of popular cigarette brands such as Marlboro in the high-end category and also medium-end brands such as Diplomat, K2, Morven Gold, and Red & White, PMPKL commands between 15-20 percent of the market share by volume (cigarette sticks). Its only major competitor is the tobacco giant Pakistan Tobacco Company (PSX: PAKT), which accounts for over 50 percent of the market's volume. Illicit cigarettes' sales volume is high in Pakistan, ranging above 20 percent, as per different estimates. There are some other smaller players, such as Khyber Tobacco (PSX: KHTC), which are operating in the formal sector, but they don't pose serious threat to the duo.
Recent financial performance After struggling in the first half of this decade with a string of net losses, PMPKL finally got back to profitability in the year ended December 31, 2016. The struggles had been on account of a combination of factors. On the external front, the post-budget FED hikes every year have consistently driven the prices of cigarettes. That directly hurts the organised-sector players who are dealing with a largely price-sensitive clientele. Meanwhile, players operating in the informal market benefit from those price hikes as they operate below the radar, evade the duties and taxes, and hence under-price their products to undercut genuine players.
It must be noted that the government-mandated excise duties and sales tax on tobacco products eat up a majority of formal sector player's gross turnover. On average, between CY11 and CY15, excise duties and sales tax on tobacco sales took away 63 percent of PMPKL's gross turnover. The same ratio was 66 percent for PAKT. The rest of the revenue, approximately a third of the top line, is available to these firms as net turnover.
PMPKL's net turnover has remained largely flat through the course of this decade so far. Its CY16 net turnover was 1.16 times that in CY11. That is not the case for PAKT, whose net turnover almost doubled during the same period. PAKT seems to be managing its marketing and distribution in a way that better beats the odds in this highly regulated industry.
During CY16, PMPKL suffered a 1.4 percent decline in net turnover, which is concerning. A top line decline in an environment of price hikes suggest that the cigarette volumes likely went down last year for the firm. The volume decline seems to have hit the firm harder that its chief rival. Last year, PAKT, which also saw volumetric decline, actually grew its net turnover by 4.6 percent.
PMPKL, however, did somewhat better when it comes to streamlining its costs. For instance, its cost of goods sold has declined gradually, in terms of net turnover, from 78 percent in CY11 to 58 percent in CY16 (66% in CY15). However, its marketing and distribution expenses have grown from 15 percent of net turnover in CY11 to 21 percent in CY16 - suggesting a competitive push towards direct marketing. Administrative expenses also inched by 2 percentage points to 9.5 percent of net turnover in CY16.
The CY16 financials were nonetheless boosted, for besides cost of sales, both these expense accounts - marketing expenses and administrative expenses - depleted a lesser proportion of the net turnover. Besides, there was also a 54 percent decline in the firm's finance costs. These factors helped PMPKL close CY16 with all three profit margins restored back to health.
The Rs 575 million in firm's net profits, which are equivalent to CY10 level, pale in comparison to PAKT's CY16 net profits (Rs 10.36 bn). However, the management must be relieved to at least close the year on a positive note and hope to build on this performance in current year. PMPKL is a very thinly-traded stock, so one is unable to comment on whether shareholders also sighed in relief at CY16 financials.
Future Outlook PMPKL is a firm that has been at work adjusting its operations and finances to better weather out the not-so-favourable market conditions. The recent equity injection and a hefty retirement of short-term borrowing should allow the firm to use more of its cash flows to bring in productive efficiencies as well as increase its distribution footprint.
But the external front will continue to be challenging. Illicit tobacco trade, which includes smuggled products as well as counterfeit tobacco, is a direct threat to the organised sector's long-run viability. Already, cigarette volumes have begun to sag for PAKT and PMPKL - and with them, excise duty collections have also lost their double-digit growth momentum.
More FED hikes may worsen the problem in the coming months and years. Cost rationalization and operational efficiencies can only create value up to a point. Without top line growth, formal-sector tobacco makers, including PMPKL, will find it difficult to sustainably grow their bottom line in the coming years.

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PMPKL: Pattern of shareholding (as at Dec. 31, 2015)        No  of          Shares     % of total
                                                         shareholders         held         shares
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Directors, CEO, and their spouse and minor children            6                55          0.00%
Associated companies, undertakings and related parties         2        60,135,410         97.65%
Philip Morris Investments B.V.                                          47,819,350         77.65%
Philip Morris Brands SARL                                               12,316,060         20.00%
Investment Corporation of Pakistan                             1                58          0.00%
Commercial banks                                               3            12,360          0.02%
Pakistan Reinsurance Company Limited                           1            21,206          0.03%
General public (local)                                   Not available     803,909          1.31%
Others                                                   Not available     607,343          0.99%
Total                                                                   61,580,341           100%
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Source: Company accounts

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PMPKL: Financial snapshot
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Rs (mn)                       CY16     CY15     CY14     CY13      CY12      CY11
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Operating results
Net turnover                14,213   14,417   13,764   13,728    13,551    12,217
Gross profit                 6,021    4,855    3,911    3,668     3,813     2,698
Operating profit/loss        1,133     -894     -909     -530      -160       -92
Profit/loss after tax          575   -1,315   -1,482     -441      -574      -442
Earning/loss per share-Rs     8.79   -21.35   -24.07    -7.17     -9.33     -7.18
Financial ratios (based on net turnover)
Gross margin                    42%      34%      28%      27%       28%      22%
Operating margin                 8%      -6%      -7%      -4%       -1%      -1%
Net margin                       4%      -9%     -11%      -3%       -4%      -4%
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