From crops to commercialisation, the company is involved in every aspect of the cigarette manufacturing. The product portfolio of PTC is well diversified; it has different varieties to offer a wide range of smokers from low price to premium quality high priced cigarettes.
British American Tobacco Company started its operations back in 1947 and is the first multinational to lay its foot on Pakistan. In 62 years it has grown from a company operating with a warehouse near Karachi port to having two state of the art facilities employing more than 1,700 employees today.
Brand portfolio PTC aims at investing in products that cater all markets and all consumer choices from low income to prestige brands. It has six different brands to offer its consumers, Dunhill and Benson and Hedges are the premium quality brands. They were re-launched in Pakistan in 2007 and 2003. Both the brands have been performing well since then.
John Player's Gold Leaf, the largest urban brand in Pakistan, is the most familiar brand and thrashes all others in the league. In the low range segment PTC offers Capstan by Pall Mall (CbPMO), Embassy and Gold flake. Embassy is the leading volume brand, and the most popular brand in Punjab. It's locally tailor made taste has enabled it to achieve high brand loyalty.
Highlights 2012 has not been kind to the tobacco industry. Increased excise duties imposed as penalty to discourage cigarette smoking, unending power crisis, and inflationary pressure are all dubbed as agonies for the cigarette manufacturers in the country.
Wavering economic well being has chopped disposable income and purchasing power of the consumers, which has forced them to switch to cheaper illicit sector brands that evade taxes and hence have become highly price competitive. Thus it is the only significant threat to the legitimate industry. The year so far has seen various marketing initiatives by Pakistan Tobacco Company for brand enhancement. It included the launch of Dunhill Master Blend, new packs for Gold Flake and Capstan by Pall Mall (CbPMO), and the rural drive for John Player's Gold Leaf.
Though during the nine months ending September 30, 2012 the major volume and market share growth came from the company's low segment brands, the marketing efforts for Dunhill and Gold Leaf resulted in some volumes and market share year on year respectively. The growth in volumes was a small 2.8 percent YoY during 9MCY12, while the market share inched up by some 1.6 percentage point year on year. However, the contribution by the company to the economy in form of federal excise duty, custom duty, sales tax, and income tax is uneatable.
Profitability 1QCY12 PTC occupies a market share of around 49 percent in the overall cigarette market. During CY12 so far, the company's brands performed well against the competition and challenging illicit market. The overall cigarette industry shrank by 7.6 percent during the period under review versus similar period last year. Sale turnover of the cigarette manufacturer increased by 12 percent YoY, and it was primarily attributable to the low segment brands and the marketing initiatives of the company.
Besides the marketing and selling initiatives for Capstan and Gold Flake, PTC also carried out targeted marketing initiatives for its premium brands, Benson & Hedges and Dunhill. While the company reigned in the cost of production which helped the cigarette manufacturer improve its gross margins from 27 percent during 9MCY11 to 32 percent in 9MCY12, the selling and distribution cost escalated by 31 percent YoY on the back of the brand strengthening initiatives.
Another cost pressure that the Pakistan Tobacco Company incurred was in relation to machinery footprint modification and the workforce rationalisation after the government's decision to ban packs with less than 20 cigarettes. Such one time expense of workforce rationalisation along with marketing expenditure could not result the trickling down of the growth achieved in the gross profit. Thus the bottom line of the Pakistan Tobacco Company witnessed a miniscule jump of six percent year-on-year during 9MCY12 with operating and net margins restricted to nine percent and six percent respectively.
Outlook Despite the favourable demographics that PTC enjoys by being the market leader and the largest player, it has not able to generate decent returns in recent times due to the illegal cigarette market and cigarette smuggling from neighbouring countries like Iran and Afghanistan. The greatest challenge for the company is the presence of illicit trade in the industry and the Pakistan-Afghan transit route. Almost 20 percent of the cigarette available in the market is coming from illegal sources.
Though Directorate General of Intelligence and Investigation Inland Revenue (IR) Federal Board of Revenue conducted a massive raid and crackdown at for a country-wide onslaught targeting the non-duty paid tobacco sector, the Industry members are not very positive as it will take a long time before results start showing. On the supply side, the rage from the tobacco growers has not subsided as they have been demanding a price as high as Rs 250 per kg. This might weight heavy on the industry as the analysts are eyeing a shrink in local demand if prices continue to soar.
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Pakistan Tobacco Company
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mn Rs 9MCY10 9MCY11 9MCY12
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Profitability
Gross profit margin 31.3% 27.0% 31.6%
Operating margin 11.6% 9.4% 9.4%
Net margin 7.3% 6.0% 6.0%
ROE 29.5% 24.8% 29.5%
ROA 8.4% 7.4% 7.8%
Liquidity & Efficiency
Current ratio 0.91 0.94 0.92
Total asset turnover 1.15 1.24 1.30
Fixed asset turnover 2.76 3.00 3.31
Market
EPS(Rs) 4.47 3.96 4.51
Market price (Rs) 111.50 72.51 61.00
P/E 24.94 18.31 13.53
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Source: Company Accounts