Philip Morris (Pakistan) Limited is the second-largest cigarette manufacturer in Pakistan. It is an affiliate of the Philip Morris International Inc (PMI). The firm is listed on the Pakistan Stock Exchange (PSX) under the moniker, PMPKL. PMI made its entry into the Pakistani market after it acquired a local tobacco firm, Lakson Tobacco, back in 2007. Philip Morris Investments B.V. (incorporated in Netherlands) is PMPKL's holding company, with a 77.65 percent stake. Philip Morris Brand's SARL is the associate company, which holds 20 percent shares of PMPKL. The firm's overall shareholding pattern is provided in the illustration.
Operations
As per the company information, PMPKL is 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. The company closed its Mandra factory during 2015 to streamline its manufacturing process.
PMPKL sells 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. The company holds roughly 15-20 percent of the market share by volume (cigarette sticks). The leading tobacco player, Pakistan Tobacco Company (PSX: PAKT), 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. Rest of the market is served by many small players, such as Khyber Tobacco (PSX: KHTC)
As tobacco is among the heaviest-taxed sectors, back in CY15, the company contributed Rs 25.9 billion to the national kitty on account of federal excise duties, custom duties, sales tax, and income tax.
Recent financial performance
PMPKL has been a loss-making entity for most part of this decade. Even though the gross turnover has increased in recent years, the firm's net losses have not recovered as of CY15 end. A combination of factors is at play. On one hand, the post-budget FED-hike every year drives up the prices of manufacturers like PMPKL and PAKT who are operating in the formal sector. This tends to benefit players in the informal market, whose duty-evasive operations undercut genuine players' revenues as the market is largely price-sensitive.
Faced with limited growth in net turnover, the company had to turn its attention inwards and optimise its manufacturing and selling activities. Thanks to that, core costs have been kept in check in recent years. For instance, in terms of gross turnover, cost of sales has steadily declined over the years, with the drop being six percentage points between CY11 and CY15. (During CY15, cost of sales consumed 23.8 percent of gross turnover).
However, some of those efficiency gains have been offset by steady rise in distribution and marketing expenses and administrative expenses selling, as a ratio of gross turnover. However, in CY15, both these expense heads exhausted 12.06 percent of gross turnover, lower than 12.54 percent a year before.
With a mixed operating performance, PMPKL in recent years has also been affected by high redundancy costs, which resulted on account of streamlining operations, eg the closure of Mandra factory. Finance costs burden had also grown during the five-year period. In CY15, these costs had gone on to deplete nearly two percent of gross turnover (1% in CY11) and 5.4 percent of net turnover (2.5% in CY11).
9MCY16 performance
But the tide is turning for the PMI affiliate, which delivered a strong financial performance in the nine months ended September 30, 2016. Even though net turnover saw a decline on account of volumetric decrease, significant savings in core costs, operating expenditures, and finance costs helped put the bottom line back in black.
During the period, the firm generated positive net cash flows from operations, unlike the corresponding period a year ago. Similarly, there was a massive net increase in cash and cash equivalents during the period. All three profit margins ameliorated, and it appears that PMPKL will close CY16 on a note of net profitability, the first time since CY10.
Future Outlook
The recent equity injection of Rs7.5 billion on account of PMPKL's issuance of Class-A preference shares to its holding company and associate - along with receipt of Rs3 billion as advance against issuance of preference shares - may prove to be a turning point for the firm. Having retired the short-term borrowing to the tune of Rs12 billion, the firm will free up significant future cash flows. Those funds can then be put to more productive uses such as bringing in even more manufacturing efficiencies, expanding the distribution footprint, and building the equity of its various cigarette brands.
On the external front, decline in cigarette stick volumes will remain a concern for the firm and the broader organized sector. Part of the blame lands at the door of illicit tobacco trade, which includes smuggled products as well as counterfeit tobacco. It remains to be seen whether the formal sector's lobbying on that front result in a sustained government crackdown on the illicit tobacco trade.