Pakistan: The Mysterious Rise of Tobacco Stocks

Source from:  Business Recorder  12/09/2013

Smoking kills. But, if you invested in tobacco stocks this year, you probably made a killing instead. After lying dormant for some time, tobacco stocks have shot up since January 2013. And aside from the case of Pakistan Tobacco, the reasons for this phenomenal growth are not very obvious.

The cigarette making industry remains in trouble, as supply of illicit cigarette continues to thrive. Last year, the illicit consumption was estimated to be over 20 billion cigarettes, according to joint study by International Tax and Investment Center and Oxford Economics. The study noted that total cigarette consumption (legal and illicit) in the country was estimated at 86 billion cigarettes in 2012.

Of this, an estimated 74.4 percent is legal domestic consumption, 0.2 percent is consumption of non-domestic or imported cigarettes, and 25.4 percent or 21.8 billion cigarettes was illicit consumption. The cost of this illicit trade to the government is estimated to be Rs18.5 billion in tax revenues in 2011 and over Rs50 billion between 2007 and 2011.

This year is no different; data reported by Pakistan Bureau of Statistics suggest that production of legal cigarettes in nine months ending September 2013 was up 7 percent or 3.3 billion sticks over the same period of last year.

Even if one hypothetically assumes that this reflects the shifting of illegal cigarettes to legal channels, the shift is not big enough to turn the situation around for legal cigarette making industry. Little wonder then, that the loss to national tax revenues on account of illicit cigarettes is reported to be more than Rs100 billion in the next five years.

In an environment like this, one would imagine, only the toughest would surviveâ€"one which Phillip Morris is clearly not.

Phillip Morris worsened its losses by about 28 percent year on year to Rs583 million in CY12-â€"and then increased its losses even more by 73 percent year on year in 9M CY13 again. Yet for the strangest of reasons the firm’s stock price has risen from Rs125/share to nearly Rs400 in CY-to- date, with an average trading volume of about 12,000 shares a day.

The other inexplicable movement in tobacco stocks is the rise in Khyber Tobacco that grew about 90 percent in CY-to-date, putting the 48 percent increase in KSE-100 to shame.

Sadly we know too little about the firm, as the last available financials on their website were of 2011, when they increased their net profits to Rs94 million from Rs34 million in 2010. One could have tried to dig the hard copy of their latest financials, but for a stock whose total trade in the whole of CY-to-date was about 52,000 shares, it wasn’t really worth the hassle.

If there is any tobacco firm that is having a ball, it is Pakistan Tobacco, which has the biggest share of more than 60 percent in legal cigarette making.

In 2012, it sold 40.6 billion sticks, just shy of the 41 billion mark it had achieved in 2009. Its 2012 net earnings stood at Rs1.7 billion as against Rs364 million in 2011. This year, its profits have more-than-doubled to Rs2.7billion in 9M CY13. Tracking this growth, the firm’s stock has risen more than 600 percent, from Rs67.5 per share at the end of December 2012 to Rs487 on Friday’s close. And that may well be the mother of all killings made this year. Enditem