Philip Morris (Pakistan) Limited
Source from: Business Recorder 12/26/2012
Philip Morris Pakistan Limited is a public limited company, listed on the Karachi and Lahore Stock Exchanges. It is an affiliate of Philip Morris International Inc. It is amongst the two multinational tobacco companies, the other being Pakistan Tobacco Company.
Formerly it was known as Lakson Tobacco Company, which got incorporated in 1969 as a public limited company. Though the name changed in 2011 to Philip Morris Pakistan Limited, Philip Morris Inc (PMI) became its majority shareholder back in 2007. The tobacco company is involved in the manufacture and sale of cigarettes for the domestic market. It currently operates three cigarette factories with primary and secondary facilities and one tobacco leaf threshing plant, all located in various parts of the country.
It also runs an extensive tobacco leaf agronomy programme in the tobacco growing areas of Khyber Pakhtunkhwa. The company is also involved in CSR where it is engaged in undertaking various initiatives in the education, environmental sustainability and disaster relief sectors to give back to the community it operates in.
Brand Portfolio For the domestic market, the company offers 10 brands of cigarettes. Of the main ones, it markets and sells both international brands like Marlboro and Red & White, and locally owned brands like Morven Gold, Diplomat, and K2.
HIGHLIGHTS FOR THE PERIOD Unlike its biggest formal sector competitor, Pakistan Tobacco Company, Philip Morris Pakistan struggled with profits during the first nine months of 2012. There is no denying that overall CY12 has been another challenging year for the economy including the tobacco industry due to the weakening economic situation fueled by power crisis and rising costs.
Philip Morris Pakistan competes for market share with Pakistan Tobacco Company, which has a market share of almost 60 percent. However, the illicit trading bottlenecks are a serious concern for the company as the non-regulated tax evading tobacco sector accounts for almost a 20 percent market share.
The detrimental impact of the non-tax paid industry extends to not only the company but to the legitimate industry as a whole and also the government as it reduces Inland Revenue.
The company faces high taxes and duties expenditure as it is a cigarette manufacturer and an importer. The company's sales tax and excise duty as a percentage of its gross turnover for 9MCY12 stood at almost 61 percent, and this share has remained fairly constant over years.
Though Philip Morris Pakistan's contribution to national exchequer went down by 4.6 percent YoY during CY11, significant efforts by FBR to control the illicit cigarette market helped the company's contribution in terms of sales tax, excise duties and other levies post a three percent YoY increase during 9MCY12 to Rs 16.875 billion.
REVENUES AND PROFITABILITY Gross turnover experienced a lift of eight percent from Rs 24.7 billion for 9MCY11 to almost Rs 27 billion during 9MCY12. The improvement during the major chunk of the year came from the company's ongoing trade incentive programmes and some volumetric consolidation during the said period.
The positive affects of the trade initiatives coupled with no periodic increase in the manufacturing expenses led to a rise in the gross profit of the company by more than 40 percent year-on-year.
Compared to last year, the gross margins improved considerably during the period under review. This was by more than 300 basis points. However, the net margins remained under duress for the tobacco multinational.
The bottom line of the company kept being eaten away by the macro economic situation in the country as well as the rising finance cost to service the short-term running finances. The rising marketing and distribution expenses and other expenses further stressed out the profit position. However, during the period the tobacco company was able to scale down the loss in comparison with similar period last year though higher selling prices and trade. On the other hand, the earnings of the Pakistan Tobacco Company, a legitimate competitor, for the same period also propelled by 14 percent year on year.
LIQUIDITY The company has no long-term debt on its book but has a significant portion of current liabilities as short term borrowings, which suggests that the company might be facing working capital problems.
OUTLOOK During CY11, the tobacco industry was seriously affected by the floods during the summers and hence the aftermath in shape of deterioration in the already dwindling economy.
Besides the macroeconomic crisis, Philip Morris Pakistan saw weaker sales by four billion cigarettes and eroding market share with the heightened activity of the non-tax paid tobacco brands. During CY12 so far, similar hurdles have made the performance journey jagged.
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 for a country-wide onslaught targeting the non-duty paid tobacco sector during the current year, 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.
