Philip Morris Pakistan Limited Gross Turnover Increases over 11% in 2012

Source from:  Business Recorder  08/22/2013

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 ten 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 Year CY12

Unlike its biggest formal sector competitor, Pakistan Tobacco Company, Philip Morris Pakistan has been struggling with profits since CY11. The story for CY12 was the same as the Company could not get out of the red zone.

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 also the legitimate industry as a whole and 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 CY12 stood at almost 62 percent, and this share has remained fairly constant over the years.

Philip Morris Pakistan's contribution to national exchequer climbed by 12 percent year on year during CY12 due to some concrete measures by FBR to control the illicit cigarette market that helped the Company's contribution in terms of sales tax, excise duties and other levies.

Revenues and Profitability

In 2012, the gross turnover experienced a boost of more than 11 percent year-on-year percent from Rs 31.9 billion in CY11 to almost Rs 36 billion in CY12. The improvement during the major chunk of the year came from the Company's ongoing trade incentive programmes and some volumetric consolidation during the period.

The positive effects of the trade initiatives resulted in higher sales of 262 million cigarette sticks, while the gross margins improved considerably due to price increase since June 2012.

However, the net margins remained under duress for the tobacco multinational, which the Company attributes to the non-tax paying illicit tobacco sector as it gains the undue advantage of excise tax-driven price increase. 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.

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.

Liquidity and Operational Position

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.

However, during CY12, the firm in its endeavour to expand the operational capacity, invested heavily in the property, plant and equipment. These investments are predominantly as per the Company's plans to modernise manufacturing facilities and equipment and upgrade warehousing for efficiency gains which will continue for the next couple of years.

Outlook Besides the macroeconomic hindrances, 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 (FBR) continue to make efforts 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. Enditem