PHILIP MORRIS (PAKISTAN) LIMITED (FORMERLY LAKSON TOBACCO) – Analysis of Financial Statements – Financial Year 2003 – Financial Year 2010

On March 1, 2011 Lakson Tobacco Company Limited’s name was changed to Philip Morris (Pakistan) Limited. The company has also changed many of its accounting policies.

Philip Morris (Pakistan) Company’s major activity is to manufacture and sale of cigarettes in Pakistan. It is a publicly listed corporation and is the largest tobacco exporter in Pakistan. The company operates in five factories located in Karachi in the districts of Dadu, Sahiwal, Rawalpindi and Swabi. The former Lakson Tobacco’s leading brands include Morven Gold and Red and White. In March 2007, Phillip Morris International acquired an additional 50.21% stake in Lakson Tobacco Company to bring its share in the Tobacco Company to approximately 90%. The name of Lakson Tobacco has now been changed to Philip Morris (Pakistan) Limited.

ANALYSIS OF FY10

In FY10, the gross turnover of Philip Morris (Pakistan) Limited increased by 11.2% as compared to FY09. The gross profit decreased by 12.5% and the profit after tax decreased by 40.2% in FY10 as compared to FY09. The results were due to a substantial increase in tax and excise duty rates. Moreover due to unfavourable economic conditions, there was a lot of pressure on manufacturing costs. There has been successive increase in prices due to excise duty levy, which is leading to an overall decline of the tobacco industry. The company’s EPS is Rs 9.3 as compared to Rs 15.56 in FY09. The dividend payout ratio for FY10 was approximately 26.8% of net profit after tax. The operating profit of the company in FY10 was Rs 992.225 million as compared to Rs 1627.4 million in FY09. The PAT in FY10 was Rs 572.6 million a decline from Rs 958.4 million in FY09. The profit available for appropriation in FY10 was Rs 576.89 million as compared to Rs 960.65 million in FY09. In FY 2009, company’s gross turnover increased by 22.2% to be Rs 30.48 billion as compared to Rs 24.94 billion, similar to the rate of increase of PTC – its major competitor. The net turnover of Philip Morris (Pakistan) Limited was 18.62% more in FY09 as compared to the FY08 figure and the company generated this increase in revenue despite the 20% increase in cost of sales for the period.

These strong results were achieved despite adverse economic factors weighting on income per capita, pressure on manufacturing costs and steep increases in tax and excise duty rates. Company invested significantly in marketing and distribution expenses in FY09, up 37.9%, primarily to expand its brand portfolio and support sales at retail segment as prices of its products considerably increased driven by the two tax and excise duty rates increases by the government in February and June 2009. Heavy marketing expenditure mainly due to selling expenses and new market offerings for the consumer segment is meant to counteract the decline in sales caused by the increase in prices of its product. This increase in cost of sales resulted in a decline in operating profit by 13.01% or 13.3% on after tax basis.

For FY09, company’s cost of sales increased (20.78%) due to increase in manufacturing expenses on an aggregate level compared to FY08. Higher wages expenses (manufacturing) 28.6% more than FY08 accompanied by a small increase in purchases and redrying expenses raise the overall cost of sales for FY09. Cost of sales for PTC also increased approximately by 16%, which shows that some portion of increase is shared by the industry due to the high inflation in the country in FY09.

The cost of sales to net turnover ratio also increased by 1.125% in FY09 as compared to FY08 which appear to enfeeble the measures taken by the management in FY08 to improve the efficiency in the business.

Administrative expenses of the company for FY09 had also jumped from Rs 530,091 million to Rs 701,145 million; this increase of 32.26% when compared against the figures of FY08 was due to the higher employees’ compensation and donation for internally displaced persons (IDPs).

Above mentioned increases in costs of the company for FY09 along with massive increase in financing cost 95.74% from Rs 45,639 million to Rs 89,336 million reduced before tax profit of the company for FY09. Profit before tax decreased by 14.05% in 2009 as compared FY08. This increase in financing was due to the huge amount paid as mark-up to the lenders for providing the company with running finance facility under mark-up arrangements.

Company witnessed the same negative pressure on profit after tax, which lessened by 13.30% from Rs 1,105,400 million in FY08 to 958,384 million in FY09. This cut is due to substantial contribution made by the formerly called Lakson Tobacco Company Limited to the annual government’s revenues as taxes. In 2009, the company contributed Rs 18.1 billion to the national exchequer in the form of Federal Excise Duty, Customs Duty, Special Excise Duty, Sales Tax and Income Tax, which represents a 23.0% increase compared to 2008.

It is important to note here that other income from miscellaneous sources registered a handsome rise of 35% to stand at Rs 103.111 million in 2009.

Philip Morris Pakistan Limited’s gross profit stood at 12.82% in FY10, a decline from FY09 when it was 16.31%. The decrease is due to a 12.55% decline in gross profit and 11.21% increase in sales in FY10. The profit margin has sharply declined from 3.4% in FY09 to 1.69% in FY10. The reason for this decline is a huge 40.26% decline in net income and 11.21% increase in sales.

The ROA has also sharply declined from 9.05% in FY09 to 4.47% in FY10. This again is due to the sharp 40.26% decline in profit after tax. It is also due to the 20.91% increase in total assets. The return on common equity has fallen from 14.05% in FY09 to 7.99% in FY10. The reason for this is the 40.26% decline in net income and 5.06% increase in common equity. The overall profitability has fallen in FY10 as compared to FY09.

The gross profit margin of Pakistan Tobacco Company, a major competitor for Philip Morris Limited is 10.3% and the net profit is 1.54% for FY10. This shows Philip Morris Company has better gross profit margin and profit margin but the ROA for Pakistan Tobacco Company was around 7.5% for FY10. The ROA for PTC is considerably better than that of Philip Morris (Pakistan) Limited.

The company’s gross profit stood at 16.31% in FY09 lower than FY08; however it is also much less than the company’s past five years average (from FY07 to FY03) which comes to be 19.24%. The main pressure on the profitability in FY09 was put on by the seasonal fluctuations in tobacco farming and purchase of stocks. However, due to the previously accumulated stocks, the impact of these fluctuations was not colossal. Furthermore, increase in cost of sales due to inflation and higher wages expense also had negative bottom line impact.

The company’s Gross Profit Margins were higher to its major competitor Pakistan Tobacco Company (PTC) which had Margins of approximately 14.3% during the FY09. The company’s profitability margin declined from 4.43% of FY08 to 3.14% in FY09. The profitability margins were lower than its major competitor Pakistan Tobacco Company (PTC) which had a profitability margin of 5.9% in the same year. Escalating distribution and marketing expenses along with substantial financing cost trim down the profitability margin of Lakson Tobacco Company Ltd in FY09. Thus, in spite of having the same higher gross profit as PTC the company’s profit margin were lower which shows that there was a need to control its cost base. The company’s return on assets (ROA) was 9.05% in FY09 lower than 11.71% in FY07 and the company’s return on equity (ROE) also declined to 14.05% from 18.44% FY07. Company’s is way behind its main competitor PTC in term of return of asset and return on equity. Thus, there is need to control the cost base, which is negatively affecting the bottom line of the company.

The company’s liquidity position has declined in FY10 as compared to FY09. The current ratio has fallen from 1.98 in FY09 to 1.72 in FY10. This decline is due to a 32.88% increase in current assets but a handsome 52.89% increase in current liabilities. The running finance under mark-up arrangements has increased by a very great percentage of 213.07% in FY10. The mark-up on running finance facilities has increased by 75.02% in FY10 as compared to FY09. Trade and other payables have increased by a minimal 0.86% and there are no provisions for FY10 as compared to FY09.

For current assets there has been a substantial increase in trade debts. Trade debts have increased by 149.43% in FY10 as compared to FY09.the income tax-net has increased by 357.94% in FY10 as compared to FY09 and the cash and bank balances has dropped by 86.21%. There are no short-term investments in FY10.

The current ratio of Philip Morris (Pakistan) Limited is better than that of Pakistan Tobacco Company. PTC had a current ratio of 0.85 in FY10.

The company’s liquidity position in FY09 remained stable and similar to FY08, as its Current Ratio decreased from 1.99 in FY08 to 1.98 in FY09. On the aggregate level company’s current asset increased by 10.29% against an increase of 10.77% in the current liabilities in FY09. In current assets, company’s trade debt and other receivables along with cash registered an impressive growth in 2009. In FY08 company’s liquidity position worsened due to a 64% growth in Current Liabilities on the back of increase in running finance under mark-up arrangement and an increase in trade and other payables as opposed to marginal growth in Current Assets. In 2009 running finance increased only by 2.45% compared to FY08. However, aftermath of this running finance liabilities is accrued markup which had escalated tremendously, growing by 56.6% in FY09. Furthermore, trade and other payables had decreased marginally owed to the reduction in the claims of the creditors, which declined by 21% in FY09 as compared to FY08. Company’s liquidity position was very good and was the best among the industry in 2009. The Current Ratio for its main competitor PTC was 0.91 in FY09 as compared to 1.98 for Philip Morris Pakistan Limited during FY09.

The company’s interest coverage ratio in FY10 declined sharply from 17.8 in FY09 to 7.23 in FY10. The EBIT for the company has fallen in FY10 by 39.03% as compared to FY09. The finance cost has increased by 53.66% in FY10 as compared to FY09.

The company’s interest coverage ratio in FY09 declined from 39.24 in FY08 to 17.8 due to a 95.74% increase in the finance cost. PTC, main competitor of Philip Morris (Pakistan) Limited had interest coverage ratio of 107.2 in FY09, which is far better than Philip Morris’. The main reason for this sharp contrast in the figures of two companies was the minimum reliance of PTC on external financing.

The company’s long debt to equity ratio also decreased from 6.55% in FY08 as to 5.73 in FY09.

The company’s EPS in FY10 is Rs 9.3 as compared to Rs 15.56 in FY09. The EPS is greater than that of Pakistan Tobacco Company, whose EPS in FY10, was Rs 3.62. The company’s book value has improved from Rs 68.2 in FY09 to Rs 71.65 in FY10. The dividend per share is same as that of FY09 at Rs 2.5 per share. The dividend payout ratio in FY10 was 26.8% of the net profit after tax.

The company’s earning per share in FY09 was higher than that of other tobacco company’s in the industry. The company’s earning per share was Rs 15.56 in FY09 as compared to Rs 17.95 in FY08. The company’s book value also improved from Rs 60 at the end of FY08 to Rs 69 at the end of FY09. However, FY09 did not prove rewarding for the investors, as the company’s reduced its cash dividends significantly from Rs 6.5 in FY08 to 2.5 in FY09. The dividend payout ratio was approximately 25.70% of the net profit after tax in FY09. The reduction in cash dividends improved the cash positions of the company. Decline in stock prices due to depressed economy and bearish stock market caused the price to earning ratio of the company to decline from 18.19 in FY08 to 17.10 in FY09, thus making the stock available at cheaper prices.

FUTURE OUTLOOK

Philip Morris (Pakistan) Limited is a fully integrated affiliate of Philip Morris International Inc and as such benefits from global resources and expertise to help further improve its effectiveness and long-term sustainability and profitability.