Growing with resilience

ANALYSIS OF THE ANNUAL REPORT

BY NAIMA JABIR AKBAR (2732)
PREFACE

I am very thankful to almighty Allah, who gave me strength and

courage to accomplish this task.

I, Naima Jabir Akbar, a student of Iqra University, Gulshan Campus,

is very grateful to my teacher, Miss Moona Shamim who give me an
opportunity to study and create a detail report on the financial
statements of Pakistan Tobacco Company as a project of the course
“Principle of Accounting.”

I wish to express my sincere appreciation to those persons who have

contributed either directly or indirectly in this project. I wish to thank
firstly my teacher Miss Moona Shamim for giving me this
opportunity; I would also like to acknowledge the suggestions of my
friends, Samreen Sabahuddin, Umme Salma and Sidra Badr. Finally,
I want to thank my family, specially my parents for their support
through this ordeal.

Page | 2
CONTENTS

CORPORATE INFORMATION

OVERVIEW OF THE COMPANY

THE BRITISH AMERICAN TOBACCO GROUP

BUSINESS PRINCIPLE

HISTORY

BRANDS

BOARD OF DIRECTORS

COMPANY ANALYSIS

FINANCIAL HIGHLIGHTS (03- 08)

INCOME STATEMENT

GRAPHS

BALANCE SHEET

GRAPHS

MARKET ANALYSIS

ECONOMIC ANALYSIS

FUTURE OUTLOOK

CONCLUSION

Page | 3
CORPORATE INFORMATION
REGISTERED OFFICE Telephone: +92 (51)
2273457-60 Fax: +92 (51)
Pakistan Tobacco Company 2277924
Limited Dubai Plaza, Plot
No. 5 Street 20, Salman SHARE REGISTRAR
Market, F-11/2 P.O. Box
2549 Islamabad-44000 FAMCO Associates (Pvt.)
Telephone: +92 (51) Ltd.
2083200, 2083201 State Life Building No. 2-A,
Fax: +92 (51) 2111913 4th Floor Wallace Road, Off
Web: www.ptc.com.pk I.I. Chundrigar Road
Karachi
COMPANY SECRETARY

Ms. Ayesha Rafique FACTORIES

Company Secretary
AKORA KHATTAK
E-mail:
FACTORY
ayesha_rafique@bat.com P.O. Akora Khattak Tehsil
and District Nowshera,
BANKERS N.W.F.P.
Telephone: +92 (923)
Citibank N.A. 630901-11
Deutsche Bank Fax: +92 (923) 510792
Habib Bank Limited
JHELUM FACTORY
HSBC Bank Middle East G.T. Road, Kala Gujran,
Limited Jhelum
MCB Bank Limited Telephone: +92 (544)
National Bank of Pakistan 646500-7
RBS- The Royal Bank of Fax: +92 (544) 646524
Scotland
REGIONAL SALES
Standard Chartered Bank OFFICE
(Pakistan) Limited
NORTHERN PUNJAB
AUDITORS AND N.W.F.P
House No. 57- A/6, Satellite
A.F. Ferguson & Co. Town, Rawalpindi.
Chartered Accountants Telephone: +92 (51)
3rd Floor, PIA Building 49 4582390-91
Fax: +92(51) 4582392
Blue Area, P.O. Box 3021
Islamabad-44000
CENTRAL PUNJAB

Page | 4
128/129- G, Commercial
Area, Phase- 1, Defence
Housing Authority, Lahore.
Telephone: +92 (42) 5899351
Fax: +92 (42) 5899356
SOUTHERN PUNJAB
House No. 93, Street No.3,
Meherban Colony, MDA
Chawk, Multan.
Telephone: +92(61) 4512553,
4584376
Fax: +92 (61) 4542921
SINDH &
BALOCHISTAN
8th Floor, N.I.C. Building,
Abbasi Shaheed Road,
Karachi.
Telephone: +92 (21)
5635490-5
Fax: +92 (21) 5635500
Page | 5
OVERVIEW OF THE COMPANY

Pakistan Tobacco Company Limited was

incorporated in 1947 immediately after partition,
when it took over the business of the Imperial
Tobacco Company of India which had been
operational in the subcontinent since 1905.

It is a part of the trans-national British American

Tobacco Group, which employs some 90,000 people
worldwide and which has a presence in 180
countries. British American Tobacco has a position of
market leader in more than 50 countries selling over
300 brands there. In 2004, the Group sold and
produced a nearly 16% share of the global market of
cigarettes.

PTC is the largest excise tax generator in the private

sector in the country. In 2004 alone, PTC paid the
government close to Rs.16 Billion in excise and sales
taxes. This amounts to over Rs. 50 million per
working day. Over one million people are
economically dependent on the industry in Pakistan.

THE BRITISH AMERICAN

TOBACCO GROUP
Pakistan Tobacco Company is part of the British
American Tobacco Group, one of the world's most
international business groups. In more than 100 years
of British American Tobacco’s existence, the Group of
companies has traded through the turbulence of
wars, revolutions and nationalizations - as well as all
the controversy surrounding smoking.

Our brands, whether international, regional or local,

are what drive British American Tobacco. The maxim
of British American Tobacco founder Buck Duke -

Page | 6
"Develop a superior product" - is as relevant today as
it was then.

BUSINESS PRINCIPLE
Our Company follows three fundamental Business
Principles:

• Mutual Benefit
• Responsible Product Stewardship
• Good Corporate Conduct

Each principle is supported by a series of core beliefs, which

are explained below:

• MUTUAL BENEFIT
The principle of Mutual Benefit is the basis on
which we build our relationships with our
stakeholders.
We are primarily in business to build long term
shareholder value and we believe the best way to
do this is to understand and take account of the
needs and desires of all our stakeholders.

CORE BELIEFS

• Creating long term shareholder value

• Engaging constructively with our stakeholders

• Creating inspiring work environment for our

people

• Adding value to the communities in which we

operate

• Ensuring that suppliers and other business

partners have the opportunity to benefit from
their relationship with us

Page | 7
 • RESPONSIBLE PRODUCT
STEWARDSHIP

The principle of Responsible Product Stewardship is

the basis on which we meet consumer demand for a
legal product that, put simply, is a cause of serious
diseases. Therefore, our products and brands should
be developed, manufactured and marketed in a
responsible manner.

CORE BELIEFS

• Provision of accurate, clear health messages

about the risks of tobacco consumption

• Reduction of the health impact of tobacco

consumption whilst respecting the right of
informed adults to choose the products they
prefer

• Continued availability of relevant and

meaningful information about our products

• Underage people should not consume tobacco

products

• Responsible marketing of our brands and

products and directed at adult consumers

• Appropriate taxation of tobacco products and

elimination of illicit trade

• Regulation that balances the interests of all

sections of society, including tobacco
consumers and the tobacco industry

• Approach public smoking in a way that

balances the interests of smokers and non-
smokers

Page | 8
 • GOOD CORPORATE CONDUCT

The principle of Good Corporate Conduct is the basis

on which all our business should be managed.
Business success brings with it an obligation for high
standards of behavior and integrity in everything we
do and wherever we operate. These standards should
not be compromised for the sake of results.

CORE BELIEFS

• Our business upholds high standards of

behavior and integrity

• High standards of corporate social

responsibility to be promoted within the
tobacco industry

• Universally recognized fundamental human

rights to be respected

• Tobacco industry to have a voice in the

formation of government policies affecting it

• Achieving world class standards of

environmental performance

HISTORY

From being the first multinational to set up its

business in Pakistan in 1947 and beginning
operations out of a warehouse near Karachi Port, we
have come a long way.

From being just a single factory operation to a

company which is involved in every aspect of
cigarette production, from tobacco cultivation to

Page | 9
packaging PTC has evolved and grown with
Pakistan. However, what is significant about these
fifty-seven years is the effort that PTC has
demonstrated in the development of the country. By
being instrumental in the campaign for modern
agricultural and industrial practices, we have helped
in the development and progress of the agricultural &
industrial sector in the country.

We have been supporting & contributing to various

causes of national interest. Educating growers in the
latest techniques and technology in agriculture,
aforestation and free health care in designated areas
are but a few examples.

Through these fifty-seven years, PTC’s continuous

investment in people, brands, technology, innovation
and the communities in which we operate has borne
fruit in many ways and to mention just a few; we are
deemed as a partner of choice by many, our
Environmental, Health & Safety standards are a
source of inspiration for local companies, our
Industrial Relations practices have led and influenced
local practices, and as a result of all these, our
managers are highly valued and sought after people
in the Pakistani corporate world based on the training
and exposure we give them from very early on in
their careers.

OUR BRANDS

We have always considered ourselves a consumer-

focused company. We aim to offer a product that
excels in all aspects and exceeds the expectations of
the consumer.

In this section, you will find the story of our brands

and their origins.

Page | 10
 • BENSON & HEDGES

In 1873, Richard Benson & William Hedges started a

partnership in London. From the very start, the idea
was to make Benson & Hedges a style statement,
which is why the business started from London’s
fashionable West End.

PTC launched Benson & Hedges in Pakistan in March

2003. Made with the finest hand picked golden
Virginia tobacco from across three continents, the
brand is packed with perfection to seal its freshness.

• JOHN PLAYER GOLD LEAF

The story of John Player Gold Leaf has to start from

the story of its founder, John Player. An enterprising
businessman, John Player started a small tobacco
selling business in 1877 and turned it into a thriving
cigarette company, John Player and Sons.

With a distinct lifebuoy and sailor trademark, John

Player Gold Leaf has an identity entrenched in sailing
and maritime adventure. Thus, staying true to John
Player’s very first big brand - Player’s Gold Leaf
Navy Cut cigarettes.

• CAPSTAN
Capstan has a rich heritage, originating in Britain in
the 19th century. The brand was created under the
auspices of W.D. & H.O. WILLS at Bristol and
London.

• GOLD FLAKE

Gold Flake, like many of their brands, also boasts its

origins at W.D. & H.O. WILLS where it was a
premium brand around the end of the 19th century.
Launched in 1982, in a 'soft cup' packaging, the brand

Page | 11
took off when it was repositioned in the value for
money segment and later a 'hinge lid' variant was
introduced in 2000.

• WILLS

WILLS takes its name from the heritage of one of the

original Imperial Tobacco Company families: the
Wills Brothers of London.

• EMBASSY

Embassy, the third leading volume brand in Pakistan,

is most popular in the Punjab where it enjoys a
leading position due to its equity and loyalty.

BOARD OF DIRECTORS

Page | 12
MUEEN AFZAL
NICHOLAS STEWART HALES
CHAIRMAN AND NON- EXECUTIVE DIRECTOR
MANAGING DIRECTOR AND CEO

MUBASHER RAZA
DEPUTY MANAGING DIRECTOR
AND FINANCE DIRECTOR

Page | 13
MIRZA REHAN BAIG
AHMED ZEB
MARKETING DIRECTOR
SUPPLY CHAIN DIRECTOR

Page | 14
FEROZ AHMED
LT. GEN. (RETD.) ALI
NON- EXECUTIVE DIRECTOR
KHAN LHULLI
NON-
EXECUTI
VE
DIRECTO
R

Page | 15
 BEN WILLIAM FORTE TOH AH WAH
NON- EXECUTIVE DIRECTOR NON- EXECUTIVE
DIRECTOR

ABID NIAZ HASSAN KUNWAR IDRESS

ISTAQBAL MEHDI
NON- EXECUTIVE DIRECTOR NON- EXECUTIVE DIRECTOR
NON- EXECUTIVE

D
I
R
E
C
T
O
R

Page | 16
COMPANY ANALYSIS

Pakistan Tobacco Company Limited (PTC) is part of

British American Tobacco - the world's most
international tobacco group - with brands sold in 180
markets around the world. The company produces
high quality tobacco products to meet the diverse
preferences of millions of consumers, and it works in
all areas of the business - from seed to smoke.

Pakistan Tobacco's operations in Pakistan began in

1947, making it one of Pakistan's first foreign
investments. The company provides a number of
reputed brands of cigarettes to consumers in
Pakistan, including Benson and Hedges, Embassy,
Gold Flake, Capstan and Gold Leaf.

Over the years, Pakistan Tobacco has shown a rising

trend as evident from the impressive growth in gross,
net and operating profits, with the operating profits
growing by 28% and net profit growing by 44% in
2006 compared to the previous year. The strong
financial performance is attributed to higher sales
volume, improved margins in all brands, and
continued control over cost through a focus on
operational efficiencies and other initiatives.

The company maintained double-digit volume

growth in 2006 with a record sales volume of 34.5
billion sticks - 13% higher compared to the same
period last year (SPLY). This is a remarkable
performance keeping in view the overall industry
growth, which is estimated at 3%. Gold Flake
remained the volume leader in the portfolio and grew
at a phenomenal rate of 27% compared to SPLY,
whereas Gold Leaf maintained its volume base.

Page | 17
FINANCIAL HIGHLIGHTS
(2003-2008)

Page | 18
Profit & Loss 2008 2007 2006 2005 2004 2003
Volume Million Sticks 41,469 37,188 34,549 30,620 26,846 24,861
Gross Turnover Rs Million 49,054 40,889 35,715 30,615 25,453 22,572
Excise & Sales Tax Rs Million 30,208 24,846 21,824 18,783 15,693 13,849
Net Turnover Rs Million 18,846 16,043 13,891 11,832 9,760 8,723
Gross Profit Rs Million 7,277 6,516 5,534 4,530 3,483 2,872
Operating Profit Rs Million 4,415 3,984 3,048 2,378 1,445 1,010
Profit Before Tax Rs Million 3,894 3,725 2,861 2,082 1,056 615
Profit After Tax Rs Million 2,532 2,420 1,905 1,322 665 321
Earning before interest,taxes,depreciation,
Amortization Rs Million 4,542 4,313 3,394 2,554 1,483 1,051
Dividends Rs Million 2,466 2,529 1,405 946 511 –
Balance Sheet
Paid up capital Rs Million 2,555 2,555 2,555 2,555 2,555 2,555
Shareholders’ Funds Rs Million 3,608 3,705 4,139 3,639 3,263 2,853
Reserves Rs Million 1,053 1,150 1,584 1,084 708 554
Property, Plant & Equipment Rs Million 5,600 5,154 4,529 3,798 3,564 3,411
Net Current Assets /(Liabilities) Rs Million (471) (182) 423 532 297 40
Capital Employed Rs Million 5,184 5,003 4,984 4,364 3,887 3,479
Capital Expenditure during the year Rs Million 1,073 1,191 1,238 717 598 854
Long Term / Deferred Liabilities Rs Million 1,576 1,299 845 725 624 371
Investor Information
Gross profit ratio % 14.83 15.93 15.49 14.80 13.70 12.70
Earnings per share After Tax Rs 9.91 9.47 7.46 5.17 2.60 1.26
EBITDA Margin % 9.26 10.55 9.50 8.34 5.83 4.65
Inventory Turnover Ratio 2.85 2.38 6.69 6.10 7.00 5.90
Fixed Assets Turnover Ratio 8.76 7.93 7.89 8.06 7.10 6.60
Total Assets Turnover Ratio 4.72 4.16 4.09 3.84 3.60 3.10
Break-up value per share Rs 14.12 14.50 16.20 14.24 12.77 12.17
Market value per share at year end Rs 106.30 155.50 72.00 68.95 61.50 27.00
Highest Market value per share during the year Rs 161.00 198.30 80.00 77.00 61.50 39.00
Lowest Market value per share during the year Rs 106.30 74.50 60.45 47.55 46.40 19.50
Price-Earning Ratio Rs 10.73 16.42 9.66 13.33 23.60 21.40
Dividend Per Share Rs 9.65 9.90 5.50 3.70 2.00 -
Dividend yield ratio % 9.08 6.37 7.64 5.37 3.25 -
Dividend payout ratio % 97.39 104.50 73.75 71.56 76.90 -
Return on Capital Employed % 48.84 48.37 38.22 30.29 17.10 9.20
Debt to Equity Ratio 0.16 0.28 0.31 0.30 0.31 0.50

Current Ratio 0.91 0.96 1.11 1.15 1.09 1.00

Interest Cover Ratio 74.02 75.02 57.03 46.91 29.90 7.70
Govt levies as a percentage of turnover % 64.97 64.75 64.50 64.84 64.02 63.98
Government Levies
Customs, Excise Duties & Sales Tax Rs Million 30,525 25,213 22,069 19,129Page16,086
| 19 14,322
Local Taxes and Other Duties Rs million 101 94 87 87 71 75
Income Tax Rs million 1,246 1,169 880 634 137 44
GRAPHS
PROPERTY, PLANT& EQUIPMENT

6000

5000

4000

3000

2000

1000

0
2008 2007 2006 2005 2004 2003

GROSSPROFIT

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2008 2007 2006 2005 2004 2003

INCOME STATEMENT
For the year ended December 31, 2008

2008 Restated

Page | 20
 Rs. 000 2007
Rs.000
Gross turnover 49,053,92 40,889,27
8 5
Excise duty 23,378,44 19,311,94
0 6
Sales tax 6,829,699 5,534,452
Turnover- net of sales & excise duty 18,845,78 16,042,87
9 7

Cost of sales 11,569,03 9,527,306

0
Gross profit 7,276,759 6,515,571
Marketing & distribution expense 1,933,364 1,795,793
Administrative expense 928,358 736,147
2,861,722 2,531,940
Operating profit 4,415,037 3,983,631

Other income 120,151 102,634

Other expense 588,147 311,374
3,947,041 3,774,891
Finance cost 53,324 50,317
Profit before taxation 3,893,717 3,724,574

Taxation 1,361,422 1,304367

Profit for the year 2,532,295 2,420,207

Earnings per share- basic and diluted 9.91 9.47

Page | 21
GRAPHS- INCOME
STATEMENT

2008 2007
Rs. 000 Rs.000

Turnover- net of sales & excise duty 18,845,789 16,042,877

19,000,000
18,000,000
17,000,000 TURNOVER- NET
16,000,000 OFSALES&
EXCISEDUTY
15,000,000
14,000,000
2008 2007

2008 2007
Rs.000 Rs.000

Cost of sales 11,569,030 9,527,306

12,000,000
10,000,000
8,000,000
6,000,000
Cost ofsales
4,000,000
2,000,000
0
2008 2007

2008 2007
Rs.000 Rs.000

Gross profit 7,276,759 6,515,571

Page | 22
 7,400,000
7,200,000
7,000,000
6,800,000
6,600,000 Grossprofit
6,400,000
6,200,000
6,000,000
2008 2007

2008 2007
Rs.000 Rs.000

Administrative expense 928,358 736,147

1,000,000
800,000
600,000
Administrative
400,000 expense
200,000
0
2008 2007

2008 2007
Rs.000 Rs.000

Operating profit 4,415,037 3,983,631

4,600,000
4,400,000
4,200,000
Operating
4,000,000
profit
3,800,000
3,600,000
2008 2007

Page | 23
 2008 2007
Rs.000 Rs.000

Profit before taxation 3,893,717 3,724,574

3,900,000
3,850,000
3,800,000
3,750,000 Profit before
3,700,000 taxation
3,650,000
3,600,000
2008 2007

2008 2007
Rs.000 Rs.000

Profit for the year 2,532,295 2,420,207

2,550,000
2,500,000
2,450,000 Profit for
2,400,000 the year
2,350,000
2008 2007

2008 2007
Rs.000 Rs.000

Earnings per share- basic and diluted 9.91 9.47

10
9.8
Earningsper
9.6
share- basic
9.4 anddiluted
9.2
2008 2007

BALANCE SHEET
Page | 24
As at December 31, 2008

Restated
2008 2007
Rs. 000 Rs.000
Property, plant & equipment 5,559,758 5,154,326
Long term investment in subsidiary 5,000 5,000
company
Long term loan 9,244 12,513
Long term deposit & prepayments 41,172 13,025

CURRENT ASSETS
Stock in trade 4,059,063 3,998,181
Stores and spares 190,646 140,777
Trade debts 2,666 2,386
Loans and advances 65,917 38,580
Short term prepayments 105,728 64,887
Other receivables 246,675 229,891
Cash & bank balance 69,172 166,666
4,739,867 4,641,368

LESS: CURRENT LIABILITIES

Trade & other payables 4,324,704 3,548,237
Accrued interest & mark up 10,354 8,401
Short term borrowings 572,397 1,038,550
Income tax payable 303,183 227,752
5,210,638 4,822,940
NET CURRENT LIABILITIES (470,771) (181,572)
Retirement benefits (739,133) (489,503)
Deferred taxation (836,939) (809,109)

NET ASSETS 3,608,331 3,704,680

Financed by:
Shares & capital reserves

Share capital 2,554,938 2,554,938

Revenue reserves 1,035,393 1,149,742

GRAPH- BALANCE SHEET

Page | 25
 2008 2007
Rs.000 Rs.000
Property, plant & equipment 5,559,758 5,154,326

5,600,000
5,400,000
5,200,000 Property, plant
& equipment
5,000,000
4,800,000
2008 2007

2008 2007
Rs.000 Rs.000
Long term loan 9,244 12,513

14,000
12,000
10,000
8,000
6,000 Longtermloan
4,000
2,000
0
2008 2007

2008 2007
Rs.000 Rs.000
Long term deposit & prepayments 41,172 13,025

50,000
40,000
30,000 Longterm
20,000 deposit &
prepayments
10,000
0
2008 2007

Page | 26
 2008 2007
Rs.000 Rs.000
Stock in trade 4,059,063 3,998,181

4,060,000
4,040,000
4,020,000
4,000,000 Stockintrade

3,980,000
3,960,000
2007 2008

2008 2007
Rs.000 Rs.000
Stores and spares 190,646 140,777

200,000

150,000

100,000
Storesandspares
50,000

0
2008 2007

2008 2007
Rs.000 Rs.000
Trade debts 2,666 2,386

2,700

2,600

2,500

2,400 Trade debts

2,300

2,200
2008 2007

Page | 27
 2008 2007
Rs.000 Rs.000
Loans and advances 65,917 38,580

80,000

60,000

40,000 Loansand
advances
20,000

0
2008 2007

2008 2007
Rs.000 Rs.000
Short term prepayments 105,728 64,887

150,000

100,000

50,000

0
2008 2007

2008 2007
Rs.000 Rs.000
Other receivables 246,675 229,891

Page | 28
 2007
2008

2008
29%
2007
71%

2008 2007
Rs.000 Rs.000
Cash & bank balance 69,172 166,666
2008 2007
Rs.000 Rs.000
Total assets 4,739,867 4,641,368

2007 2008

CURRENT LIABILITIES 2008 2007

RS.000 RS.000
Trade & other payables 4,324,704 3,548,237
Accrued interest & mark up 10,354 8,401
Short term borrowings 572,397 1,038,550
Income tax payable 303,183 227,752

Page | 29
 4,500,000
4,000,000 Trade & other
3,500,000 payables
3,000,000
Accrued interest &
2,500,000
mark up
2,000,000
1,500,000 Short term
1,000,000 borrowings
500,000 Income tax
0 payable
2008 2007

ANALYSIS

MARKET ANALYSIS
In terms of volume alone, PTC managed to sell 41.5
billion cigarette sticks, an increase of 12%. Compared
to sales volume of the tobacco industry, which
increased by only 2.4%, sales volume growth of PTC
was remarkable. Due to

which the company increased its market share by

1.3% to a new level of 46.4%. This is thanks to two of
the company's high performing brands, Gold Leaf and
Gold Flake. Gold Leaf is the company's main value
generator, growing at a healthy rate of 10%. On the
other hand, Gold Flake is the fastest growing brand in
the market with a growth rate of 19%.

ECONOMIC ANALYSIS
PTC managed to post a strong performance in FY08 in
spite of adverse economic situation prevalent in the
country during the time. Factors such as inflation,
rupee devaluation, high fuel costs, damage to company
property and operations due to terrorism, and an overall

Page | 30
recessionary trend did not dampen the sales of PTC. In
fact, the sales turnover reached a new high of Rs 49
billion in FY08, up from Rs 41 billion in FY07. The
gross profit was Rs 7.28 billion, an upsurge of 11.8%
from the previous year's Rs 6.52 billion. The profit for
the year increased by 4.9% to Rs 2.53 billion from Rs 2.42
billion a year earlier.

Profitability has witnessed a decline, but only to a

nominal extent. The gross profit margin has come down
to just below 15%, a change of nearly one percentage
point from its last year's figure. This trend was seen
as sales turnover of the company grew by a robust 20%
but the growth in gross profit was only 12%.

Many factors have led to this trend. One of them is

the increased government levies for all tobacco
product and producers in the form of custom duties,
government sales tax and especially Federal Excise
Duty (FED).

In fact, the government had announced a further

increase on FED on tobacco products in February
2009. Therefore, the effect would also be seen in the
company's performance of the next year. Secondly,
the cost of sales rose by over 21% in FY08. Primarily, this
was due to the inflationary pressures in the country,
along with the high international and local oil prices.
Understandably, the purchase costs of raw material
and fuel and power costs contributed a hefty portion
of the increased cost of sales.

The profit margin of the company was down to 5.16%

from FY07's 5.90%. Mainly, this can be attributed to a
great increase in the administrative expenses, which
rose by 26%. Within administrative expenses, there
were prominent increases seen in the salaries and
wages as well as in the fuel and power categories.
These are quite obvious due to the prevalence of high
inflation in the economy.

Page | 31
Aside from these, administrative expenses included
great upward movement in repair and maintenance
and travelling, accounted for by the relocation and
repair costs borne by the PTC due to destruction of its
head office in the Marriott bombings. Secondly, a lower
profit margin for FY08 was also due to a surge of
other expenses by a whopping 89%. Furthermore,
nearly half of other expenses are made up of costs of
business restructuring, which the company is going
through at the moment.

The net income grew by 4.63%, which was slower than

the growth seen in total assets of the company. This is
what pulled the return on assets down marginally to
24.36%, a 0.2% decrease in one year. The company's
assets grew by an overall 5.79%. This was the average of
the growth

rates seen by fixed assets, showing a greater growth

of around 8.6%, and of current assets, which grew by
2.1% only. The return on equity, however, escaped this
downtrend seen in profitability ratios.

ROE went up to 70.2% in FY08 compared to 65.1% last

year. The reason why ROE witnessed an upsurge, in
contrast to other related ratios, was that total equity
of PTC has seen a decline of 2.6%, mainly on account
of decreased levels of revenue reserves which
declined by 8.4% from their figure in FY07. There was
no change in the share capital of PTC in the year under
review.

The liquidity position of PTC worsened in the financial

year 2008. Following a declining trend since 2006, the
current ratio reached a level of 0.90 in 2008, down from
0.96 a year earlier. Basically, this happened because
much more growth was seen in the firm's current
liabilities compared to its current assets. In 2008, current
liabilities grew at almost 8% while current assets' pace of

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growth was little over 2%. In fact, due to the slow
growth, current ratio now constitutes 45.6% of all
assets, while previously they formed 47.23%. The
main head making over 85% of current assets is that of
stocks-in-trade, which only grew at 1.5%, bringing down
the growth rate of current assets.

Similarly, the main growth driver of current liabilities

was trade and other payables, which grew at a rate of
21.9%. Trade and other payables form about 83% of all
current assets.

If we analyze further, we find that payables as FED to

the government form nearly half of trade and other
payables, and they grew by 30%. Something similar
was

witnessed in the sub heading of sales tax payable to

the government. Thus, we find that a large part of the
current liabilities grew because of the presence of
payables to the government in the form of tax.

PTC's Asset Management has been very

commendable in the recent past, and the same can be
said about the year 2008. Inventory Turnover Ratio was
36.4 days in 2007, which improved to 31.2 days in
FY08. Virtually, PTC's entire inventory is in the form of
stock-in-trade, which has only grown by 1.5% in 2008.
Comparing this with the 11% growth seen in sales
turnover, the result is a faster inventory turnover.
Thus, PTC was able to grow its sales by 11% by not
even increasing its inventory by 2%, which is quite a
feat.

One of the most striking features of PTC's asset

management is its day sales outstanding ratio, which is
at an astoundingly low level of 0.02 days. The ability to
convert its credit sales into cash so quickly is a great
achievement of the company. As a result, the
company boasts an operating cycle of 31.21 days,

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down from 36.46 days in FY07.

In FY08, the total assets turnover ratio has improved to

4.72, an increase of 0.56 compared to the previous year.
Growth in sales turnover has outpaced total assets by
almost two times which led to a better TATO. As we
have discussed before, total assets had grown at 5.8%,
out of which current assets grew at a slower rate of 2.1%,
while fixed assets grew by 8.64%. The major growth
driver of fixed assets was the head of property, plant
and equipment, which makes up 54% of all assets of
PTC, and which grew by 8.4% on account of additions
to plant and machinery. Despite this, the growth
shown by either fixed or current assets was no match
for that of the sales turnover.

Deterioration was witnessed in PTC debt

management ratios. The Debt-to-Asset ratio increased to
0.65 in FY08, up from 0.62 in FY07. A similar increase
was seen in the Debt-to-Equity ratio, which was
previously on the level of 1.65, but grew to 1.88. The
reason for both these trends is the high growth rate of
liabilities, both current and long-term, compared to
the slow growing assets, and the declining equity.
The effect is even more pronounced in Long-term
Debt-to-Equity, which was 0.44 in FY08, a long way
from its previous figure

of 0.35. Long-term Liabilities of PTC grew by 21%,

mostly due to the 51% increase in the retirement benefits
which were a result of the changes made in actuarial
projections.

The Times Interest Earned ratio was at 74.02 in FY08 as

compared to 74.80 a year earlier. The EBIT of the
company was up by 4.6% but the finance costs of PTC
had seen a greater increase of about 6%. Thus an
increase in finance cost of 6%, considering the high
interest rates prevalent in the economy, was not able
to bring about an equal rate of increase in EBIT. This

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deteriorated the TIE ratio to its current level.

PTC has been lukewarm when it comes to its market value.

It must be mentioned that its dividend payout ratio
has been high, although its dividend for FY08 of Rs 9.65
is lower than that of 2007 by Rs 0.25. The earnings per
share was up by 4.65% from Rs 9.47 in 2007 to Rs 9.91
in 2008. The price-to-earnings ratio tumbled to Rs 10.73
from Rs 16.42, mainly on account of a lower market
price in 2008. This was due to the ill performing of the
stock exchanges of the country during the year, a
contrast to the highflying year of 2007. The Book Value
per Share has decreased slightly as the equity of the
company saw a small decline while the number of
outstanding shares remained constant.

FUTURE OUTLOOK
The ratification of Framework Convention for
Tobacco Control (FCTC) by Pakistan, coupled with
marketing restrictions of various kinds has not bid
well for tobacco manufacturers. Furthermore, there
have been increased taxes and duties levied by the
government on tobacco products and producers. In
fact, in February 2009, the government increased the
Federal Excise Duty on tobacco products.
Considering that the cost of doing business will not
subside in the near future for manufacturers due to
prevalence of high inflation and fuel costs, these
factors would hurt the future earnings of PTC.

Furthermore, the head office of PTC was destroyed

by the Marriott bombings in Islamabad. The company
will continue to incur costs arising due to relocation
and repairs, as their new Head Office is not ready yet
and they are still heading their operations from an
alternate location. There is also a lot of concern about
the volatile situation in the NWFP due to terrorism
activities. Keep in mind that much of PTC's tobacco
growers are in the NWFP area and so is one of its

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manufacturing facilities.

A very serious threat to the tobacco manufacturers of

Pakistan in general, and PTC in particular, is the
scourge of smuggled cigarettes in the country. The
sources of these illicit commodities are Afghanistan
and Iran. According to an

estimate around 15%-20% of all cigarettes sold in

Pakistan are illegal in nature. A lot needs to be done
on the enforcement of laws to curb this trade. Even a
market leader like the PTC is being badly affected by
smuggled products, as it can gain a lot of market
share if these smuggled products can be controlled by
the government.

Under a new CEO, PTC is also going through a

rigorous business process reengineering programs
which would affect the way, the company is
managed. This would hopefully improve PTC's
performance in the long run and enable the company
to face the tough uncertain times ahead.

CONCLUSION
Pakistan Tobacco Company Limited (PTC) is part of
British American Tobacco - the world's most
international tobacco group - with brands sold in 180
markets around the world. The company produces
high quality tobacco products to meet the diverse
preferences of millions of consumers, and it works in
all areas of the business - from seed to smoke.

The company provides a number of reputed brands

of cigarettes to consumers in Pakistan, including
Benson and Hedges, Embassy, Gold Flake, Capstan
and Gold Leaf.

Over the years, Pakistan Tobacco has shown a rising

trend as evident from the impressive growth in gross,

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net and operating profits, with the operating profits
growing by 28% and net profit growing by 44% in
2006 compared to the previous year. The strong
financial performance is attributed to higher sales
volume, improved margins in all brands, and
continued control over cost through a focus on
operational efficiencies and other initiatives.

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