Comparative

Financial
Analysis
For year
2010 - 2011
The report is a snapshot of basic financial
analysis of two leading tobacco
manufacturers, Pakistan Tobacco Company
Limited, and Philip Morris Pakistan Limited.
Group Members
Yasir Saeed
Muneeb Bin Amir
Muneeb Bilal Malik
Nauman Iqbal
2

Executive Summary

This report consists of financial statements analysis of two leading
tobacco manufacturing companies, PTC and Philip Morris in Pakistan. The
following is included in the report:

1. Horizontal Analysis of Balance Sheet & Income Statement
2. Vertical Analysis of Balance Sheet & Income Statement
3. Ratio Analysis

Both companies are listed on the Karachi Stock Exchange and have been an
integral part of our economy ever since the independence. We have confirmed
to complete the analysis without any bias and plagiarism. Calculations can be
verified. Our group thanks Miss Nausheen Shehzad for her outstanding
capabilities as an instructor and confidence booster.

3

Contents
Executive Summary ................................................................................................................................. 2
Pakistan Tobacco Company Vertical Analysis Income Statements ...................................................... 5
Philip Morris Pakistan Limited, Vertical Analysis .................................................................................... 6
Pakistan Tobacco Company Horizontal Analysis ................................................................................ 7
Philip Morris Pakistan Horizontal Analysis ........................................................................................... 8
Pakistan Tobacco Company Vertical Analysis ...................................................................................... 9
Philip Morris Pakistan Limited Vertical Analysis ................................................................................ 10
Philip Morris Pakistan Horizontal Analysis ......................................................................................... 11
Pakistan Tobacco Company Horizontal Analysis ................................................................................ 13
Profitability Ratios ................................................................................................................................. 14
Future Outlook PTC and PMI ................................................................................................................ 15



4



Review of Financial Statements
For 2010 and 2011














5


Above is a vertical analysis of PTCs Income statement for Year 2010 and 2011. The vertical
analysis is conducted with every figure of the income statement as a percentage of Net
turnover of the company, after sales taxation.

After our thorough analysis, we came to know that in both years, Cost of sales were over
70% of the net income, a rise in cost that we can attribute to governments increased
taxation and duties on discouraging smoking in Pakistan.

Administrative and distributive expenses made up of only 15% of the net income and as
compared to 21.54% in 2010, in 2011, the expenses were trimmed to 19.4% which is a good
sign of improvement by the company. The results were due to a substantial increase in tax and
excise duty rates. Manufacturing costs rose due to poor economic conditions and increase in load
shedding. Duties had been levied upon the cigarette manufacturing industry, due to which after tax
profits for PTC were severely hit.

If we look at the Excise duties, they were a bigger chunk of net sales at 297% of 2011 as
compared to 284% for year 2010. This is a measure of government to discourage smoking.
This has affected companys profitability severely and could continue the same trend in
coming years unless expenses are controlled.
Pakistan Tobacco Company Vertical Analysis Income Statements

2011 2010

Percent Percent
Income Statement $ $
Gross Turnover 67,491,816 294.08% 60,195,535 287.29%
Less: Excise Duties 34,719,661 151.28% 30,476,421 145.45%
Sales Tax 9,822,181 42.80% 8,766,485 41.84%
Net Turnover 22,949,974 100.00% 20,952,629 100.00%


Less: Cost of Sales 16,709,273 72.81% 14,747,717 70.39%
Gross Profit 6,240,701 27.19% 6,204,912 29.61%

Less: Selling & Dist Exp. 3,129,938 13.64% 3,279,390 15.65%
Admin Expenses 1,321,713 5.76% 1,233,165 5.89%
Net Expenses 4,451,651 19.40% 4,512,555 21.54%

Operating Income(Loss) 1,789,050 7.80% 1,692,357 8.08%
Other Op. Income(Loss) 53,967 0.24% 46,610
Other Op. Expense 1,182,363 5.15% 208,211 0.99%
Oper. Profit (Loss) 660,654 2.88% 1,530,756 7.31%

Finance Income 39,160 0.17% 36,933 0.18%
Finance Cost 140,539 0.61% 149,680 0.71%

Profit/(Loss) b/f Tax 559,275 2.44% 1,418,009 6.77%
Taxation 195,490 0.85% 492,909 2.35%
Net Profit/(Loss) a/f Tax 363,785 1.59% 925,100 4.42%
6

Philip Morris Pakistan Limited, Vertical Analysis
2011 2010

Percent Percent
Income Statement $ $
Gross Turnover 32,296,490 256.59% 33,910,750 254.54%
Less: Excise Duties 15,140,587 120.29% 15,662,922 117.57%
Sales Tax 4,568,921 36.30% 4,925,476 36.9%
Net Turnover 12,586,982 100.00% 13,322,352 100.00%


Less: Cost of Sales 9,460,827 75.16% 8,956,591 67.23%
Gross Profit 3,126,155 24.84% 4,365,761 32.77%

Less: Selling & Dist Exp. 2,254,522 17.91% 2,560,141 19.22%
Admin Expenses 963,612 7.66% 813,395 6.11%
Net Expenses 3,218,134 25.57% 3,373,536 25.32%

Operating Income(Loss) (91,979) -0.73% 992,225 7.45%
Other Op. Income(Loss) 22,167 93,663
Other Op. Expense 152,247 1.21% 71,934 0.54%
Oper. Profit (Loss) (222,059) -1.76% 1,013,954 7.61%

Finance Income - 0.00% - 0.00%
Finance Cost 308,690 2.45% 137,275 1.03%

Profit/(Loss) b/f Tax (530,749) -4.22% 876,679 6.58%
Taxation (75,943) -0.60% 304,117 2.28%
Net Profit/(Loss) a/f Tax (454,806) -3.61% 572,562 4.30%
Year 2011 wasnt impressive for Philip Morris as we can see excise duties and sales taxes
eroding 61% of the companys sales returns. The remaining expenses had to be borne by the
remaining 40% of the companys earnings.

As compared to PTC, PMIs portion of excise duties as a percentage of gross turnover was
not very less and stood at 256.6%. The acquisition of Lakson tobacco company, with an
undisclosed amount resulted in operating loss as it was difficult to manage a newly acquired
company.

Profit before taxes stood at 6.58% of the net turnover, and in 2011, they were -4.22%.

7

Pakistan Tobacco Company Horizontal Analysis

2011 2010 Amount Percent


Income Statement $ $ $
Gross Turnover 67,491,816 60,195,535 7,296,281 12.12%
Less: Excise Duties 34,719,661 30,476,421 4,243,240 13.92%
Sales Tax 9,822,181 8,766,485 1,055,696 12.04%
Net Turnover 22,949,974 20,952,629 1,997,345 9.53%


Less: Cost of Sales 16,709,273 14,747,717 1,961,556 13.30%
Gross Profit 6,240,701 6,204,912 35,789 0.58%

Less: Selling & Dist Exp. 3,129,938 3,279,390 (149,452) -4.56%
Admin Expenses 1,321,713 1,233,165 88,548 7.18%
Net Expenses 4,451,651 4,512,555 (60,904) -1.35%

Operating Income(Loss) 1,789,050 1,692,357 96,693 5.71%
Other operating Income(Loss) 53,967 46,610 7,357 15.78%
Other Operating Expense 1,182,363 208,211 974,152 467.87%
Operating Profit (Loss) 660,654 1,530,756 (870,102) -56.84%

Finance Income 39,160 36,933 2,227 6.03%
Finance Cost 140,539 149,680 (9,141) -6.11%

Profit/(Loss) b/f Taxation 559,275 1,418,009 (858,734) -60.56%
Taxation 195,490 492,909 (297,419) -60.34%
Net Profit/(Loss) a/f Tax 363,785 925,100 (561,315) -60.68%


The horizontal analysis for PTC is not quite dismissal. In fact even after the rise of cost of
sales by 13.3%, the gross profit increased by 0.58% and there was no negative trend. Selling
and admin expenses were also controlled and saw reduction of 1.35%.

Operating income increased but the operating costs increased 467%, which is a big rise due
to uncontrollable power crises and inflation. The manufacturing costs increased of the
operating facilities at Jhelum and Akora Khattak. This adversely affected the operating profit
which decreased by 56.84%.
This resulted in the decline of profit before and after taxation of nearly 60% from 925.1
million PKR to 363 million PKR.

This is a drastic fall of profits within just a year. Current the company is at the brink of
making losses at 0.54% net profit margin which could likely to go negative in the coming
year if expenses cannot be controlled.

8

Philip Morris Pakistan Horizontal Analysis

2011 2010 Amount Percent


Income Statement $ $
Gross Turnover 32,296,490 33,910,750 (1,614,260) -4.76%
Less: Excise Duties 15,140,587 15,662,922 (522,335) -3.34%
Sales Tax 4,568,921 4,925,476 -356,555 -7.23%
Net Turnover 12,586,982 13,322,352 (735,370) -5.52%
-
-
Less: Cost of Sales 9,460,827 8,956,591 504,236 5.63%
Gross Profit 3,126,155 4,365,761 (1,239,606) -28.39%
-
Less: Selling & Dist Exp. 2,254,522 2,560,141 (305,619) -11.94%
Admin Expenses 963,612 813,395 150,217 18.47%
Net Expenses 3,218,134 3,373,536 (155,402) -4.61%
-
Operating Income(Loss) (91,979) 992,225 (1,084,204) -109.27%
Other operating Income(Loss) 22,167 93,663 (71,496) -76.33%
Other Operating Expense 152,247 71,934 80,313 111.65%
Operating Profit (Loss) (222,059) 1,013,954 (1,236,013) -121.90%
-
Finance Income - - -
Finance Cost 308,690 137,275 171,415 124.87%
-
Profit/(Loss) b/f Taxation (530,749) 876,679 (1,407,428) -160.54%
Taxation (75,943) 304,117 (380,060) -124.97%
Net Profit/(Loss) a/f Tax (454,806) 572,562 (1,027,368) -179.43%

Year 2011 wasnt impressive for PMI due to increases inflation, uncontrollable power crisis,
and poor economic conditions, which saw 5% increase in cost of sales and 28.39% decline in
gross profit. Net expenses decreased by 4% even though administrative expenses increased
by 4%. As compared to past years, the company suffered a major blow when its operating
income shrunk from nearly 992 million PKR to PKR 91 million losses, a decline of nearly
110%. Operating expenses rose by 111%, partly due to rising in manufacturing costs that can
be attributed to rise in fuel costs, increase in load shedding and electric rates and operating
loss rose by 121%.

As compared to PKR 572 million profits of Year 2010, the company showed losses of 454
PKR million in closing of year 2011.

As compared to PTC, PMI recorded negative trend on their net turnover and gross turnover
of above 4%, whereas PTC showed nearly 9% increase in the Net Turnover. This shows that
PMI isnt doing well when it comes to market competition. The competitive advantage is
lost to the major competitor, whose sales is nearly doubled at PKR 67 billion, whereas PMIs
gross sales is 32 Billion PKR.

9

Pakistan Tobacco Company Vertical Analysis
Balance Sheet - Non Current 2011 Percent 2010 Percent
Property, Plant & Equipment 6,092,284 46.0% 5,823,688 47.1%
Investment in Sub. Comp 5,000 0.0% 5,000 0.0%
Long term Loans 1,260 0.0% 3,417 0.0%
Long term deposits 22,640 0.2% 15,375 0.1%
Total Non Current Assets 6,121,184 46.2% 5,847,480 47.3%

Current Assets
Stores & Spares 6,462,330 48.81% 6,002,824 48.55%
Stock in Trade 190,110 1.44% 199,208 1.61%
Trade Debts 1,202 0.01% 1,597 0.01%
Loans and advances 64,310 0.49% 48,267 0.39%
Prepayments 94,052 0.71% 118,329 0.96%
Profit accrued - -
Other receivables 196,249 1.48% 93,546 0.76%
Cash and Bank Balances 109,631 0.83% 51,945 0.42%
Income Tax Net - -
Total Current Assets 7,117,884 53.76% 6,515,716 52.70%

Total Assets 13,239,068 100.00% 12,363,196 100.00%

Share Capital & Reserves
Share Capital 2,554,938 19.30% 2,554,938 20.67%
Revenue Reserves 778,997 5.88% 1,047,151 8.47%
Total 3,333,935 25.18% 3,602,089 29.14%

Non Current Liabilities
Deferred Taxation 1,082,038 8.17% 1,137,581 9.20%

Current Liabilities
Trade and other payable 7,067,704 53.39% 5,339,725 43.19%
Short term finances & borrowings 51,187 0.39% 46,789 0.38%
Accrued-mark up interest 1,783,623 13.47% 2,252,218 18.22%
Taxes payable 79,419 0.60% 15,206 0.12%
Total Current Liabilities 8,823,095 66.64% 7,623,526 61.66%
Net liabilities 13,239,068 100.00% 12,363,196 100.00%

The vertical analysis of PTCs balance sheet does not record any major, but only minor
changes to the assets. The structure more or less remained the same however trade and
other payables increased by 10.2% from 43.19% to 53.39% from 2010 to 2011. This resulted
in the total current liabilities increasing as a chunk of net assets from 61.66% in 2010 to
66.64% in 2011.

Unfortunately a large amount of cash is held in stocks and spares, which isnt a very liquid
asset. The most liquid asset is cash and bank balances, which is less than 1% in 2011, even
though it increased from 0.4% to 0.84% from 2010 to 2011. The company needs to liquidate
the stocks and spares and convert them into cash.

10

Philip Morris Pakistan Limited Vertical Analysis
Balance Sheet - Non Current 2011 2010
Property, Plant & Equipment 3,943,202 32.2% 3,847,679 30.0%
Investment in Sub. Comp 1 0.0% 1 0.0%
Long term Loans 17 0.0% 421 0.0%
Long term deposits 57,354 0.5% 51,678 0.4%
Total Non Current Assets 4,000,574 32.7% 3,899,779 30.4%

Current Assets
Stores & Spares 361,615 2.95% 359,922 2.81%
Stock in Trade 6,776,689 55.34% 7,706,696 60.17%
Trade Debts 210,781 1.72% 164,240 1.28%
Loans and advances 70,280 0.57% 10,405 0.08%
Prepayments 148,218 1.21% 161,579 1.26%
Profit accrued - 556
Other receivables 116,109 0.95% 90,018 0.70%
Cash and Bank Balances 28,088 0.23% 15,104 0.12%
Income Tax Net 533810 398964
Total Current Assets 8,245,590 67.33% 8,907,484 69.55%

Total Assets 12,246,164 100.00% 12,807,263 100.00%

Share Capital & Reserves
Share Capital 1,000,000 8.17% 1,000,000 7.81%
Revenue Reserves 5,553,178 45.35% 6,164,821 48.14%
Total 6,563,178 53.59% 7,164,821 55.94%

Non Current Liabilities
Deferred Taxation 221,000 1.80% 472,000 3.69%

Current Liabilities
Trade and other payable 1,117,395 9.12% 1,187,234 9.27%
Short term finances & borrowings 2,810,170 22.95% 2,471,772 19.30%
Accrued-mark up interest 82,586 0.67% 61,564 0.48%
Taxes payable 1,451,835 11.86% 1,449,872 11.32%
Total Current Liabilities 5,461,986 44.60% 7,623,526 59.53%
Net liabilities 12,246,164 100.00% 12,807,263 100.00%

PMIs vertical analysis of balance sheet had been same for two years however with minor
improvements as compared with PTCs balance sheet. While PTCs stock and trade remained
somewhat constant, PMIs stocks and trades decreased as a chunk from 60.17% in 2010 to
55.34% in 2011.

Moreover, PMI also struggled to decrease its current liabilities from 59.53% in 2010 to
44.60% in 2011. Overall, it was a positive sign showed by PMI as an effort of improving its
assets and liabilities.
11

Philip Morris Pakistan Horizontal Analysis
Balance Sheet - Non Current 2011 2010 Amount Percentage
Property, Plant & Equipment 3,943,202 3,847,679 95,523 0.0%
Investment in Sub. Comp 1 1 0 0.0%
Long term Loans 17 421 -404 -95.69%
Long term deposits 57,354 51,678 5,676 10.98%
Total Non Current Assets 4,000,574 3,899,779 100,795 2.5%

Current Assets
Stores & Spares 361,615 359,922 1,693 0.0%
Stock in Trade 6,776,689 7,706,696 -930,007 -6.5%
Trade Debts 210,781 164,240 46,541 28.33%
Loans and advances 70,280 10,405 59,875 590%
Prepayments 148,218 161,579 -13,361 -8.2%
Profit accrued - 556
Other receivables 116,109 90,018 26,091 28.9%
Cash and Bank Balances 28,088 15,104 12,984 85%
Income Tax Net 533,810 398,964 134,846 33.4%
Total Current Assets 8,245,590 8,907,484 -661,894 -7.4%
0
Total Assets 12,246,164 12,807,263 -561,099 -9.7%

Share Capital & Reserves
Share Capital 1,000,000 1,000,000 0 0%
Revenue Reserves 5,553,178 6,164,821 -611,643 -9.91%
Total 6,563,178 7,164,821 -601,643 -8.3%

Non-Current Liabilities
Deferred Taxation 221,000 472,000 -251,000 -53.1%

Current Liabilities
Trade and other payable 1,117,395 1,187,234 -69,839 -8.0%
Short term finances & borrowings 2,810,170 2,471,772 338,398 13.6%
Accrued-mark up interest 82,586 61,564 21,022 34.14%
Taxes payable 1,451,835 1,449,872 1,963 0.13%
Total Current Liabilities 5,461,986 7,623,526 -2,161,540 -29.6%
Net liabilities 12,246,164 12,807,263 -561,099 4.3%

Due to poor economic conditions, trade debts increased by nearly 29% from 90.08 m PKR to
116 m PKR in 2010 to 2011. However the company has shown and proved its efforts of
decreasing it short term liabilities as evident from 29.6% decrease in total current liabilities.
Taxation had also been cleared as more than 50% decrease was witnessed in deferred
taxation.
Compared with PTCs Horizontal analysis of balance sheet, the situation of PMI is slightly
better with a 4.3% increase in net liabilities as compared to PTCs 7.1%. Moreover, PTC had
12

been somewhat sluggish in paying taxes and therefore increased liabilities manifolds,
whereby PMI had shown strict control over paying its creditors.
The payment to creditors coupled with rise in debtors as well as the acquisition of Lakson
Tobacco Company has worsened the financial position of PMI. We can see the rise in other
receivables, loans and advances and long term deposits.



13

Pakistan Tobacco Company Horizontal Analysis
Balance Sheet - Non Current 2011 2010 Amount Percentage
Property, Plant & Equipment 6,092,284 5,823,688 268,596 4.6%
Investment in Sub. Comp 5,000 5,000 0 0.0%
Long term Loans 1,260 3,417 -2,157 -63.1%
Long term deposits 22,640 15,375 7,265 47.3%
Total Non Current Assets 6,121,184 5,847,480 273,704 4.7%

Current Assets
Stores & Spares 6,462,330 6,002,824 459,506 7.7%
Stock in Trade 190,110 199,208 -9,098 -4.6%
Trade Debts 1,202 1,597 -395 -24.7%
Loans and advances 64,310 48,267 16,043 33.2%
Prepayments 94,052 118,329 -24,277 -20.5%
Profit accrued - -
Other receivables 196,249 93,546 102,703 109.8%
Cash and Bank Balances 109,631 51,945 57,686 111.1%
Income Tax Net - -
Total Current Assets 7,117,884 6,515,716 602,168 9.2%

Total Assets 13,239,068 12,363,196 875,872 7.1%

Share Capital & Reserves
Share Capital 2,554,938 2,554,938 0 0.0%
Revenue Reserves 778,997 1,047,151 -268,154 -25.6%
Total 3,333,935 3,602,089 -268,154 -7.4%

Non Current Liabilities
Deferred Taxation 1,082,038 1,137,581 -55,543 -4.9%

Current Liabilities
Trade and other payable 7,067,704 5,339,725 1,727,979 32.4%
Short term finances & borrowings 51,187 46,789 4,398 9.4%
Accrued-mark up interest 1,783,623 2,252,218 -468,595 -20.8%
Taxes payable 79,419 15,206 64,213 422.3%
Total Current Liabilities 8,823,095 7,623,526 1,199,569 15.7%
Net liabilities 13,239,068 12,363,196 875,872 7.1%
PTCs year to year growth in balance sheet is showing a somewhat mixed trend. It can be
observed that although company managed to recover long term loans, the short term
advances and receivables increased by well over 100%, which isnt a good sign of companys
management especially in the current economic recession. The company did not show signs
of improvement because current taxes payable rose over 422%, and other payables also
increased over 32.4%. Net liabilities rose 7.1%, which needs to be managed in the poor
economic conditions.

14

Pakistan Tobacco Company

Philip Morris

Profitability Ratios
2011 2010 2011 2010
% % % %
1 Gross Profit Margin 9.2 10.31 9.67 12.87
2 Operating Profit Margin 0.97 2.54 2.9 7.4
3 Net Profit Margin 0.54 1.54 -1.4 1.68
4 Return on Assets 2.51 7.52 -3.7 4.46


The year 2011 saw drastic negative impact upon both tobacco companies. Analysis reveals
that the gross profit margin is somewhat similar to both companies, near to 10%, which
shows nearly 90% cost of sales including excise duties and sales taxes imposed by the
government. Both companies suffered hit on their profits due to increasing duties & taxes.
Operating profit margin for Philip Morris was remarkably better for PTC in both years,
however the actual ability of a firm to cover all expenses is reflected in the net profit
margin. NPM is the indication of how net profit is compared with the gross sales.
Unfortunately, Philip Morris incurred a -1.4% (loss) NP margin whereas PTC managed to stay
at 0.54%, thereby not reporting any losses.

Even though NP margin was observed for Philip Morris, it needs to be noted that Philip
Morris acquired Lakson Tobacco Company (for an undisclosed sum), which has a big impact
upon the profitability of the company. We need to be broader on our vision to see how the
acquisition shall impact PMIs performance in the next FY 2012.

Return on Assets was comparatively favorable for PTC for both years as compared to PMI.
Due to net loss of over 500 million PKR, PMI registered a -3.7% net return on total assets in
2011 as compared to 4.46% in 2010.

Overall, the profitability fell for both companies due to increase in sales taxes, excise duties,
electricity costs, admin expenses, fuel expenses and uncontrollable power crisis.

15

Future Outlook PTC and PMI

Despite the favorable demographics that PTC enjoys by being the market leader and the
largest player, it has not been able to generate decent returns in recent times due to the illegal
cigarette market and cigarette smuggling from neighboring countries like Iran and Afghanistan. This
is the biggest challenge for the company alongside rising excise duties and taxes. According to
Business recorder, nearly 20% of cigarettes are coming from illegal trade sources in Pakistan market.
There needs to be strict law enforcement that needs to be exercised to stop this illegal trade and
thrive our own local industries.
Almost 20 percent of the cigarette available in the market is coming from illegal sources.
Moreover, there had been supply shocks as well because no farmers had been subsidized in Pakistan
where farmers of tobacco are demanding as high as PKR 250 per kg.
The advertising and marketing efforts have been very tough for both companies. PMI
reported 1
st
annual loss and needs to improve before it faces bankruptcy. A big cost pressure to both
companies resulted when the government of Pakistan put a ban on packs of less than 20 cigarettes.
The industry is oligopolistic in nature and is facing severe crises with profitability going down
the drain. There needs to be efforts done on the law enforcement parts as well as maintaining
regular soppy of power and electricity.