Growing with resilience

ANALYSIS OF THE ANNUAL REPORT

By Ammad Amer Zia
Fatima Mesud
Fatima Ejaz
Atta Ul Hassan
Hashaam Waqar
Mohammad Usman
Valeed Shahid
Hassan Zahid
TABLE OF CONTENTS

CORPORATE INFORMATION…………3

OVERVIEW OF THE COMPANY…….4

THE BRITISH AMERICAN TOBACCO GROUP…………4

HISTORY………………….6

BRANDS……………….6

EXECUTIVE SUMMARY…………..8

FINANCIAL HIGHLIGHTS (04- 09)……………………9

PRODUCTION FLOW CHART……………10

COST METHOD USED………11

INCOME STATEMENT…………12

VERTICAL ANALYSIS………..13

TREND ANALYSIS…………..14

HORIZONTAL ANALYSIS………..15

BALANCE SHEET…………17

EVALUATION FOR OUTSIDER……..18

EVALUATION FOR INSIDER………19

BREAKEVEN ANALYSIS………..20

INSIDER / OUTSIDER ANALYSIS………..20

RECOMMENDATIONS……..24

D
CONCLUSION…………25

REFERENCES…………26

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CORPORATE INFORMATION
REGISTERED OFFICE
Pakistan Tobacco Company
Limited Dubai Plaza, Plot
No. 5 Street 20, Salman
Market, F-11/2 P.O. Box 2549
Islamabad-44000
Telephone: +92 (51) 2083200,
2083201
Fax: +92 (51) 2111913
Web: www.ptc.com.pk
COMPANY SECRETARY
Ms. Ayesha Rafique
Company Secretary
E-mail:
ayesha_rafique@bat.com
BANKERS
Citibank N.A.
Deutsche Bank
Habib Bank Limited
HSBC Bank Middle East
Limited
MCB Bank Limited
National Bank of Pakistan
RBS- The Royal Bank of
Scotland
Standard Chartered Bank
(Pakistan) Limited
AUDITORS
A.F. Ferguson & Co.
Chartered Accountants
3rd Floor, PIA Building 49
Blue Area, P.O. Box 3021
Islamabad-44000
Telephone: +92 (51) 2273457-
60 Fax: +92 (51) 2277924
SHARE REGISTRAR
FAMCO Associates (Pvt.)
Ltd.
State Life Building No. 2-A,
4th Floor Wallace Road, Off
I.I. Chundrigar Road Karachi
FACTORIES
AKORA KHATTAK
FACTORY
P.O. Akora Khattak Tehsil
and District Nowshera,
N.W.F.P.
Telephone: +92 (923) 630901-
11
Fax: +92 (923) 510792
JHELUM FACTORY
G.T. Road, Kala Gujran,
Jhelum
Telephone: +92 (544) 646500-
7
Fax: +92 (544) 646524
REGIONAL SALES OFFICE
NORTHERN PUNJAB AND
N.W.F.P
House No. 57- A/6, Satellite
Town, Rawalpindi.
Telephone: +92 (51) 4582390-
91
Fax: +92(51) 4582392
CENTRAL PUNJAB
128/129- G, Commercial
Area, Phase- 1, Defence
Housing Authority, Lahore.
Telephone: +92 (42) 5899351
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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
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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 -
"Develop a superior product" - is as relevant today as it
was then.

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BUSINESS PRINCIPLE
Our Company follows three fundamental Business
Principles:

Mutual Benefit
Responsible Product Stewardship
Good Corporate Conduct

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.

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.

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.

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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 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.

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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.

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

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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 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.

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EXECUTIVE SUMMARY
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 2007
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 2007 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.

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Page | 11
FINANCIAL HIGHLIGHTS
(2004-2009)

Profit & Loss 2009 2008 2007 2006 200

Volume Million Sticks 41,469 37,188 34,549 30,620 26,84
Gross Turnover Rs Million 49,054 40,889 35,715 30,615 25,45
Excise & Sales Tax Rs Million 30,208 24,846 21,824 18,783 15,69
Net Turnover Rs Million 18,846 16,043 13,891 11,832 9,76
Gross Profit Rs Million 7,277 6,516 5,534 4,530 3,48
Operating Profit Rs Million 4,415 3,984 3,048 2,378 1,44
Profit Before Tax Rs Million 3,894 3,725 2,861 2,082 1,05
Profit After Tax Rs Million 2,532 2,420 1,905 1,322 66
Earning before interest,taxes,depreciation,
Amortization Rs Million 4,542 4,313 3,394 2,554 1,48
Dividends Rs Million 2,466 2,529 1,405 946 51
Balance Sheet
Paid up capital Rs Million 2,555 2,555 2,555 2,555 2,55
Shareholders’ Funds Rs Million 3,608 3,705 4,139 3,639 3,26
Reserves Rs Million 1,053 1,150 1,584 1,084 70
Property, Plant & Equipment Rs Million 5,600 5,154 4,529 3,798 3,56
Net Current Assets /(Liabilities) Rs Million (471) (182) 423 532 29
Capital Employed Rs Million 5,184 5,003 4,984 4,364 3,88
Capital Expenditure during the year Rs Million 1,073 1,191 1,238 717 59
Long Term / Deferred Liabilities Rs Million 1,576 1,299 845 725 62

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PRODUCTION FLOW CHART

Harvesting Curing

Green Leaf
Manufacturing Threshing

HARVESTING

Thousands of farmers around the country are

harvesting tobacco leaves. All farmers who contract
with us for tobacco production benefit from our full
time extension service. We see our farmers as valued
business partners and feel proud that our relationship
has led to many successes for families in the rural
community. At this stage the tobacco leaves are
harvested.

CURING

Curing is a carefully controlled process used to achieve the

texture, colour and overall quality of a specific tobacco type.
During the process, leaf starch is converted into sugar, the

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green colour vanishes and the tobacco goes through colour
changes from lemon to yellow to orange to brown, like tree
leaves in autumn. Curing is done by the farmer after
cultivation.

GREEN LEAF THRESHING

At this stage, the tobacco leaves are carefully cleaned.

All dust, sand, scraps and foreign matter are removed.
The stems are separated from the leaves. And the
overall moisture level of the leaves is stabilized to a
specific level to ensure freshness and high quality and
prevent from going bad.

MANUFACTURING

This is the stage where all the different ingredients for

their respective brands are brought together with the
tobacco into a finalized product or products in cases of
different brands. The cleaned tobacco is mixed with its
respective ingredients, then moved on in a conveyor
belt to the cigarette making machines which roll the
tobacco and filter in a small paper covered with rings of
gun powder. After that, a quality check is imposed to
see if all the cigarettes are made properly, and then they
are sent off to the packaging machines to assort them
properly in their according packages/brands. Further
testing is ensued to make sure the packaging is just right
and the cigarettes are in perfect condition.

COSTING METHOD USED

Since PTC is a huge company with different sub-brands

underneath it, it would be impossible to say that the
firm uses many procedures or costing methods in
accounting its calculations. Since the raw material is
obtained from an outside source before it is processed,
and later given to distributors, the firm has decided to
capitalize on one common costing method, process

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costing. Since the firm only produces cigarettes, under
different names, but same ingredients and techniques
etc., it is easier for it to determine its costs using process
costing.

INCOME STATEMENT
For the year ended December 31, 2009

2009 Resta
Rs. ted
000 2008
Rs.00
0
Gross turnover 49,053 40,889
,928 ,275
Excise duty 23,378 19,311
,440 ,946
Sales tax 6,829, 5,534,
699 452
Turnover- net of sales 18,845 16,042
& excise duty ,789 ,877

Cost of sales 11,569 9,527,

,030 306
Gross profit 7,276, 6,515,
759 571
Marketing & 1,933, 1,795,
distribution expense 364 793
Administrative expense 928,35 736,14
8 7

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 2,861, 2,531,
722 940
Operating profit 4,415, 3,983,
037 631

Other income 120,15 102,63

1 4
Other expense 588,14 311,37
7 4
3,947, 3,774,
041 891
Finance cost 53,324 50,317
Profit before taxation 3,893, 3,724,
717 574

Taxation 1,361, 1,3043

422 67
Profit for the year 2,532, 2,420,
295 207

Earnings per share- 9.91 9.47

basic and diluted

VERTICAL ANALYSIS

2007 2008 2009

Sales – net of sales tax and excise

duties 100 100 100

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 Cost of sales 60.16 59.39 61.39
Gross profit 39.84 40.61 38.61

Marketing and distribution

expenses 13.13 11.19 10.26
Administration expenses 4.76 4.59 4.93
Operating profit 21.94 24.83 23.43

Other income 0.49 0.64 0.64

Other expenses 1.47 1.94 3.12
20.96 23.53 20.94

Finance cost 0.37 0.31 0.28

Profit before taxation 20.59 23.22 20.66

Taxation 6.88 8.13 7.22

Profit for the year 13.71 15.09 13.44

TREND ANALYSIS

2007 2008 2009

Sales – net of sales tax and excise

duties 100 15.49 17.47
Cost of sales 100 14 21.43

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Gross profit 100 17.75 11.68

Marketing and distribution

expenses 100 -1.55 7.66
Administration expenses 100 11.32 26.11
Operating profit 100 30.69 10.83

Other income 100 50.74 17.07

Other expenses 100 52.22 88.89
100 29.64 4.56

Finance cost 100 -1.46 5.98

Profit before taxation 100 30.2 4.54

Taxation 100 36.49 4.37

Profit for the year 100 27.05 4.63

Earnings per share 100 26.94 4.65

HORIZONTAL ANALYSIS

$ change
2009 2008 2007 $ change 2008-2007 2009-200

Gross turnover 49,053,928 40,889,275 35,715,451 5,173,824 8,164,65

Sales tax 6,829,699 5,534,452 4,833,285 701,167 1,295,24
Excise duties 23,378,440 19,311,946 19,311,946 4,066,49
Turnover (net of sales 18,845,789 16,042,877 30,882,166 -14,839,289 2,802,91

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tax)
Cost of sales 11,569,030 9,527,306 25,348,646 -15,821,340 2,041,72
Gross profit 7,276,759 6,515,571 5,533,520 982,051 761,18

Marketing and
distribution expenses 1,933,364 1,795,793 1,816,198 -20,405 137,57
Administrative
expenses 928,358 736,147 644,981 91,166 192,21

Operating profit 4,415,037 3,983,631 3,072,341 911,290 431,40

Other income 120,151 102,634 68,088 34,546 17,51

Other expenses 588,147 311,374 228,696 82,678 276,77

Finance cost 53,324 50,317 51,060 -743 3,00

Profit before taxation 3,893,717 3,724,574 2,860,673 863,901 169,14

Taxation 1,361,422 1,304,367 955,685 348,682 57,05

Profit for the year 2,532,295 2,420,207 1,904,988 515,219 112,08

% change 2008- % change 2009-

2007 2008

14.48623454 19.9677128
14.50704852 23.40334689
21.05688365
-48.05132192 17.47137998
-62.41493135 21.43023432
17.74731093 11.6825985

-1.123500852 7.660738181

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 14.13467994 26.11041001

29.66109556 10.82946689

50.73728117 17.06744354

36.1519222 88.88763994

-1.455150803 5.976111453

30.19922235 4.541271029

36.48503429 4.374152367

27.04578717 4.631339385

BALANCE SHEET
As at December 31, 2009

Restated
2009 2008
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

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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

EVALUATING ANNUAL RESULTS FOR

OUTSIDER

Current Ratio analysis = Current Assets/Current

Liabilities

2008 2009
4641368 4739867
4822940 5210638
0.96 0.909

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Quick Ratio analysis = Current Assets – inventory – prepaid
expenses / Current liabilities

2008 2009
348409 328221
4822940 5210638
0.072 0.0629

PROFITBILITY RATIOS

Gross Profit Margin = Gross Profit / Net sales

2008 2009
6515571 7276759
16042877 18845789
40.61% 38.61%

Operating Profit Margin = Operating profit / Net sales

2008 2009
3983631 4415037
16042877 18845789
24.83% 23.42%

Net profit margin = Net profit / Net sales

2008 2009
2420207 2532295
16042877 18845789
15.08% 13.44%

Return on Assets = Net profit / Total assets

2008 2009
2420207 2532295
9826232 10395041
24.63% 24.36%

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EVALUATING ANNUAL RESULTS FOR
INSIDER

Cost of goods manufactured / Units manufactured

2008 2009
9,513,551,000 11,570,882,000
38,183,000,000 41,973,000,000
$0.25 $0.27

Cost of beginning finished goods inventory / units in beg.

f/g inventory

2008 2009
496,384,000 482,629,000
1,836,620,800 2,027,041,800
$0.27 $0.24

Cost of ending f/g inventory / units in ending f/g inventory

2008 2009
482,629,000 484,481,000
1,833,990,200 1,884,578,900
$0.26 $0.25

Cost of goods sold / Units sold

2008 2009
9,527,306,000 11,569,030,000
37,188,000,000 41,969,000,000
$0.256 $0.275
BREAKEVEN ANALYSIS

2009 2008 2007

SALES $18,845,789.00 $16,042,877.00 $30,882,166.00

COST OF SALES $11,569,030.00 $9,527,306.00 $25,348,646.00

GROSS PROFIT $7,276,759.00 $6,515,571.00 $5,533,520.00

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NUMBER OF UNITS SOLD $41,469,000.00 $37,188,000.00 $34,549,000.00

CONTRIBUTION MARGIN PER UNIT $0.18 $0.18 $0.16

AVERAGE COST PER STICK $0.28 $0.26 $0.26

TOTAL FIXED COSTS $2,314,499.00 $1,932,237.00 $1,937,558.00

BREAKEVEN VOLUME IN UNITS 13,189,932 11,028,355 12,097,307

BREAKEVEN VOLUME IN SALES $3,627,231.40 $2,823,258.86 $3,181,591.79

COST OF GOODS SOLD ANALYSIS

In terms of volume alone, PTC managed to sell 42 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%.

EVALUATING THE INSIDER &

OUTSIDER ANALYSIS
PTC managed to post a strong performance in FY09 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 recessionary
trend did not dampen the sales of PTC. In fact, the sales
turnover reached a new high of Rs 49 billion in FY09, up
from Rs 41 billion in FY08. The gross profit was Rs 7.28

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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 FY09. 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 FY08'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.

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 FY09 was also due to a surge of other expenses by a

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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 FY09 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 FY08. 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 2009. Following a declining trend since 2007, the
current ratio reached a level of 0.90 in 2009, 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 2009, current liabilities
grew at almost 8% while current assets' pace of 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.

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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 2009. Inventory Turnover Ratio was 36.4 days in
2009, which improved to 31.2 days in FY09. Virtually,
PTC's entire inventory is in the form of stock-in-trade,
which has only grown by 1.5% in 2009. 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, down from
36.46 days in FY08.

In FY09, 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

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ratios. The Debt-to-Asset ratio increased to 0.65 in FY09, up
from 0.62 in FY08. 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 FY09, 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 FY09 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 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 FY09 of Rs 9.65 is
lower than that of 2009 by Rs 0.25. The earnings per share
was up by 4.65% from Rs 9.47 in 2009 to Rs 9.91 in 2009.
The price-to-earnings ratio tumbled to Rs 10.73 from Rs
16.42, mainly on account of a lower market price in
2009. This was due to the ill performing of the stock
exchanges of the country during the year, a contrast to
the highflying year of 2009. 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.

RECOMMENDATIONS
The ratification of Framework Convention for Tobacco
Control (FCTC) by Pakistan, coupled with marketing

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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 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.

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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,
net and operating profits, with the operating profits
growing by 28% and net profit growing by 44% in 2007
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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