News Analysis |
Turning a blind eye to the fact that every year 100,000 people die of smoking induced illnesses in Pakistan, data suggest that cigarette producers are having a field year. In the first half of the fiscal year 2018, 29 billion cigarette sticks were produced in Pakistan, as per the Pakistan Bureau of Statistics (PBS). Statistically speaking, that’s a 70 percent growth year-on-year and a 68 percent growth over the previous six months.
If the pace is steady, tobacco companies may retain these numbers in the next fiscal year. Due to the infestation of illicit cigarettes, mostly locally-produced, duty-non-paid (DNP) brands being produced and sold at the expense of the formal sector in recent years, it is a bit difficult to estimate the quantum of actual local production in this market.
The Illicit share stood around 20 percent of overall cigarette sales (by volume) in 2011, a stake that had doubled by the middle of 2017, giving tough competition to the formal producers. But taking into consideration the Pakistan Bureau of Statistics Data, the formal-sector production is returning to its normal output level, which produces an average 5 billion sticks a month for the last ten years.
This third tier helped take the fight to the illicit brands in the affordable, VFM segment as cheaper cigarettes arrived in the formal market, closing the price differential with the illicit, duty-non-paid brands.
With that rate, production will be over 29 billion sticks in the second half of the fiscal year ‘18, obtaining a growth of 68 percent year-on-year. That quantum would have local cigarette production grow around 69 percent year-on-year for the full fiscal year, according to a business publication.
The rise in formal production is apparently coming at the expense of DNP brands. Years of FED-driven price hikes after every budget announcement had widened the price differential between legitimate brands and duty-evading brands.
The formal cigarette production sector suffered a huge blow in the last fiscal year, when prominent players like Pakistan Tobacco and Philip Morris Pakistan lost a major chunk of their cigarette volumes, especially in the value-for-money (VFM) segment, to duty-evading brands. That translated into a significant reduction in government taxes from the formal sector.
Alarmed, federal government, through the FY18 budget announced in late May 2017, acted to reverse the slide of formal sector sales. On one hand, it only marginally increased FED on two exiting pricing tiers. And on the other, a third, low-price tier was introduced – where cigarettes could retail below Rs58 per pack.
Prior to the latest budget, there were two tiers for cigarettes brands and those having retail price of Rs88 or more for a pack of twenty cigarettes would be imposed FED of Rs74.8 per pack plus sales tax thus fell in Tier 1 while those having retail price of less than would be taxed Rs32.98 for a packet of 20 cigarettes plus the sales tax.
The Illicit share stood around 20 percent of overall cigarette sales (by volume) in 2011, a stake that had doubled by the middle of 2017, giving tough competition to the formal producers.
In the budget 2017-18, the government introduced a new tier. The documents show that now the rate of FED on the first tier of cigarettes is Rs3,705 per 1,000 cigarettes and Rs1,649 per 1,000 cigarettes in the 2nd tier. While for third tier an FED of Rs800 is payable per thousand cigarettes, i.e. Rs16 per pack of twenty cigarettes with sales tax at approximately Rs6.98 per pack to tackle the illicit, non-duty-paid cigarettes
This third tier helped take the fight to the illicit brands in the affordable, VFM segment as cheaper cigarettes arrived in the formal market, closing the price differential with the illicit, duty-non-paid brands. While this government move has drawn criticism from public health advocates, the corporate financials have seen a remarkable turnaround since those fiscal measures went into effect in Jul-Dec 2017 period.
For instance, PAKT, the market leader, has bounced back. Compared to the rout in Jan-Jun 2017 – when its gross revenues were down 39 percent and bottom-line declined 58 percent year-on-year – the Jul-Dec 2017 period yielded the firm a gross turnover growth of 32 percent and a net profit surge of 101 percent year-on-year.
So, as PAKT and PMPK have been experiencing a much more favorable operating environment lately, they might keep utilizing their capacity to the maximum. As might smaller players in the formal market, like Khyber Tobacco (PSX: KHTC). As those fiscal measures are still in place, the tobacco high may last until at least the next budget announcement in a few months.