Tobacco: PAKISTAN TOBACCO COMPANY - Analysis of Financial Statements Financial Year 2003-3Q- Financial Year 2010.

The tobacco industry in Pakistan operates in an oligopolistic market, with only two major players, Pakistan Tobacco Company (PTC) and Lakson Tobacco in the market.

Incorporated in 1947, Pakistan Tobacco became the first multinational company to begin operations in Pakistan. Owned by British American Tobacco, a company operating in over 180 countries in the world, Pakistan Tobacco strives to maintain its reputation for making and marketing high quality tobacco brands for its consumers. The company is involved in every aspect of cigarette production, from tobacco cultivation to packaging. The company provides a number of brands catering to the diverse market of tobacco consumers, including Benson and Hedges, Embassy, Gold Flake, Capstan and Gold Leaf.

Recent results (3Q10)

The third quarter of 2010 ended with net sales touching Rs 15.7 billion, a decline of 2.4% as compared to 3Q09. Despite the drop in sales, cost of goods sold increased during the period, rising from Rs 9.77 billion at the end of 3Q09, to Rs 10.79 at the end of 3Q10. As a result, gross profit saw a considerable decline; dropping from Rs 6.3 billion to Rs 4.9 billion at the end of the third quarter this year. Selling and distribution expenses also rose over the period, and operating profit declined by 52% due to a combined effect of the increased costs.

Profit for the period stood at Rs 1.14 billion, as compared to Rs 2.53 billion at the end of 3Q09. This decline of over 50% was reflected in the EPS, which fell from Rs 9.89 per share at the end of 3Q09, to Rs 4.47 per share at the end of 3Q10.

Adapting itself to the changing market, the company has expanded its portfolio, introducing a new Value for Money brand called "Capstan by Pall Mall Original", which has been well-received by the market and has been growing since its launch in June 2010. The strain on the company's finances continues to mount due to rising costs combined with the fact that the recent price increases were inadequate to cover increases in Excise duties as well as inflation. The company therefore has posted a loss during the three months period of Jul-September 2010.

Operating in a weak economy, further challenged by the widespread devastation of the recent floods, PTC aims to defend its market share through the low medium segment brands while enhancing its equity through focused marketing and trade activities throughout the year. To effectively leverage the opportunities in this area, the company has amplified its efforts, increasing its budget for selling and distribution, which can be seen from the company's income statement for the period.

Financial performance (FY09)

Over the years, Pakistan Tobacco has shown a steady pattern of growth as evident from the rising trend of gross, net and operating profits, with the operating profits as well as net profits growing by 19% in 2009 as compared to the previous …