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.

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CONTENTS

CORPORATE INFORMATION

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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

REGISTERED OFFICE

Pakistan Tobacco Company Limited Dubai Plaza, Plot No. 5 Street 20, Salman Market, F-11/2 P.O. Box 2549 Islamabad-44000Telephone: +92 (51) 2083200, 2083201 Fax: +92 (51) 2111913Web: www.ptc.com.pk

COMPANY SECRETARY

Ms. Ayesha RafiqueCompany SecretaryE-mail: ayesha_rafique@bat.com

BANKERS

Citibank N.A.Deutsche BankHabib Bank LimitedHSBC Bank Middle East LimitedMCB Bank LimitedNational Bank of PakistanRBS- The Royal Bank of ScotlandStandard Chartered Bank (Pakistan) Limited

AUDITORS

A.F. Ferguson & Co.Chartered Accountants3rd Floor, PIA Building 49 Blue Area, P.O. Box 3021 Islamabad-44000Telephone: +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 FACTORYP.O. Akora Khattak Tehsil and District Nowshera, N.W.F.P.Telephone: +92 (923) 630901-11Fax: +92 (923) 510792

JHELUM FACTORYG.T. Road, Kala Gujran, JhelumTelephone: +92 (544) 646500-7Fax: +92 (544) 646524

REGIONAL SALES OFFICE

NORTHERN PUNJAB AND N.W.F.PHouse No. 57- A/6, Satellite Town, Rawalpindi.Telephone: +92 (51) 4582390-91Fax: +92(51) 4582392

CENTRAL PUNJAB128/129- G, Commercial Area, Phase- 1, Defence Housing Authority, Lahore.Telephone: +92 (42) 5899351Fax: +92 (42) 5899356

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SOUTHERN PUNJABHouse No. 93, Street No.3, Meherban Colony, MDA Chawk, Multan.Telephone: +92(61) 4512553, 4584376Fax: +92 (61) 4542921

SINDH & BALOCHISTAN8th Floor, N.I.C. Building, Abbasi Shaheed Road, Karachi.Telephone: +92 (21) 5635490-5Fax: +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

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Buck Duke - "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 BENEFITThe 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

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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

GOOD CORPORATE CONDUCT

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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 packaging PTC has evolved and grown with Pakistan. However, what is significant about

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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.

BENSON & HEDGES

In 1873, Richard Benson & William Hedges started a partnership in London. From the very

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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.

CAPSTANCapstan 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

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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

MUEEN AFZALNICHOLAS STEWART HALES

CHAIRMAN AND NON- EXECUTIVE DIRECTORMANAGING DIRECTOR AND CEO

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MUBASHER RAZADEPUTY MANAGING DIRECTOR AND FINANCE DIRECTOR

MIRZA REHAN BAIGAHMED ZEB

MARKETING DIRECTORSUPPLY CHAIN DIRECTOR

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FEROZ A HMEDLT. GEN. (RETD.) ALI

NON- EXECUTIVE DIRECTORKHAN LHULLI

NON- EXECUTIVE DIRECTOR

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BEN WILLIAM FORTE TOH AH WAHNON- EXECUTIVE DIRECTOR NON- EXECUTIVE

DIRECTOR

ABID NIAZ HASSAN KUNWAR IDRESSISTAQBAL MEHDI

NON- EXECUTIVE DIRECTOR NON- EXECUTIVE DIRECTORNON- EXECUTIVE

DIRECTOR

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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.

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FINANCIAL HIGHLIGHTS(2003-2008)

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 27.00Highest Market value per share during the year Rs 161.00 198.30 80.00 77.00 61.50 39.00Lowest 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 0.500.91 0.96 1.11 1.15 1.09 1.00

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Current Ratio

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 19,129 16,086 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

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INCOME STATEMENTFor the year ended December 31, 2008

2008Rs. 000

Restated200

7Rs.000

Gross turnover 49,053,928

40,889,275

Excise duty 23,378,440

19,311,946

Sales tax 6,829,69

9

5,534,45

2Turnover- net of sales & excise duty

18,845,789

16,042,877

Cost of sales 11,569,030

9,527,30

6Gross profit 7,27

6,759

6,515,57

1Marketing & distribution expense

1,933,36

4

1,795,79

3Administrative expense

928,358

736,147

2,861,72

2,531,94

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2 0Operating profit 4,41

5,037

3,983,63

1

Other income 120,151

102,634

Other expense 588,147

311,374

3,947,04

1

3,774,89

1Finance cost 53,3

2450,317

Profit before taxation

3,893,71

7

3,724,57

4

Taxation 1,361,42

2

1,304367

Profit for the year 2,532,29

5

2,420,20

7

Earnings per share- basic and diluted

9.91 9.47

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GRAPHS- INCOME STATEMENT

2008Rs. 000

2007Rs.000

Turnover- net of sales & excise duty

18,845,789

16,042,877

2008Rs.000

2007Rs.000

Cost of sales 11,569,030

9,527,306

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2008Rs.000

2007Rs.000

Gross profit 7,276,75

9

6,515,57

1

2008Rs.000

2007Rs.000

Administrative expense

928,358

736,147

2008Rs.000

2007Rs.000

Operating profit 4,415,03

3,983,63

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7 1

2008Rs.00

0

2007Rs.00

0

Profit before taxation 3,893,717

3,724,574

2008Rs.00

0

2007Rs.00

0

Profit for the year 2,532,295

2,420,207

2008 2007

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Rs.000

Rs.000

Earnings per share- basic and diluted

9.91 9.47

BALANCE SHEETAs at December 31, 2008

2008Rs. 000

Restated2007

Rs.000Property, plant & equipment 5,559,75

85,154,326

Long term investment in subsidiary company

5,000 5,000

Long term loan 9,244 12,513Long term deposit & prepayments 41,172 13,025

CURRENT ASSETSStock in trade 4,059,06

33,998,181

Stores and spares 190,646 140,777Trade debts 2,666 2,386Loans and advances 65,917 38,580Short term prepayments 105,728 64,887Other receivables 246,675 229,891Cash & bank balance 69,172 166,666

4,739,867

4,641,368

LESS: CURRENT LIABILITIESTrade & other payables 4,324,70

43,548,237

Accrued interest & mark up 10,354 8,401Short term borrowings 572,397 1,038,550Income tax payable 303,183 227,752

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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

2008Rs.000

2007Rs.000

Property, plant & equipment 5,559,758

5,154,326

2008Rs.000

2007Rs.000

Long term loan 9,244 12,513

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2008Rs.000

2007Rs.000

Long term deposit & prepayments 41,172 13,025

2008Rs.000

2007Rs.000

Stock in trade 4,059,063

3,998,181

2008Rs.000

2007Rs.000

Stores and spares 190,646 140,777

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2008Rs.000

2007Rs.000

Trade debts 2,666 2,386

2008Rs.000

2007Rs.000

Loans and advances 65,917 38,580

2008Rs.000

2007Rs.000

Short term prepayments 105,728 64,887

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2008Rs.000

2007Rs.000

Other receivables 246,675 229,891

2008Rs.000

2007Rs.000

Cash & bank balance 69,172 166,6662008

Rs.0002007

Rs.000Total assets 4,739,8

674,641,368

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CURRENT LIABILITIES 2008RS.000

2007RS.000

Trade & other payables 4,324,704

3,548,237

Accrued interest & mark up 10,354 8,401Short term borrowings 572,397 1,038,550Income tax payable 303,183 227,752

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

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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 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

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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.

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

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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 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.

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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, 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,

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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 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

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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 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

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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, 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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