Pakistan Tobacco Final for Print

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February. 11, 2012 Auditing & assurance

Superior University

Auditing & Assurance

Analysis of Annual Report of

PAKISTAN TOBACCO PVT LTD.

Submitted to:

Prof. Miss Mariam Khawar

Submitted by:

Muneeb ul Haq 11372

Khuram Sattar 11304

Asad Ali Shah 11311

Iftikhar Ahmad 11329

Faisal Azeem 11331

Ali Jaffar 11336

Waqas Khan 11349

Rashid Ali 11360

Riaz Ahmad 11339

Superior University, Lahore 1


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TABLE OF CONTENT

Description Page No

Dedication and Acknowledgment-------------------------------- 03

Company Profile--------------------------------------------------- 04

Company History -------------------------------------------------- 05

Vision and Mission------------------------------------------------- 06

Companys Brands------------------------------------------------- 07-11

Financial Highlights------------------------------------------------ 12-16

SWOT Analysis------------------------------------------------------ 16-20

Ratio Analysis------------------------------------------------------- 21-30

Financial Analysis-------------------------------------------------- 30-33

Auditor Report to share holders ---------------------------------- 33-34

Justification of Auditor Report to share holders -----------------

34

Crux----------------------------------------------------------------- 35

References----------------------------------------------------------- 35



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Dedication

We dedicate this project to our Parents specially our Sweat

Mothers, whose prays, affection and Support is always besides us,

and our Teachers who are the source of motivation and

inspiration through out our studies. May God bless our parents

and our teachers for making us whatwe are today.

ACKNOWLEDGEMENT

By the grace ofAlmighty Allah, We have been able to compile

this project. Without his help, we cannot accomplish any

objectives in our lives. The omnipotent Allah bestows thisability, knowledge, strength and competence required for this

project to me as boons.

Special acknowledgement for our Professor Miss Mariam

Khawar who gives us the opportunity to analyse the Annual

report and Auditor reports of Pakistan Tobacco Company Pvt

Ltd. We are really thankful to our teacher for her guidance to

complete this Project.



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Pakistan Tobacco Company

Company Profile:

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.The company prides itself in being the first multi-

national company to begin its operations in Pakistan. Our parent company, British American

Tobacco has been in business for over 100 years now with a presence in over 180 countries.

The Group has built an international reputation for making and marketing high quality

brands for the millions of informed adults who choose to consume tobacco.

From being just a single factory operation to a company which is involved in every aspect of

cigarette production, from crop to consumer, we have evolved into one of the leading

corporations in Pakistan. We run two state of the art factories and employ more than 1,700

people while indirectly providing livelihoods to more than a million people who are involved

in various aspects of the business. We are market leaders and contribute more than Rs. 30

billion in excise duties and taxes to the Government. Our strategy reflects our vision, being

the champions of growth, productivity, responsibility and a winning organization.

Our brands encompass our values and we boast a diversified portfolio catering to the

different tastes and preferences of the entire tobacco market. By offering products that are

superior in quality, driven by global standards, we meet and exceed the expectations of our

consumers. We as a company, work towards broader goals beyond the benefit of the

shareholders and demonstrate support for communities, high standards of ethical behaviour

and greater transparency and accountability. We are committed to continuous improvement

and to keeping an open mind. We have learnt that companies can rarely act alone; almost

all our contributions to society involve working constructively with others and by engaging

and listening to our stakeholders. By matching our words with our actions, we aim to

demonstrate the behaviour of a responsive and responsible tobacco company.

Registered OfficePakistan Tobacco Company Limited

Evacuee Trust Complex, First Floor,

Agha Khan Road, Sector F-5/1,

P.O. Box 2549,

Islamabad-44000.

Telephone: (051) 2083200, 2083201

Fax: (051) 2278376, 2278377

Web: www.ptc.com.pk

Auditors



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A.F. Ferguson & Co

Chartered Accountants

3rd Floor, PIA Building,

49 Blue Area, P.O. Box 3021,

Islamabad-44000.

Telephone: (051) 2273457-60Fax: (051) 2277924

Company 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 now involved in every

aspect of cigarette production, from crop to consumer, we have evolved and grown with

Pakistan. However, what is significant about these 64 years is the effort that Pakistan Tobacco Company 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 and industrial sector in the

country.

We have been supporting and contributing to various causes of national interest. Educating

growers in the latest techniques and technology in agriculture, a forestation and free health

care in designated areas are but a few examples.

Throughout these 62 years, our continuous investment in people, brands, technology,innovation and the communities in which we operate has borne fruit in many ways. We are

deemed as a partner of choice by many, our Environmental, Health and 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.

Suffice it to say that the history of the Pakistan Tobacco Company is closely linked with the

development and history of the areas in which we operate. Be it corporate practices, social

investments, advancements in agricultural techniques, or establishing new ways of

marketing and distribution, we have always been instrumental in establishing the

benchmarks against which others are measured.

Corporate Objectives

Our vision, mission and strategic objectives define the way we live and work



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Company Vision

First Choice for Everyone

Company Mission

Transform PTC to perform responsibly with the speed, flexibility and enterprising spirit of an

innovative, consumer-focused Company.

Strategic Objectives

Our strategy reflects our vision, being the champions of Growth, Productivity, Responsibilityand the Winning Organization.

Awards:

Regional Legacy Award

BAT Global EH&S Award

BAT Zero Accident Award

Supply Chain Global Award by Supply Chain Council, USA.

2007 Environment Excellence by Ministry of Environment Government of Pakistan.

Runner up Best Corporate Report in the miscellaneous category by Joint Committeeof ICMAP & ICAP.

ISO 9001 & 14001 Certification

SA8000 Certification

MRP II Class A Certification

Companys 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 our consumers.



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Pakistan Tobacco Company invests in trying to understand the consumers preferences and

ensures that adult smokers make informed choices about different brands available in the

market. We have put in particular effort in promoting two of our Global Drive Brands, Dunhill

and Pall Mall; and two of our great value for money brands, John Player Gold Leaf and Gold

Flake.

Benson & Hedges:

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

Benson & Hedges was launched in Pakistan in March 2003 and has since been able to build

strong brand loyalty among its consumers showing excellent year on year growth.

Embassy:

Embassy, is a leading volume brand in Pakistan, and is most popular in Punjab where it

enjoys a leading position. Having built its heritage over a number of years, Embassy thrives

on its brand loyalty and locally tailored taste characteristics.

Gold Flake:

Gold Flake, like many of our brands, also boasts its origins at W.D. & H.O. WILLS where it

was a premium brand around the end of the 19th century. Gold Flake has grown

tremendously as a brand since 2004, making it the largest volume brand in Pakistan, and

the second largest brand in British American Tobacco's Asia Pacific region. The key to Gold



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Flakes success has been its novel engagement schemes which have fuelled growth over the

years.

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.



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John Player Gold Leaf has become an institution in itself, becoming one of the most

recognizable cigarette brands in the country. John Player Gold Leaf has recently been

declared the largest Urban Brand in Pakistan, beating out products across the F.M.C.G.

spectrum.

Dunhill:

Dunhill, a premium global brand, celebrated its centenary in 2007.2008 was an exceptional

year for Dunhill in Pakistan as the brand witnessed exponential growth; fuelled by its re-



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launch in July. Going forward, Dunhill is poised to strengthen its foothold in the premium



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segment.



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Capstan by Pall Mall:

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.



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MAJOR COMPETITORS:

LACKSON TOBACCO COMPANY (LTC):



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MARDANWALLAS

COUNTERFEIT / OTHER TAX EVADED BRANDS

Market Share of PTC and its Competitors:

Pakistan Tobacco 45.70%

Lackson Tobacco 44.20%

Mardanwalls 2.20%

Counterfeit/other 1.8%

Tax evaded brands 5.90%

Financial Highlights

Year

Gross Turnover

2004

25,453 Million Rupees

2005


2006


2007


2008


2009


2010 60,196 Million Rupees



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Years Property Plant and Equipment









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Year Earnings Dividend

Yield

2004 2.60/Share 3.25%

2005 5.17/Share 5.37%

2006 7.46/Share 7.64%

2007 9.47/Share 6.37%

2008 9.91/Share 9.08%

2009 11.83/Share 9.10%

2010 3.62/Share 5.44%


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Year Gross Profit Operating Profit After Tax Profit

2004 3,483 Million 1,077 Million 665 Million

2005 4530 Million 2,081 Million 1,322 Million





2010 6205 Million 1531 Million 925 Million



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Swot Analysis:

Scan of the internal and external environment is an important part of the strategic planning

process. Environmental factors internal to the firm usually can be classified as strengths (S)

or weaknesses (W), and those external to the firm can be classified as opportunities (O) or

threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm's resources and

capabilities to the competitive environment in which it operates. As such, it is instrumental

in strategy formulation and selection.

Strengths:



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Economies of scale in production

Enterprise resource management for quick and cost effective operations

Efficient management

Marketing efficiency and capital effectiveness

Business process re-engineering

Strong market position.

Geographically diversified.

Decentralization at each level of management.

PTC provides opportunities for professional and career growth.

Large brand portfolio and strong market share.

Social responsibilities activities by implementing international market standards.

Continuous market research by AC Nelson to develop future plans and strategies.

Multinational company connected with BAT worldwide.

PTCs own reputation as a dynamic enterprise.

Technological sophistication in terms of highly advanced production techniques and

manufacturing plants.

Compliance with the regulations of the government and regular payment of taxes has

earned the company the respect of all and sundry.

Weaknesses:



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Wastage of material in production

Resource allocation for rural communication is not according to number of outlets in

a village which is improper utilization of resources.

Improper distribution of work

Salaries differences between the workers who wore more and who put minimum

efforts

Workers are always under threat due to the downsizing

Slow in new brand development.

Salesman commission is low.

Offices should be maintained according to PTC standards. (Regional Office)

Lack of advertisement due to controversial industry

Very minimum marketing as compare to its competitors

Failure of PTC to file a strong case against lower quality brands whose producers do

not pay any tax to the government and yet have maintained a prominent presence in

the market.

Cigarette being a controversial product convincing the consumer to prefer PTCs

brands to competitors because of the quality of their constituents has become an

uphill task.

For gaining an edge over the competitors and in a bid to live up to its image in the

market much of PTCs operations are highly costly. So financial resources are being

extravagantly used.

Cutting back on such cost may be difficult, because of which in recent years the

company has done extensive across the board retrenchment.

Opportunities:



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Growing demand of cigarettes despite such anti smoking campaigns.

As most of the population is in low social economic class, there is an opportunity for

PTC to increase market share in this segment through focus strategy.

Light cigarettes.

Market potential in rural areas.

Rising popularity of smokeless tobacco.

Promoting IMS implementation can enhance the relationship with government and

other regulatory authorities.

Participation in social activities can enhance the corporate image.

Intense competition provides opportunity for continuous improvement in the quality

of brand.

Export of premium brands

Threats

The illicit sector continues to be the single biggest threat to long term commercial

viability and sustainability of the legitimate sector along with its adverse impact on

Government revenue

The law and order situation has been precarious, culminating in the bombing at the

Marriott hotel which led to collateral damage to our Head Office in Islamabad. The

general security situation in the country continued to deteriorate in 2008 and it was

especially difficult in the tobacco growing areas of NWFP.

Changing Optimization techniques not only to ensure capacity enhancement but also

toad here to international Environment, Health and Safety standards.

Need of Raw material for meeting rising demand of cigarette

Government intervention for decreasing the cultivation of tobacco

Switching to Discount brands due to decreasing purchasing power of the consumers

Government action

Cigarette use prohibition and awareness in people for hazards of smoking

Ban on sales promotions

Ban on product advertisements including sports sponsorships, TV, radio and

outdoor hoarding.

Changing Consumer needs



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Threats from Social and economic trends

Social trends:

Increasing know how of cigarettes hazards

Anti - cigarette campaigns and litigations

Economic trends:

Rising taxes

High inflation

Rupee devaluation

Rising commodity and oil prices

Sharp increase in energy costs.

Threat of rivalry and new entrants

PTC faces rivalry from Lakson Tobacco Pakistan in major, after it there is no other big market

player and cannot affect the sales of PTC that much. As there have been the anti tobacco

campaigns internationally, there is a threat that the other international industries mightdirect themselves for the developed countries to ensure their sustainability. Pakistani

market may also be in the threat for the international companies to enter, as government

policies for the entry are much relaxed but after wards the company has to abide by the

strict rules and regulation for operating in the region



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Ratio Analyses 2004-2010

Current Ratio

Years Current Assets Current Liabilities Current Ratio

2004 3,434,601 3,137,467 1.094

2005 4,136,116 3,604,366 1.147

2006 4,172,950 3,750,209 1.112

2007 4,641,368 4,822,940 0.962

2008 4,739,867 5,210,638 0.909

2009 6,242,528 6,856,780 0.910

2010 7,893,825 8,630,286 0.914

Quick Ratio:

Years Quick Assets Current Liabilities Quick Ratio

2004 3,60,549 3,137,467 0.1149

2005 3,55,185 3,604,366 0.098

2006 3,82,097 3,750,209 0.101

2007 6,43,187 4,822,940 0.133

2008 6,80,804 5,210,638 0.130

2009 4,77,161 6,856,780 0.069

2010 6,38,818 8,630,286 0.074

Liquidity Ratios:

Inventoryturnover



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Years Cost of Sales Average Inventory Inventory Turnover

2004 6,089,955 3,069,090 1.98

2005 7,223,576 3,427,491 2.10

2006 8,357,474 3,785,892 2.20

2007 9,527,306 3,894,517 2.44

2008 11,595,736 4,028,622 2.87

2009 13,442,066 4,972,215 2.70

2010 10,789,048 6,510,187 1.67

Average account receivable turnover

Years Credit Sales Average A/R A/R Turnover

2004 9,572,576 1,05,266 90.93

2005 11,753,180 1,11,958 104.97

2006 13,890,994 98,575 140.91

2007 16,042,877 1,61,125 99.562008 18,872,495 2,38,282 117.15

2009 21,666,525 1,67,411 129.41

2010 15,696,107 1,06,521 147.34

Asset Turnover:

Years Sales Average Total

Assets

Assets Turnover

2004 9,572,576 6,641,792 1.45



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2005 11,753,180 7,496,609 1.56

2006 13,890,994 8,351,426 1.66

2007 16,042,877 9,280,316 1.78

2008 18,872,495 10,110,636 1.86

2009 21,666,525 11,310,951 1.91

2010 15,696,107 12,964,936 1.21

Profit Margin:

Years Sales Cost of Goods Sold Profit Margin

2004 9,572,576 6,089,955 36.38 %

2005 11,753,180 7,223,576 38.53 %

2006 13,890,994 8,357,474 39.83 %

2007 16,042,877 9,527,306 40.61 %

2008 18,872,495 11,595,736 38.55 %

2009 21,666,525 13,442,066 37.95 %

2010 15,696,107 10,789,048 31.27%

Return on Assets:

Years Net Income Average Total

Assets

Return on Assets

2004 665,227 6,641,792 0.10



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2005 1,321,919 7,496,609 0.17

2006 1,904,988 8,351,426 0.22

2007 2,420,207 9,280,316 0.26

2008 2,532,295 10,110,636 0.25

2009 3,022,406 11,310,951 0.27

2010 1,141,621 12,964,936 0.80

Return on Average Stock Holder equity

Years Net Income Average Stock

Holders Equity

Return on Stock

holders Equity

2004 665,227 3,262,823 0.20

2005 1,321,919 3,451,118 0.38

2006 1,904,988 3,889,300 0.48

2007 2,420,207 4,081,022 0.59

2008 2,532,295 3,656,505 0.69

2009 3,022,406 3,934,282 0.76

2010 1,141,621 4,065,563 0.28

Earning per share:

Years Net Income Average Shares

Outstanding

Earnings per Share

2004 665,227 2,55,494 2.60

2005 1,321,919 2,55,494 5.17

2006 1,904,988 2,55,494 7.46



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2007 2,420,207 2,55494 9.47

2008 2,532,295 2,55,494 9.91

2009 3,022,406 2,55,494 11.83

2010 1,141,621 2,55,494 3.62

Payout ratios:

Years Dividends per

Share

Earnings per Share Payout Ratio

2004 1.61 2.60 0.61

2005 3.69 5.17 0.71

2006 5.48 7.46 0.73

2007 7.88 9.47 0.83

2008 11.62 9.91 1.17

2009 9.53 11.83 0.80

2010 5.99 4.47 1.34

Solvency ratios:

Debt to asset ratio

Years Total Debts Total Assets Debt to AssetsRatio

2004 1,896,686 7,024,765 0.27

2005 2,916,486 7,968,453 0.33

2006 3,505,382 8,734,400 0.40



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2007 4,586,767 9,826,232 0.46

2008 4,897,101 10,395,041 0.47

2009 6,338,306 12,226,861 0.51

2010 8,377,229 13,613,012 0.61

Time Interest EarnedYears Operating Income Interest Expense Times Interest

Earned

2004 1,056,039 390,812 2.70

2005 2,082,064 760,145 2.73

2006 2,860,673 955,685 2.99

2007 3,724,574 1,304,367 2.85

2008 3,893,717 1,361,422 2.86

2009 4,648,489 1,626,083 2.85

2010 1,755,839 614,218 2.85

Interpretation of Analysis:

Liquidity Ratios:

The analysis of Pakistan Tobacco Companys financial statement shows that it has a high

tendency to pay its debts and to convert assets into liquid form within short intervals of

time.

The current ratio of PTC remained between 0.90 1.14 in the last six years and it

shows its ability to pay short term liabilities.



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The quick ratio of PTC ranged between 0.069 0.133 from 2005 to 2010. It shows the

companys ability to convert its current assets into liquid form (cash form) in order to

meet current liabilities.

On yearly basis from the year 2005 2010, we observed that the number of times

the total inventory or stock of the company was sold on the average of 2.25

times/year. It shows the sales of the company are on a very large scale and also

gives rise to the company opportunity to generate huge profits in the long run.

Average Account Receivables Turnover shows that how many times a company is

able to recover the amount of credit sales to people. PTC has shown a high Accounts

Receivables turnover rate which shows its high liquidity transformation rate.

Profitability Ratios:

Pakistan Tobacco Companies Profitability ratios clearly reflect its great ability to generate

huge profits and of generating dividends for its shareholders.

Average Assets turnover of the company ranges between 1.21 - 1.91 times per year.

It shows the generation of huge sales from the worth of assets of the company and in

the case of Pakistan Tobacco Company, it shows the firm's efficiency at using its

assets in generating sales or revenue- the higher the number the better.



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The profit margin of PTC lies between 31.27% - 40.61% in previous six years. It

measures the percentage of each dollars of sales that results in net income. A higher

profit margin indicates a more profitable company that has better control over its

costs compared to its competitors.

The return on assets of PTC ranges among 0.80 to 0.27 according to preceding six

years record. An overall measure of profitability is return on assets. ROA gives an

idea as to how efficient management is at using its assets to generate earnings. This

number tells you what the company can do with what it has, i.e. how many rupees of

earnings they derive from each rupee of assets they control.

Return on common stockholders equity of PTC varies between 0.28 0.76 between

the years 2005 to 2006. Another widely used profitability ratio is return on common

stockholders equity. It measures profitability from common stockholders point of

view. Return on equity measures a corporation's profitability by revealing how

much profit a company generates with the money shareholders have invested.

Averaging ROE over the past 5-10 years can give you a better idea of the historical

growth.

Earnings per share are a measure of net income earned on each share of common

stock. PTCs earning per share of last six years lies among 4.47 - 11.83. The EPS

formula does not include preferred dividends for categories outside of continued

operations and net income. Earnings per share serve as an indicator of a company's

profitability.

Payout ratio of this company ranges from 0.8 - 1.34. It measures the percentage of

earnings distributed in the form of cash dividends. The amount of earnings paid out

in dividends to shareholders. Investors can use the payout ratio to determine what

companies are doing with their earnings. Dividend payout ratio is the fraction of

net income a firm pays to its stockholders in dividend.



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Price earnings ratio is an oft-quoted measure of the ratio of the market price of each

share of common stock to the earnings per share. It is also called its "P/E", or simply

"multiple". The P/E ratio is a vital ratio for investors. Basically, it gives us anindication of the confidence that investors have in the future prosperity of the

business. A P/E ratio of 1 shows very little confidence in that business whereas a P/E

ratio of 20 expresses a great deal of optimism about the future of a business. It is the

valuation ratio of a company's current share price compared to its per-share

earnings.

Solvency Ratio:Solvency ratios measure the ability of a company to survive over a long period of time. It

provides a measurement of how likely a company will be to continue meeting its debt

obligations. Different countries use different methodologies to calculate the solvency ratio,

and have different requirements.

Debt to total assets ratio measures the percentage of total assets that creditors

provide. A metric used to measure a company's financial risk by determining how

much of the company's assets have been financed by debt. If the ratio is less than

one, most of the company's assets are financed through equity. If the ratio is greater

than one, most of the company's assets are financed through debt. Calculated by

adding short-term and long-term debt and then dividing by the company's totalassets.

The average value of Times interest earned of PTC is approximately 2.8 for previous

six years. IT PROVIDES COMPANYS ABILITY TO MEET interest payments as they come

due. Times interest earned (TIE) or interest coverage ratio is a measure of a

company's ability to honour its debt payments. The times interest earned lets the

creditor understand whether or not a company has sufficient income to cover its

interest payments requirements. It is calculated by taking a company's earningsbefore interest and taxes (EBIT) and dividing it by the total interest payable on bonds

and other contractual debt.

Financial Analysis



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Pakistan Tobacco Company (PTC) has maintained its growth momentum during the year;

scaled new heights with the achievement of milestones and made significant progress in

every facet of the business. This is especially pertinent as the Company has embarked upon

the 64th year of its operations in Pakistan. PTC has achieved record level of sales and

profitability during the year but due high level of taxation and country conditions the

company profitability ratios decreases. Operating profit of the company was Rs 60,196

million decreased by 67% from last year and profit after tax decreased by 69% to Rs 925

million. Companys contribution to the Governments revenue was an unprecedented

amount of over Rs. 26 billion, an increase of approximately 15% over the last year. Where as

the sales volume, at 36.8 billion sticks, grew by 8% during the year ahead of the industry

growth that was estimated at 2%. Market share also grew by 1.7 percentage points, further

strengthening company position as the market leader in the domestic tobacco industry.

Cost of Sales

Cost of sales increased by 14% over last year and this was mainly due to higher

production volumes and inflation. However, the Company was able to derive benefit from

economies of scale (highest ever production) and various cost control initiatives in its

supply chain. As a result, increase in cost per unit was contained at 6% over last year,

which is well below inflation.

Operating and Other Costs

Despite inflationary pressures and increased volumes, the Company continued its focus

on investment in its brands and people. A number of initiatives were undertaken in

marketing, but effective campaigns coupled with adoption of global best practices kept

marketing costs at the same spend level as in 2009. The Company considers talent a key

factor in driving its growth. In pursuance of its commitment towards attracting and



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retaining high quality talent, the Company maintained a competitive remuneration

package.

Moreover, the employees further benefited from the performance bonuses, a result of

the outstanding Company performance in 2010. These factors were the major drivers of

the increase in the administrative expenses by 15% over last year. Other income

increased by Rs 35 million in comparison to last year, and this was primarily due to the

prior year adjustments. Other expenses showed an increase of 36% in 2010 and this can

be attributed to the cost of restructuring and increased contribution to Workers Profit

Participation Fund (WPPF) and Workers Welfare Fund (WWF)

Cash Flows

Improved financial performance of the Company translated into a significant increase in

its operating cash flows. Though they were partially offset by higher dividend payments

and investment in plant and equipment during the same period, yet it resulted in a net

decrease in cash and cash equivalent amounting to Rs 947 million.

Plant Modernization

In line with its drive to invest in latest machinery and facilitate up-gradation in its

technology footprint to meet the industrys increased demand, the Company invested Rs

646 million in tangible fixed assets in 2010.This included induction of latest cigarette

making and packing machinery, modernization of tobacco curing facilities and

equipment inducted for adopting of modern energy optimization techniques. Moreover,

various process optimization initiatives were undertaken at both the factories to further

strengthen supply chain's competitive advantage.

Appropriation of Profits

The profit for the year, along with distributable profit at year end, has been appropriated

as follows:



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Dividend

The Company proposed a final dividend of Rs 2.10 (2009: Rs 4.75) per share in respect of

the financial year ended December 31, 2010, over and above the interim dividends paid

during the year. The final dividend shall subject to the share holder approval in their

meeting scheduled for April 22, 2011.

Business Challenges and Future Outlook

2010 was, indeed, a challenging year for the company due to the exigent circumstances

prevailing in the country. Despite these difficult circumstances and challenges, the Company

continued to deliver and achieve its business objectives.

This year also saw a major global tobacco player entering Pakistan through acquisition of

controlling share of Lakson Tobacco Company. As the focus of PTC shifts from local

competition to a global player, the Company looks forward to a healthy and level playing

field that will benefit the industry on the whole.

Illicit trade continues to be a key challenge and area of concern for the tax paying sector.For the time being, the Government initiatives seem to have contained the incidence of

smuggling and counterfeiting. However, the local Duty Not Paid (DNP)/illicit elements remain

the biggest threat and are proving to be a major hurdle in creation of a level playing field.

The outstanding performance of the Company for the year 2010 was not possible without

the dedication, hard work, enterprising spirit, and enthusiasm of its employees. The

Company is confident that it will continue to lead the tobacco industry responsibly and will



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maintain the growth momentum. PTC remains committed to increase sustainable growing

shareholders value by ensuring continuous focus on its strategy pillars of driving Growth,

enhancing Productivity and acting Responsibly all of which are delivered through our

Winning Organization

Contribution to the National ExchequerDespite the adverse change in operating conditions and its impact on our sales volume, the

Companys contribution to the exchequer continues to grow, with 2009 being higher by 19%

over last year. The Company paid a total of Rs. 38 billion in 2009 in the form of Federal

Excise Duty, Sales Tax, Custom Duties and Income Tax.

Auditor Report to share holders

We have audited the annexed balance sheet of Pakistan Tobacco Company Limited as at

December 31, 2010 and the related profit and loss account, statement of comprehensive

income, cash flow statement and statement of changes in equity together with the notes

forming part thereof, for the year then ended and we state that we have obtained all theinformation and explanations which, to the best of our knowledge and belief, were necessary

for the purposes of our audit. It is the responsibility of the Company's management to

establish and maintain a system of internal control, and prepare and present the above said

statements in conformity with the approved accounting standards and the requirements of

the Companies Ordinance, 1984. Our responsibility is to express an opinion on these

statements based on our audit. We conducted our audit in accordance with the auditing

standards as applicable in Pakistan. These standards require that we plan and perform the

audit to obtain reasonable assurance about whether the above said statements are free of

any material misstatement. An audit includes examining on a test basis, evidence

supporting the amounts and disclosures in the above said statements. An audit also includes

assessing the accounting policies and significant estimates made by management, as well

as, evaluating the overall presentation of the above said statements. We believe that our

audit provides a reasonable basis for our opinion and, after due verification, we report that:

(a) In our opinion, proper books of account have been kept by the Company as required by

the Companies Ordinance, 1984;

(b) In our opinion

(i) The balance sheet and profit and loss account together with the notes thereon have been

drawn up in conformity with the Companies Ordinance, 1984, and are in agreement with the

books of account and are further in accordance with accounting policies consistently

applied;

(ii) The expenditure incurred during the year was for the purpose of the Company's

business; and

(iii) The business conducted, investments made and the expenditure incurred during the

year were in accordance with the objects of the Company;

(c) In our opinion and to the best of our information and according to the explanations given

to us, the balance sheet, profit and loss account, statement of comprehensive income, Cash



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flow statement and statement of changes in equity together with the notes forming part

thereof conform with approved accounting standards as applicable in Pakistan, and, give the

information required by the Companies Ordinance, 1984, in the manner so required and

respectively give a true and fair view of the state of the Company's affairs as at December

31, 2010 and of the profit, total comprehensive income, its cash flows and changes in equity

for the year then ended; and

(d) In our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980

(XVIII of 1980), was deducted by the Company and deposited in the Central Zakat Fund

established under section 7 of that Ordinance.

Chartered Accountants

Islamabad

Date: March 16, 2011

Engagement partner: Sohail M Khan

Justification of Auditor Report to share holders

A.F. Ferguson & Co has audited the financial statement of Pakistan Tobacco Company

Limited and gives opinion regarding the fairness of these reports. The firm is a well

renowned auditor Firm in Pakistan. In the Audit report the Firm has given his opinion that the

company maintained all financial records in accordance with the Accounting and Auditing

Standards. There is no misstatements regarding any financial record and all necessary

information is provided by the company where and when required.

We have done the SWOT analysis, Ratio Analysis and financial analysis of the company andwe are able to understand that the company is operating its business very effectively andefficiently in Pakistan. The company is utilizing all of its available resources to be the bestcigarettes making company in Pakistan. The financial statements of the company have beenprepared in accordance with approved accounting standards as applicable in Pakistan.Approved accounting standards comprise of such International Financial ReportingStandards (IFRS) issued by the International Accounting Standard Board as are notifiedunder the Companies Ordinance, 1984 (the Ordinance), and provisions of and directivesissued under the Ordinance. In case requirements differ, the provisions or directives of theOrdinance shall prevail. The preparation of financial statements in conformity with IFRSrequires the use of certain critical accounting estimates. It also requires management toexercise its judgments in the process of applying the Companys accounting policies. Thecompany evaluates all the requirements and applies it.

The auditor conducted its audit in accordance with the auditing standards as applicable inPakistan. The auditor plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements of Pakistan Tobacco Company are free of any materialmisstatement. The auditor examined the financial statements on a test basis; evaluate the



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evidence supporting the amounts and disclosures in it. The auditor also assessed theaccounting policies and significant estimates made by management, as well as, evaluatingthe overall presentation of the financial statements. The auditor believe that their auditprovides a reasonable

CRUX

From being just a single factory operation to a company which is involved in every aspect ofcigarette production, from crop to consumer, Pakistan tobacco company have evolved intoone of the leading corporations in Pakistan. Pakistan tobacco company run two state of theart factories and employ more than 1,700 people while indirectly providing livelihoods tomore than a million people who are involved in various aspects of the business. Pakistan

Tobacco Company is market leader and contributes more than Rs. 30 billion in excise dutiesand taxes to the Government. Companys strategy reflects companys vision, being thechampions of growth, productivity, responsibility and a winning organization. Theperformance of the company during the year 2010 was severely impacted by a constrainedeconomy, floods, stringent regulations and rising Government taxes. Company has investeda huge amount for buying new and advance Technology during the year which increases itssales, quality and production quantity. Pakistan Tobacco Company is part of a growing

industry and the trends in the sales for the five years studied have been positive. As saidearlier the company is enjoying a major share of the market through most of its brand beingthe market leader. The major competitors of the company are importing their finished goodsstock from their operations in other countries and are well-established companies too. PTCstill enjoys the control over the local market, but todays customer is more price consciousand if PTCs competitors give competition through improved production facilitates andreduction in costs PTC might not be able to transform to low cost production facilities inshort span of time. Thus for the last six years PTC has been investing in new tangible assets.

To do so the company has been taking advantage of long term loans and leasing. This hasled to an increase in companys financial expenses. The company also had to take shortterm loans to run day to day expenses as most of its operative income is unstable andcannot be reliable for day to day expenses. The need for short term financing also escalateddue to increased financial expenses as a result of long term borrowing. Thus short term

financing also resulted in an increase in financial charges.The overall position of the company is very much effective and efficient. The company iscontributing a very sound role in the economy of the Pakistan.

References

Annual reports of Pakistan Tobacco Company 2010, 2009www.ptc.com.pk

Pakistan Tobacco Final for Print

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