The Dynamics of Tobacco Industry in Pakistan

Abstract

The following report has been produced on two of the biggest players in the Pakistan tobacco industry, namely, LTC and PTC and their impact on the economy. The tobacco industry has also been reviewed in this regard to draw pertinent and relevant conclusion. Tobacco industry is one of the fastest growing industries and is one of the greatest contributors of the national exchequer, contributing almost 30 Billion to the economy. The industry is, however, subject to numerous regulations and human rights’ movements, which threatens it. Both technical and fundamental analysis has been done in order to draw relevant conclusions as to the impact that both lakson and Pakistan tobacco group have on the economy. The sales have, however, been increasing in spite of that. In 2005, both companies had sales in excess of Rs. 20 Billion. This was an increase of 20% in case of PTC and 18% in case of LTC over the last year. Other measures of profitability have also been increasing, such as gross profit, operating profit and net profit. However, the net profit increase has slowed down. This may be owed to increase in government levies in the last two years. PTC seems to have better consolidation and streamlining of operations. Its turnover is on the increase (Fixed Asset Turnover increased from 7.1 to 8.1 between 2004 and 2005). However, LTC’s Fixed Assets Turnover declined from 11.8 to 10.22. However, both firms face some issues in managing their liquidity. PTC seems to have a very high stock level, which implies that cash may have been unnecessarily tied up. This is further reinforced by the very small cash ratio of 0.016 times. LTC on the other hand, has kept too much cash in hand amounting to about 1.03. This shows that the company is not taking advantage of its investment potential. Dividend yield of PTC is close to 5 due to its low share price in comparison to LTC which has a yield of only 0.07. The share prices of PTC at the end of 2005 were 50 and 249 respectively. The EPS of LTC is also much higher being 32 as opposed to 5 of PTC. The company therefore enjoys greater strength in terms of capital gains for investors. The future projections have been made to analyze whether or not the market was trading at its fair value in 2005. The growth taken for this purpose was the long-term growth rate expected to be 3% although the average growth rate for PTC came out to be 10% and that for LTC came out to be 20% based on the formula: ROE * Retention Rate. It was felt that currently the industry is in a period of hyper growth and will stabilize to 3% in the long-run as predicted by the industry analysts. The latest slump in stock market has put a downward push on the prices of both. However, PTC has again experienced sharper trends between overselling and overbuying, rising and falling 2-3 times each month, in the last two months. I recommend that at present stock market is very risky business and any investor should take due care in evaluating the strength of any stock. PTC seems to be riskier at this point and investors should attempt to liquidate their stock on the days when the stock has picked up after a period of over-selling or hold on to the stock until the market stabilizes. Further investment in PTC is not wise. LTC again suffers from the same effects with its price falling from above Rs. 299 to Rs. 277 in June alone. In fact, the PTC stock has seen a change from Rs. 68 to Rs. 66 which is far narrower than that of LTC.