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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
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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
30,615 Million Rupees
2006
35,715 Million Rupees
2007
40,889 Million Rupees
2008
49,054 Million Rupees
2009
57,544 Million Rupees
2010 60,196 Million Rupees
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Years Property Plant and Equipment
2004 3,564 Million Rupees
2005 3,798 Million Rupees
2006 4,529 Million Rupees
2007 5,154 Million Rupees
2008 5,600 Million Rupees
2009 5,952 Million Rupees
2010 5,824 Million Rupees
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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
2006 5534 Million 2,841 Million 1,905 Million
2007 6516 Million 3,720 Million 2,420 Million
2008 7277 Million 3,860 Million 2,532 Million
2009 8224 Million 4,589 Million 3,022 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