Part 1.project objective and overall research approach 1.1: Introduction: In this section, introduction, brief profile, vision of Pakistan Tobacco Company (hereafter referred as “PTC” will be given) 1.1.1: Profile of PTC: 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 1.1.2: Vision:
“Like a lighthouse in a dark, stormy sea... Our vision serves as a beacon of light and hope, helping us navigates the waters” 1.1.3: MISSION STATEMENT:
“ Transform PTC to perform responsibly with the speed, flexibility and enterprising spirit of an innovative, consumer focused Company” 1.1.4: STRATEGIC OBJECTIVES:
“Our strategy reflects our our vision of being the champions champions of Growth, Productivity, Responsibility Responsibility and a Winning Winning Organization” Organization”
1.1.5: History and Current State: From being the first worldwide company to set up its business in Pakistan in 1947 and launch operations out of a stockroom 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 62 years is the effort that Pakistan Tobacco Company has established in the development of the country. By being involved in the operation for modern agricultural and industrial practices, we have helped in the development and progress of the agricultural and industrial sector in the country.
Reasons to select this Topic: It was our first experience to conduct a comparative study of business and financial performance so to develop analytical skills necessary for applying basic financial concepts and tools in the decision-making process in JOB Career we selected this topic. We think this Research work will be helpful in budding Key consulting skills in us in order to successfully support management at a strategic level. Another objective was to get a exact experience to financial Documents and valuation, credit analysis, and to identify trends and patrons in its development for a specific period.
Reasons to Select this Company Pakistan Tobacco Company is a biggest shareholder of tobacco sector in Pakistan and facing a strong competition from Lakson Tobacco Company Pakistan. This competition is since the Birth of these companies but still PTC is in better position against Lakson. We think through this Financial and Business analysis we may know what are the advantages to PTC and policies of the PTC that are giving this position to it. Major cause of selecting PTC is that to analyze the business of Tobacco Company as it is a highly risky sector for the future of human life as it is dangerous for health; there is always a risk of ban on its products as its product advertisement is banned in Pakistan. Here we want to know about the effect of this Ban on profits of PTC. Pakistan Tobacco Company is Consumer of Tobacco; we want to know the effect of its demand for cultivation of tobacco in Pakistan. Pakistan Tobacco Company is a source of direct as well as indirect employment in Pakistan.
Project Aims: Aim of this project is to analyze •
The working and Business strategies of Tobacco industry in Pakistan
•
Economic Share of Tobacco industry
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Business Performance of PTC for year 2007-2009
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Financial Performance of PTC for year 2007-2009
Research Objectives: The following research objectives 1. To analyze the financial performance i.e. 1 Profitability ratio of PTC. Liquidity of PTC. Working capital management Solvency of PTC. Activity situation of PTC. 2. To analyze Business performance .i.e. BCG matrix Pestel analysis Swot analysis Porter five forces model
Research questions: 1 2 3 4 5 6 7
1. What is the profitability position of PTC? 2. What is the liquidity position of PTC? 3. What is the working capital management position of PTC? 4. What is the solvency position of PTC? 5. What is the activity position of PTC? 6. What are the political, economic, social and technological challenges for PTC? 7 What is the condition of Tobacco industry of Pakistan?
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Overall Research Approach: The overall research approach which we will going to adopt in our project is based on financial performance of the business i.e. ratio analysis of PTC .and business performance of the PTC based on BCG matrix ,PESTEL analysis, SWOT analysis, PORTER five forces model. In order to conduct this analysis we will use three year financial and business repots of the PTC with comparison of LTC (Lakson Tobacco Company). The research aim, objectives and research questions served as a framework in which research was carried out. The result section of this report will give an account on achievement of research aim and objectives. This will be followed by conclusion.
PART 2 – INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUES
Sources of Information: There are two types of data for the course of project and research. One is Primary Data (data on first hand with no mathematical and statically operate) and Secondary Data (already processed data prepared by someone else but is used for your own purposes). In our project it was very difficult for us to collect data by physically visit so we used mostly Secondary data in our project
2.2: Description of Methods Used to Collect Information: Primary Data was collected data through our observations and from the general public, shopkeepers, and sales agents of the respective company with the help of Questionnaires. For the sake of Secondary data we used Internet. In order to get financial data we used official website of the Both companies, annual reports of three years are used for financial Information of companies, there was some data available in research articles, e-Books and some other websites related to our projects. For the Different models used in our projects we consulted our University library and web.
2.3: Limitations of Information Gathering: As we are conducting business and financial performance of the Pakistan tobacco Company against Lakson Tobacco Company. It was easy to get access to the financial information of these companies through internet and official website. But physical visit of these companies to observe the actual practices of these companies was very difficult. As Manufacturing Plants and were situated in Karachi and Jehlem and we do not have any reference. In the conduct of this project, the information was collected from sample of customers, Sales agent, shopkeepers and distributors. Due to no reference to the company’s official we use those Respondents that were easily available to us. So those persons may not actual representative in their characteristics.
2.4: Ethical Issues that may arose After Research: As the data collected for our project is mostly secondary source of information i.e. already processed data and readily available on net so company cannot claim any ethical issue against us. We are not disclosing any secret of the companies on any objectionable material.
2.5: Detailed Description of Accounting & Business Techniques Used in our Project: For the course of our projects we used the following Models and techniques to find out Financial and Business performance of the company PESTEL Analysis SWOT Analysis BCG Matrix RATIO Analysis • • • •
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PESTEL Analysis
PEST analysis (as Kotler (1998) claims that) is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. PEST stands for POLITICL, ECONOMICAL, SOCIAL, and TECHNOLGICAL aspects of the business, sometimes two additional factors, environmental and legal, will be added to make a PESTEL analysis. As we are conducting analysis of such an industry that have great impact on Environment and Law so these two factors are also analyzed. The headings of PESTEL are a framework for reviewing a situation, and can in addition to SWOT and Porter’s Five Forces models, be applied by companies to review a strategic directions, including marketing proposition. The use of PESTEL analysis can be seen effective for business and strategic planning, marketing planning, business and product development and research reports. PESTEL also ensures that company’s performance is aligned positively with the powerful forces of change that are affecting business environment (Porter, 1985). (www.coursework4you.co.uk)
Bcg Matrix The BCG matrix method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash.
SWOT ANALYSIS It is a planning tool used to understand the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business. It involves specifying the objective of the business or project and identifying the internal and external factors that are supportive or unfavorable in achieving that objective. Weihrich (1982) Kotler (1998) urged that an organization should conduct SWOT analysis. It is often used as part of a strategic planning process. The analysis can be performed on a product, on a service, a company or even on an individual. Done properly, SWOT will give you the BIG PICTURE of the MOST IMPORTANT FACTORS that influence SURVIVAL and PROSPERITY. As well as a PLAN to ACT ON.
RATIO ANALYSIS Ratio Analysis is a tool used by Businesses to conduct a quantitative analysis of information of a company’s financial statements. Stakeholders including managers, employees and the government may be interested in analyzing the accounts of the
business. These ratios Indicate long term and short term financial stability of the organization and areas of strength, which can be built upon to improve future performance or encourage potential investment in the business. Liquidity, Profitability, working capital and market ratios are computed for conducting financial analysis of PTC and LTC.
PART 3: ANALYSIS AND DISCUSSION Industry’s OVERVIEW: The Tobacco industry in Pakistan continually to be a source of revenue contributing some 27.5 billion rupees per year - the equivalent of 4.4% of Pakistan's GDP through tax generation, employment through development, and foreign exchange. Although the regulatory and governmental steps hindered full strength growth in Tobacco, the major players and the industry as a whole faced the external environment with great capability and care. However, there was severe threat from the illegal production and smuggling of raw and finished products in the country. In terms of smoking prevalence, the number of smokers continued to increase among females and the urban population. In spite of a number of companies operating in Tobacco industry of Pakistan, The Pakistan Tobacco Co Ltd continued to lead in 2009. It was followed closely by Lakson Tobacco Co Ltd. Notwithstanding strong competition between them, these two companies cooperated with regard to plans to secure their volume shares from illegally traded supplies of their brands that were smuggled into Pakistan at lower prices. The government has currently not taken any action to stop this illegal trade, nor is it expected to do much during the predicted period. Given the increase in the number of deaths arising from Tobacco consumption, Pakistan’s Ministry of Health has mandated to have clear warnings covering 40% of the major display area on cigarette packets as from 1 January 2010. Although this is being done to discourage consumers – especially the youth – from heavy use, this step is being protested by manufacturers ,However, addicted smokers cannot be expected to give up smoking in haste, hence no major downward impact on sales is expected during the forecast period.
SWOT Analysis of Pakistan Tobacco Company Pakistan Tobacco Company is a part of British American Tobacco which is the parent company of PTC. PTC was established in 1947 immediately after the partition of SubContinent. The parent company has been doing business for last 100 years in 180 countries in present. PTC is a very large organization and it does not only manufacture cigarettes but also produces tobacco itself. For this purpose the company establishes farms and helps farmers who cultivate tobacco by providing to them funds, technical assistance and many more facilities just to encourage tobacco cultivation in Pakistan especially in NWFP. PTC has introduced six brands in Pakistan, namely, Dunhill, Benson & Hedges, Capstan by Pall Mall, Embassy, John Player Gold Leaf and finally Gold Flake. All these brands are well-known brands of Pakistan. Now we will see the strengths, weaknesses, opportunities and threats related to PTC. Strengths
(1) The parent company of PTC has a huge business in 180 countries in the world, which can flourish the PTC by providing funds and experience from other countries. (2) It can produce tobacco locally which is the core raw material for the production of cigarettes. The land of NWFP and Punjab is very suitable for the production of raw material. By doing so, It can reduce the cost of material. (3) PTC has two manufacturing sites at Jehlem (Punjab) and Akora Khattak (NWFP). Both sites are at very suitable locations because the labor is very cheaper in the surroundings of these two sites. The company can take the advantage of cheaper labor to increase its production level. (4) PTC has a manufacturing plant having modern technology for production. (5) The brands introduced by the PTC are well reputed both in the market and in the customers. (6) PTC has a workforce of about 1700 employees that is very diversified and competent, provides PTC a competitive edge in the market. (7) PTC has 68% market share. Which is, no doubt, a big part of the total market of tobacco in Pakistan? (8) It has a well developed integrated supply chain system, right from the crop to the consumer. This shows the efficient performance of its management.
Weaknesses (1) First weakness of the PTC is its business itself because in Pakistan smoking is a controversial product. (2) PTC has failed to sue against the low quality brands in the market not paying complete tax to FBR yet have a prominent place in the market. (3) PTC has a good image in the market and to maintain this image against competitors it has to pay countless expenses. (4) There is lack of management and incapability to perform according to its mandates.
Strengths and weaknesses were the internal factors. Now, we will see the external factors affecting the PTC. Opportunities It will show the opportunities that the PTC can avail from the outside environment. 1) As PTC has already a big market share of the total market. It shows that PTC
has availed all the available opportunities from the market. So, it can see for the prospects and can plan to avail them. As the brands offered by the PTC are available almost at all shops in Pakistan. 2) PTC has an opportunity to expand its business in the neighboring country Afghanistan as; it will not be difficult for PTC because there is no big difference between these two countries. 3) PTC can introduce its New smoke free tobacco products as it has a great demand in local market 4) This opportunity is justified by the strong and successful operations of area sales office at Peshawar that is just like Afghanistan .
Threats Now we will analyze the threats that can be faced by the PTC. 1) First of all the big threat for PTC is its business itself, as smoking is considered unethical in the Pakistan so there are many social organizations discouraging the sale and purchase of cigarettes. 2) Second threat is a big problem not only for the PTC but for all the industries in Pakistan that is smuggling. There are many imported brands in the Pakistan that are smuggled from neighboring countries without paying taxes and are sold at low prices. 3) An energy crisis is a very big threat for PTC that can affect the cost efficiency and production efficiency of company. 4) Day by day increase in tax rates is also a big challenge for PTC. 5) Government regulations are also hindrance for independent sale of cigarettes.
RATIO ANALYSIS Ratios
PTC 2009
LTC
2008
2007
2009
2008
2007
15.00
16.00
16.00
17.00
14
5.00
5.00
5.00
3.00
4.00
5
Return on Assets
24
24
25
9.00
11.00
6.00
Return on Equity
0.71
0.70
0.65
14.00
18.00
16
Gross Ratio Net Ratio
14.00
15.56
EPS
17.95
11.83
9.91
9.17
Current Ratio
0.91
0.91
0.96
1.98
1.99
2.56
Quick Ratio
0.03
0.11
0.12
0.11
0.10
0.25
-0.06
-0.05
-0.02
0.31
0.32
0.39
Assets Turnover Ratio
4.71
4.72
0.04
2.88
2.64
3.40
Inventory Turnover Ratio
2.33
2.86
0.02
1.44
1.31
0.84
104.78
148.39
1.43
17.29
39.24
80.48
Debt Equity Ratio
2.87
2.88
0.03
1.55
1.57
1.40
Price to Earning Ratio
8.88
10.73
0.16
Networking Capital Ratio
Interest Coverage Ratio
15.30
Dividend pay out Ratio
0.81
0.97
0.01
Discussion on PESTEL Analysis of PTC
It is very useful tool for determining the macro-environmental factors that a company has to face. PESTEL stands for Political, Economic, Social, Technological, Environmental and Legal analysis of a company. It can be used to understand market growth, business position, direction and potential of business.
Political Factors: Now we will see the political factors influencing the business of PTC. Tax Rate: The government of Pakistan has no proper strategy for tax rates. It can be increased at any time without any reason just to increase the national income. Labor Laws: There is no proper implementation of labor laws in Pakistan. Recently the government of Pakistan has increased the minimum labor pay. Political Stability: It is a very big challenge for the business. As every day, some new political issue arises that may give uncertainty in stock market.
Environmental Laws: These are also big challenge for the businesses because government and other environmental organization compel
businesses not to affect the natural environment and humanity. Tobacco industry has to face many such problems from government. Health: Tobacco industry has to face many health issues. As a strong publicity is done to prevent smoking. We often see such messages that smoking is injurious to health, smoking causes cancer etc. Economic Factors: Now we will see the economic issues that are being faced by PTC. Interest Rate: It is not stable in Pakistan. Increasing interest rate can increase the cost of capital. Inflation Rate: Inflation rate is a very big challenge for PTC. Because it can affect the price control and ultimately the market place of the business. Now a days Pakistan is facing the high inflation rate. It is about 15.48% according to a report published in November 2010. Exchange Rate: Exchange rate can also increase the cost of goods and raw material imported from foreign countries. PTC has to import cigarette machinery, spares, finished cigarettes and raw materials from other countries. So change in exchange rate can affect the cost of PTC. Economic Growth: PTC is largest cigarette company in Pakistan. It has a very economic significance. It pays every year about 30 billion tax to FBR. Social Factors: Now we will see the social factors affecting the operations of PTC. Social factors are determined by the individual’s tastes and demand for the product of company products. PTC has well defined target customers for all of its offered brands. But as the people are becoming more health conscious the
demand of such products that can affect the health badly is decreasing day by day. As a proof the sales volume of PTC has decreased about 0.7% from 20082009. The company also has got EH&S Excellence Awards For Sustainable cleaning and Water Recycling.
Technological Factors: Technology has a great impact on the success of business. As the technology is becoming the modern with every day passed. PTC has a modern plant to thresh raw tobacco. PTC has consumed for information technology Rs.135, 568,000 in 2009.
Environmental Factors: PTC has played an important role to reduce environmental issues. For this purpose it has got EH&S award for saving the environment from pollution. As the smoking is a controversial issue so the companies conducting such business tend to take steps for the betterment of environment and society to capture the sympathy of people. PTC is working according to the Pakistan Environment Protection Act. 1972. The parent company of PTC has established its internal EHS (environment, health, safety) policy and compels its affiliates to comply with this policy. PTC claimed that it is involved in monitoring and reporting its environmental performance for the Global Reporting Initiative GRI upon which it will communicate publicly its economic, environment and social performance. Both factory sites are re-certified with ISO14001 earning an “Evergreen” status.
Legal Factors: Legal issues are those issues which are imposed by law and to comply with them is necessary. Pakistan law prohibits the sale of tobacco products to child i.e. people less than age of 18 years. PTC is abiding by this law and also tries to discourage it. Law demands that the tobacco sellers should inform their customers about the harmful effects of smoking. It is keeping all the accounting records according to the requirements of accounting standards required internationally and locally. It
follows its employment principles strictly. They say that their people are the recognition of their business. Topics covered by the Employment Principles include: • • • • • • • • •
• • •
Equality of opportunity and non-discrimination. Internal communications and the free flow of ideas. Worker representation and freedom of association. Fairness at work and the unacceptability of harassment and bullying. That we do not condone or employ child labour. That forced or bonded labour is completely unacceptable. Performance responsibility. Health, safety and environmental responsibility. Community contributions and skills development for employees and communities in markets where our companies operate. Personal development and learning. Reasonable working hours and family friendly policies. Fair, clear and competitive remuneration and benefits.
Discussion on BCG Matrix of PTC: PTC has total five brands in the market to capture various segments of target market. 1) 2) 3) 4) 5)
John Player Gold Leaf Dunhill Gold Flake Capstan Embassy This is the each brand position in BCG Matrix .
Discussion on FINANCIAL ANALYSIS of PTC
Liquidity: Liquidity means a firm’s ability to meet its short term financial obligations on time, as we are concerning with Pakistan Tobacco Company (PTC), the liquidity of position of the PTC is not in favorable situation, the current ratio of the PTC is less tan one, the favorable situation is that current ratio must be equal to one, this is indicating that the PTC is unable to meet its short term obligations, the quick ratio of the PTC is also not good, the networking capital ratio, in in negative sign, which is indicating that PTC is unable to pay out its short term obligation, negative networking capital ratio is also indicating that PTC is funding its long term projects from its short funds (Mr. Hafiz Imran), as whole the liquidity ratios of the PTC remains stable in 3 years. On the other hand, the company we have selected for comparison Lakson Tobacco Company (LTC), the liquidity position of the LTC, is in better situation as compare to the PTC, the current ratio is more than 1, quick ratio is in better figure, the networking capital ratio of the LTC is also in positive figure, it is indicating that LTC is in better position to pay out its short term obligation.
Activity: Activity ratios means the ability and efficiency of the management of the entity towards the utilization of the resources, the activity ratios of the PTC indicating that management of the PTC is efficient towards the utilization of the resources, the total assets turnover ratio of the PTC is quite good as it is more than 4, where as the inventory turnover ratio of the PTC is better, activity ratios almost remain same in the 3 years. On the other hand, the activity position of the LTC is not good as compare to the PTC, it is indicating that the management of the LTC in not effective as PTC, the total asset turnover ratio and inventory turnover ratio of the LTC are less to the PTC which indicating the weakness of the LTC management.
Profitability: Every business is conducted with the perspective of earning business, the profitability ratios are good indicator to examine the Profitability of the firms, as we have discussed the PTC is the largest tax generator in Private sector of the Pakistan, its main and basic reason is that PTC is earning very handsome profits, the on the assets ratio of PTC is showing a very attractive results as it is approximately 25% in 3 years, return on equity is also showing good results more than 70% in 2008 and 2009, where as it has improve from 2007 from 65%, net profit margin of the PTC is also good and remains same in 2009,08,07, Earning per share is also attractive of the PTC, it is also improve from 2007 result. On the other hand, LTC profitability showing a mix trend as compare to the PTC, Return on Asset ratio and return on equity ratio are less to the PTC, where as the net profit margin of the LTC is close to the PTC, EPS and Gross Profit Margin if the LTC is more attractive as compare to the PTC.
Debt Ratios: Debt ratios are tell us about the firm’s ability to pay out its long term obligations, the Debt Ratios of the PTC indicating that PTC is in better position to meet its long term obligations, the interest coverage ratio of the PTC indicating that PTC is in better position to pay its finance cost, but this ability has decreased from 2008-2007, butt still it is in good position, debt equity ratio is also stable in 3 years, it is indicating that PTC is mostly funded from its own funds, which is good for PTC. Where as, the LTC debt ratios are showing good results but it is less as compare to the PTC, the interest Coverage Ratio of the LTC is indicating that LTC EBIT has the ability to meet its finance cost round about 17 time in 2009, the debt equity ratio of the LTC is indicating that it is also mostly funded from its internal resources.
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