A SWOT Analysis The Tobacco Industry The tobacco industry is a source of revenues, employment and foreign exchange for the country. The industry has to pay very high excise and sales tax while complying with various strict rules and regulations of the government. During 2004-2005, it contributed above Rs. 28 billion as Central Excise Duty and Sales Tax. Despite its contribution to the economy, the industry is highly criticized for its negative impacts on the society. Structure of Industry: In Pakistan the industry consists of: Farmers who grow tobacco. * Firms that convert the raw materials into finished goods (Cigarettes). * Exporters and importers of tobacco and its products. Size and number of sellers: In Pakistan, tobacco cultivation occupies a relatively small area of 0. 27% of the total irrigated land. The country has been divided into various zones depending on the type of tobacco being grown in that region.

The major firms involved in the manufacture of finished goods and exports include ten players: * Pakistan Tobacco Company * Lakson Tobacco Company Souvenir Tobacco Company * Saleem Cigarette Industry * Universal Tobacco Company * Imperial Cigarette Industry * Khyber Tobacco Company * International Cigarette Industry * Walton Tobacco Company * Sarhad Cigarette Industry Of these firms Pakistan Tobacco Company is the market leader with Lakson Tobacco Company in second place. Number of buyers: The firms that manufacture finished goods act as purchasers themselves, buying tobacco from the farmers, they serve as intermediaries that purchase, process and resell. In the local market, Twenty-nine percent of men and 3. % of women smoke cigarettes regularly, concluded the National Health Survey, while the Pakistan Society of Cancer Prevention says 37% of men and 4% of women over 15 years of age are smokers. According to Pakistan Pediatric Association, 1,000 to 1,200 children between the ages of 6 and 16 years take up smoking every day. Cigarette consumption in Pakistan is five times higher than in India, 620 cigarettes per adult per annum against 119 for India. This shows that the market for tobacco industry is very immense locally. Chewing tobacco is in demand in the villages.

Along side this; various countries are also acting as buyers for the tobacco industry. Product differentiation: The major product differentiation exists between chewing tobacco and cigarettes and cigars. The main differentiation exists between the manufactured goods in the form of branded cigarettes. The firms target different segments of the society with different price levels. Differentiation also exists between imported and local cigarettes and cigars. Consumers are willing to pay a premium price for imported products especially cigars.

Entry conditions and government regulations: There are no entry conditions as such but when a company enters the industry, it has to abide by all the rules and regulations of government. This is very costly especially in terms of advertising. The firms have to inform the consumers about the potential health hazards related to tobacco products. This implies that in order to enter as a manufacturer, heavy investment is required. The government is providing incentives to the tobacco growers in order to promote the industry.

This is being done through the Pakistan tobacco board. The board tries to find out their problems and to educate them about the cultural operations, plant protection measures, picking and curing operations. Other responsibilities of the board are to regulate, control and promote the export of tobacco and tobacco products, and to fix grading standards. The board is also helping in the research and development to improve the quality. It looks after the interests of the industry. Demand and supply:

The tobacco board also manages the demand and supply in the industry. According to legal requirements, the tobacco manufacturing and exporting companies are required to inform their tobacco requirements by the 21st of October to the Pakistan Tobacco Board. After discussions between the Board and other stakeholders like buyers, growers, dealers, etc. , and taking into account factors like crop size, prices, domestic usage and exports, these figures are finalized. In this way the growers get a rough estimate of how much they should grow.

This creates a balance between demand and supply. The Pakistan Tobacco Board, in collaboration with tobacco companies, holds meetings in the tobacco growing areas to inform the growers about the requirements of tobacco companies. Image: The industry has a negative image among its consumers and the general public. This is due to the various health hazards associated with tobacco consumption. People are also blaming the government for its support for the industry. Smoking is the cause of lung cancer in 90% of the cases. Its users get addicted to it.

Although the companies can not change the nature of their product, they are trying to build a socially responsible image in the eyes of the consumers. PTC is currently engaged in various programs such as a-forestation, Mobile doctors program, Youth smoking prevention, learning resource centers. The laskson group has set up Lakson medical center (Sahiwal hospital) and a Medical complex in Sawabi NWFP. Price: The government fixes the lowest price that firms can pay to growers. There is a restriction that price for the current year can not be lower than that paid in the preceding year.

The tobacco board has specified the criteria for fixing prices. Smuggling is resulting in revenue leakage for the government. Some groups say that high taxation on the tobacco industry is encouraging smuggling. Future plans: To further improve the quality of tobacco in Pakistan the PTB imported two numbers of modern Tobacco Bulk Curing Barns from Greece. PTB, in collaboration with the growers and manufacturers is examining facilities of fabrication of cheaper versions of such barns locally which can be operated on C. N. G. or other alternate and cost-effective energy sources.

SWOT Analysis The tobacco industry’s strengths, weaknesses, opportunities & threats are presented below: Strengths The tobacco industry is a major player among the sources of revenue for the government. * It is a huge sector that employs many people and, as such, is a source of benefit for the country in its current times of high unemployment & instability. * The FDI (Foreign Direct Investment) for tobacco industry just in the Fiscal year ’08 was 9. 2 million USD, followed by 3. 4 million (USD) from July ’08 to Feb ’09. That indicates a huge amount of FDI flowing to the country.

Tobacco cultivation grounds take up only about 0. 27% of the totally irrigation land in Pakistan. Weaknesses * The tobacco industry is filled with pirates who bring to the country illegal cigarettes & cigars, which means that the industry’s true profitability is undermined. * The excessive amount of regulation that exists upon entry in the sector and selling of the good deters further development of companies. Opportunities * Concluded upon a study by the State Bank of Pakistan, Pakistan’s tobacco sector could export further to a number of developed & developing countries. If it is successful in ceasing the illegal trade of cigarettes & cigars in the market, the industry will be able to attract more foreign investment. * The current number of legal traders could be increased by softening the amount of regulation. Threats * The industry itself poses a big threat to the nation, as it is a dangerous product involved in causing various severe diseases. The threats to the industry, however, include: * The society in general continues to get more educated in terms of illness & diseases caused by tobacco, which poses a threat to the extinction of the industry, however, it is a far-fetched idea. The illegal trade going on in the market poses a threat to legal foreign traders who might abandon the industry if this problem is not curbed. | 2001| 2002 | 2003 | 2004 | 2005 | 2006| A. Liquidity:| | | | | | | 1. Liquid Assets:| 96. 5| 1080. 0| 686. 5| 1717. 0| 1464. 9| 1075. 8| (1)Cash| 91. 5| 1075. 0| 681. 5| 412. 8| 1459. 9| 670. 7| (II)Investments| 5. 0| 5. 0| 5. 0| 1304. 2| 5. 0| 405. 1| 2. Other Current Assets| 5853. 8| 5363. 3| 1209. 6| 710. 8| 1386. 0| 849. 7| 3. Inventories| 0. 0| 0. 0| 4889. 4| 4555. 8| 4895. 4| 5812. 8| 4. Current Assets | 5950. | 6443. 3| 6785. 5| 6983. 6| 7746. 3| 7738. 3| 5. Current Liabilities| 5500. 9| 5518. 4| 6326. 0| 6274. 5| 5878. 9| 5677. 1| 6. Total Liabilities| 6091. 3| 5947. 5| 6424. 4| 6278. 2| 5880. 8| 5677. 1| 7. Net Current Assets| 449. 5| 924. 9| 459. 5| 709. 1| 1867. 4| 2061. 2| 8. Contractual Liabilities| 3050. 0| 2049. 3| 1709. 5| 1005. 8| 406. 2| 1296. 6 | 9. Net liquid assets | -5404. 3 | -4438. 4 | -5639. 5 | -4557. 5 | -4414. 0 | -4601. 3| | | | | | | | B. Fixed Assets:| | | | | | | 1. Fixed Asset At Cost| 5559. 0| 6329. 7| 7016. 9| 8039. 0| 9573. 9| 11442. 5| 2.

Fixed assets net of accumulated depreciation| 3798. 4| 4019. 6| 4472. 9| 5041. 7| 5833. 0| 6955. 8| 3. Depreciation for the year| 399. 3| 426. 1| 460. 0| 572. 4| 889. 7| 860. 2| 4. Total assets | 9748. 8| 10462. 9| 11258. 4| 12025. 3| 13579. 3| 14694. 1| | | | | | | | C. Operation:| | | | | | | 1. Gross sales| 35615. 5| 37048. 0| 38380. 1| 45144. 9| 54015. 4| 56411. 6| (1)Local sales| 35615. 5| 37048. 0| 38380. 1| 45143. 5| 53994. 5| 56407. 9| (2)Export sales| 0. 0| 0. 0| 0. 0| 1. 4| 20. 9| 3. 7| 2. Cost of Sales| 31711. 2| 32285. 6| 32654. 8| 38425. 9| 45391. 4| 46687. 7| 3.

Gross profit| 3904. 3| 4762. 4| 5725. 3| 6719. 0| 8624. 0| 9723. 9| 4. Overhead and Other Expenses| 34275. 9| 34992. 2| 36375. 8| 42148. 3| 49388. 4| 51238. 7| 5. Operating profit| 1356. 2| 2095. 4| 2047. 5| 3044. 2| 4718. 9| 5311. 2| 6. Financial expenses| 380. 4| 288. 7| 131. 9| 55. 7| 54. 7| 61. 8| 7. Net profit before tax| 975. 8| 1806. 7| 1915. 6| 2988. 5| 4664. 2| 5249. 4| 8. Tax provision| 251. 9| 416. 6| 488. 9| 628. 2| 1498. 3| 1705. 3| 9. Total amount of dividend| 196. 3| 578. 9| 704. 5| 897. 2| 1276. 7| 2661. 0| 10. Total value of bonus shares issued| 118. | 71. 3| 85. 5| 0. 0| 0. 0| 123. 2| | | | | | | | D. Operating Financial & Investment Ratios:| | | | | | | 1. Gearing ratio| 13. 9| 8. 7| 2. 0| 0. 1| 0. 0| 0. 0| 2. Current ratio | 108. 2| 116. 8| 107. 3| 111. 3| 131. 8| 136. 3| 3. Acid test or Quick ratio| 108. 2| 116. 8| 30. 0| 38. 7| 48. 5| 33. 9| 4. Debt equity ratio | 166. 5| 131. 7| 132. 9| 109. 2| 76. 4| 63. 0| 5. Return on assets| 10. 0| 17. 3| 17. 0| 24. 9| 34. 3| 35. 7| 6. Self financing ratio| 83. 0| 116. 4| -| 178. 8| 96. 9| 67. 1| 7. Cash flow ratio| 89. 6| 110. 2| 263. 9| 146. 4| 97. | 80. 1| 8. Shareholders equity as % of ordinary share capital| 124. 0| 153. 1| 161. 1| 186. 2| 249. 5| 282. 8| 9. Overhead and other expenses as % of gross sales| 96. 2| 94. 5| 94. 8| 93. 4| 91. 4| 90. 8| 10. Financial expenses as % of operating profit| 28. 0| 13. 8| 6. 4| 1. 8| 1. 2| 1. 2| 11. Financial expense as % of gross sales | 1. 1| 0. 8| 0. 3| 0. 1| 0. 1| 0. 1| 12. Financial expenses as % of contractual liabilities| 12. 5| 14. 1| 7. 7| 5. 5| 13. 5| 4. 8| 13. Tax provision as % of net pre-tax profit| 25. 8| 23. 1| 25. 5| 21. 0| 32. 1| 32. 5| 14.

Sundry debtors as % of gross sales| 0. 5| 0. 4| 0. 6| 0. 1| 1. 4| 0. 2| 15. Net profit as % of shareholders’ equity | | | | | | 58. 2| 15. Return on Equity| 26. 7| 40. 0| 39. 6| 52. 0| 60. 6| | | | | | | | | E. Key Performance Indicators:| | | | | | | 1. Dividend cover ratio | 368. 8| 240. 1| 202. 5| 263. 1| 248. 0| 133. 2| 2. Dividend ratio to equity | 5. 4| 12. 8| 14. 6| 15. 6| 16. 6| 29. 5| 3. Net profit margin | 2. 7| 4. 9| 5. 0| 6. 6| 8. 6| 9. 3| 4. Earning per share before tax | 3. 3| 6. 1| 6. 4| 9. 7| 15. 1| 16. 5| 5. Earning per share after tax | 2. 5| 4. 7| 4. | 7. 6| 10. 3| 11. 1| 6. Average annual % depreciation on written down fixed assets| 11. 9| 11. 2| 11. 5| 12. 8| 17. 6| 14. 7| 7. Sales as % of total assets | 365. 3| 354. 1| 340. 9| 375. 4| 397. 8| 383. 9 | 8. Earning per share before tax growth | -925. 0| 84. 8| 4. 9| 51. 6| 55. 7| 9. 3| 9. Sales growth| 14. 8| 4. 0| 3. 6| 17. 6| 19. 6| 4. 4| 10. Break-up value of ordinary shares (in rupees) | 12. 4| 15. 3| 16. 1| 18. 6| 24. 9| 28. 3 | | | | | | | | The RatiosThe Financial ratios for the sector as reported by the State Bank of Pakistan are reported below, from 2001-2006.

Their graphical analysis follows ;amp; presents a clear indicator of the trend that shows in the sector. From the years 2000-2006, the industry has shown a steady rise in its ratios ;amp; values from the Sales to EPS. Therefore, we conclude that this sector will continue to flourish, regardless of the increasing concerns over the diseases caused by tobacco products. | References www. pakistaneconomist. com/database1/cover/c96-61 www. yespakistan. com/people/tobacco www. thenetwork. org. pk/pressrelease04-01-08. htm www. ptb. com. pk www. sbp. gov. pk

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