February.

11, 2012

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Superior University
Auditing & Assurance Analysis of Annual Report of

PAKISTAN TOBACCO PVT LTD.

Submitted to:
Prof. Miss Mariam Khawar

Submitted by:
Muneeb ul Haq Khuram Sattar Asad Ali Shah Iftikhar Ahmad Faisal Azeem Ali Jaffar Waqas Khan Rashid Ali Riaz Ahmad 11372 11304 11311 11329 11331 11336 11349 11360 11339

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TABLE OF CONTENT Description Page No

03 04 05 06 07-11 12-16 16-20 21-30 30-33 33-34

Dedication and Acknowledgment-------------------------------Company Profile--------------------------------------------------Company History -------------------------------------------------Vision and Mission------------------------------------------------Companys Brands------------------------------------------------Financial Highlights-----------------------------------------------SWOT Analysis-----------------------------------------------------Ratio Analysis------------------------------------------------------Financial Analysis-------------------------------------------------Auditor Report to share holders ---------------------------------Justification of Auditor Report to share holders ----------------34 Crux----------------------------------------------------------------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 what we are today.

ACKNOWLEDGEMENT
By the grace of Almighty Allah, We have been able to compile this project. Without his help, we cannot accomplish any objectives in our lives. The omnipotent Allah bestows this ability, knowledge, strength and competence required for this project to me as boons. Special acknowledgement Khawar who gives us the report and Auditor reports Ltd. We are really thankful complete this Project. for our Professor Miss Mariam opportunity to analyse the Annual of Pakistan Tobacco Company Pvt to our teacher for her guidance to

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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 multinational 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 Office
Pakistan 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,

Auditing & assurance

49 Blue Area, P.O. Box 3021, Islamabad-44000. Telephone: (051) 2273457-60 Fax: (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, Responsibility and 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 Committee of 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 Lackson Tobacco Mardanwalls Counterfeit/other Tax evaded brands 45.70% 44.20% 2.20% 1.8% 5.90%

Financial Highlights
Yea r 200 4 200 5 200 6 200 7 200 8 200 9 201 0 Gross Turnover 25,453 Million Rupees 30,615 Million Rupees 35,715 Million Rupees 40,889 Million Rupees 49,054 Million Rupees 57,544 Million Rupees 60,196 Million Rupees

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Years

Property Plant and Equipment

2004 2005 2006 2007 2008 2009 2010

3,564 Million Rupees 3,798 Million Rupees 4,529 Million Rupees 5,154 Million Rupees 5,600 Million Rupees 5,952 Million Rupees 5,824 Million Rupees

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Year

Earnings

Dividend Yield 3.25% 5.37% 7.64% 6.37% 9.08% 9.10% 5.44%

2004 2005 2006 2007 2008 2009 2010

2.60/Share 5.17/Share 7.46/Share 9.47/Share 9.91/Share 11.83/Share 3.62/Share

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Year 2004 2005 2006 2007 2008 2009 2010

Gross Profit 3,483 Million 4530 Million 5534 Million 6516 Million 7277 Million 8224 Million 6205 Million

Operating Profit 1,077 Million 2,081 Million 2,841 Million 3,720 Million 3,860 Million 4,589 Million 1531 Million

After Tax Profit 665 Million 1,322 Million 1,905 Million 2,420 Million 2,532 Million 3,022 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 might direct 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 2004 2005 2006 2007 2008 2009 2010 Current Assets 3,434,601 4,136,116 4,172,950 4,641,368 4,739,867 6,242,528 7,893,825 Current Liabilities 3,137,467 3,604,366 3,750,209 4,822,940 5,210,638 6,856,780 8,630,286 Current Ratio 1.094 1.147 1.112 0.962 0.909 0.910 0.914

Quick Ratio:
Years 2004 2005 2006 2007 2008 2009 2010 Quick Assets 3,60,549 3,55,185 3,82,097 6,43,187 6,80,804 4,77,161 6,38,818 Current Liabilities 3,137,467 3,604,366 3,750,209 4,822,940 5,210,638 6,856,780 8,630,286 Quick Ratio 0.1149 0.098 0.101 0.133 0.130 0.069 0.074

Liquidity Ratios: Inventory turnover

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Auditing & assurance Cost of Sales 6,089,955 7,223,576 8,357,474 9,527,306 11,595,736 13,442,066 10,789,048 Average Inventory 3,069,090 3,427,491 3,785,892 3,894,517 4,028,622 4,972,215 6,510,187 Inventory Turnover 1.98 2.10 2.20 2.44 2.87 2.70 1.67

Years 2004 2005 2006 2007 2008 2009 2010

Average account receivable turnover

Years 2004 2005 2006 2007 2008 2009 2010 Credit Sales 9,572,576 11,753,180 13,890,994 16,042,877 18,872,495 21,666,525 15,696,107 Average A/R 1,05,266 1,11,958 98,575 1,61,125 2,38,282 1,67,411 1,06,521 A/R Turnover 90.93 104.97 140.91 99.56 117.15 129.41 147.34

Asset Turnover:
Years 2004
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Sales 9,572,576

Average Total Assets 6,641,792

Assets Turnover 1.45

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2005 2006 2007 2008 2009 2010

11,753,180 13,890,994 16,042,877 18,872,495 21,666,525 15,696,107

7,496,609 8,351,426 9,280,316 10,110,636 11,310,951 12,964,936

1.56 1.66 1.78 1.86 1.91 1.21

Profit Margin:
Years 2004 2005 2006 2007 2008 2009 2010 Sales 9,572,576 11,753,180 13,890,994 16,042,877 18,872,495 21,666,525 15,696,107 Cost of Goods Sold 6,089,955 7,223,576 8,357,474 9,527,306 11,595,736 13,442,066 10,789,048 Profit Margin 36.38 % 38.53 % 39.83 % 40.61 % 38.55 % 37.95 % 31.27%

Return on Assets:
Years 2004
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Net Income 665,227

Average Total Assets 6,641,792

Return on Assets 0.10

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Auditing & assurance 1,321,919 1,904,988 2,420,207 2,532,295 3,022,406 1,141,621 7,496,609 8,351,426 9,280,316 10,110,636 11,310,951 12,964,936 0.17 0.22 0.26 0.25 0.27 0.80

2005 2006 2007 2008 2009 2010

Return on Average Stock Holder equity

Years 2004 2005 2006 2007 2008 2009 2010 Net Income 665,227 1,321,919 1,904,988 2,420,207 2,532,295 3,022,406 1,141,621 Average Stock Holders Equity 3,262,823 3,451,118 3,889,300 4,081,022 3,656,505 3,934,282 4,065,563 Return on Stock holders Equity 0.20 0.38 0.48 0.59 0.69 0.76 0.28

Earning per share:

Years 2004 2005 2006
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Net Income 665,227 1,321,919 1,904,988

Average Shares Outstanding 2,55,494 2,55,494 2,55,494

Earnings per Share 2.60 5.17 7.46

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2007 2008 2009 2010

2,420,207 2,532,295 3,022,406 1,141,621

2,55494 2,55,494 2,55,494 2,55,494

9.47 9.91 11.83 3.62

Payout ratios:
Years 2004 2005 2006 2007 2008 2009 2010 Dividends per Share 1.61 3.69 5.48 7.88 11.62 9.53 5.99 Earnings per Share 2.60 5.17 7.46 9.47 9.91 11.83 4.47 Payout Ratio 0.61 0.71 0.73 0.83 1.17 0.80 1.34

Solvency ratios: Debt to asset ratio

Years 2004 2005 2006
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Total Debts 1,896,686 2,916,486 3,505,382

Total Assets 7,024,765 7,968,453 8,734,400

Debt to Assets Ratio 0.27 0.33 0.40

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Auditing & assurance 4,586,767 4,897,101 6,338,306 8,377,229 9,826,232 10,395,041 12,226,861 13,613,012 0.46 0.47 0.51 0.61

2007 2008 2009 2010

Time Interest Earned

Years 2004 2005 2006 2007 2008 2009 2010 Operating Income 1,056,039 2,082,064 2,860,673 3,724,574 3,893,717 4,648,489 1,755,839 Interest Expense 390,812 760,145 955,685 1,304,367 1,361,422 1,626,083 614,218 Times Interest Earned 2.70 2.73 2.99 2.85 2.86 2.85 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 an indication 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 total assets.

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 earnings before interest and taxes (EBIT) and dividing it by the total interest payable on bonds and other contractual debt.

Financial Analysis
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Auditing & assurance

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 Exchequer

Despite 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 the information 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 and we are able to understand that the company is operating its business very effectively and efficiently in Pakistan. The company is utilizing all of its available resources to be the best cigarettes making company in Pakistan. The financial statements of the company have been prepared in accordance with approved accounting standards as applicable in Pakistan. Approved accounting standards comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting Standard Board as are notified under the Companies Ordinance, 1984 (the Ordinance), and provisions of and directives issued under the Ordinance. In case requirements differ, the provisions or directives of the Ordinance shall prevail. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgments in the process of applying the Companys accounting policies. The company evaluates all the requirements and applies it. The auditor conducted its audit in accordance with the auditing standards as applicable in Pakistan. The auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements of Pakistan Tobacco Company are free of any material misstatement. 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 the accounting policies and significant estimates made by management, as well as, evaluating the overall presentation of the financial statements. The auditor believe that their audit provides a reasonable

CRUX
From being just a single factory operation to a company which is involved in every aspect of cigarette production, from crop to consumer, Pakistan tobacco company have evolved into one of the leading corporations in Pakistan. Pakistan tobacco company 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. Pakistan Tobacco Company is market leader and contributes more than Rs. 30 billion in excise duties and taxes to the Government. Companys strategy reflects companys vision, being the champions of growth, productivity, responsibility and a winning organization. The performance of the company during the year 2010 was severely impacted by a constrained economy, floods, stringent regulations and rising Government taxes. Company has invested a huge amount for buying new and advance Technology during the year which increases its sales, 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 said earlier the company is enjoying a major share of the market through most of its brand being the market leader. The major competitors of the company are importing their finished goods stock from their operations in other countries and are well-established companies too. PTC still enjoys the control over the local market, but todays customer is more price conscious and if PTCs competitors give competition through improved production facilitates and reduction in costs PTC might not be able to transform to low cost production facilities in short 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 has led to an increase in companys financial expenses. The company also had to take short term loans to run day to day expenses as most of its operative income is unstable and cannot be reliable for day to day expenses. The need for short term financing also escalated due 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 is contributing a very sound role in the economy of the Pakistan.

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

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