PORTFOLIO MANAGEMENT

Term Report

Risk and Return Analysis of Pakistan Tobacco Company’s Stock

Group Members:
Abdul Lateef (02-112162-001)
Saba Ali (02-112162-030)
Sunbul (02-112162-035)
Taleya Fatima (02-112162-048)
Farah Nadeem Khan (02-112162-050)

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Table of Contents

Introduction of Company ........................................................................................................ 3

Return Analysis ........................................................................................................................ 4

Risk Analysis ............................................................................................................................ 7

Ratio Analysis ........................................................................................................................... 9

Conclusion .............................................................................................................................. 12

References ............................................................................................................................... 13

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 INTRODUCTION OF COMPANY

Pakistan Tobacco Company Limited is a Pakistani tobacco manufacturing company which is

a subsidiary of British American Tobacco. It is headquartered in Islamabad, Pakistan and is
the biggest cigarette maker in Pakistan. It has two factories which are located in Akora
Khattak (which is near Nowshera), and Jhelum. Latest company annual report shows that
over 94 percent of PAKT shareholding continues to rest with British American Tobacco
(Investments) Limited, with the remaining shares held by a variety of investors, including
investment companies, banks, insurance companies, mutual funds and the general public.
Product portfolio
Pakistan Tobacco Company manufactures around nine brands in both factories, including
John Player Gold Leaf (launched in 1947), Capstan by Pall Mall (launched in 1962), Benson
& Hedges (launched in 2003), Gold Flake (launched in 2004), Dunhill (launched in 2007),
and some local brands.
Major competitors
1. Khyber Tobacco Co. Ltd.
2. Philip Morris (Pakistan)Ltd.
Market share of company and competitors

➢ Pakistan Tobacco Company Limited - Market leader with 71% of market share in the
legitimate cigarette market as of 2018

➢ Philip Morris (Pakistan)Ltd - Roughly 20% share of the organized market.

➢ Khyber Tobacco Co. Ltd. and other small players are included in the remaining market
share.
Number of Directors (Executive and Non-Executive)
Non-executive directors (6)
Executive directors (3)

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 RETURN ANALYSIS

25.0000%

20.0000%

15.0000%

10.0000%

5.0000%

0.0000% May 20, 2018

Apr 08, 2018

Apr 23, 2017

Dec 18, 2016

May 22, 2016

Apr 03, 2016
Dec 30, 2018

Aug 26, 2018

Feb 25, 2018

Mar 12, 2017

Sep 25, 2016

Feb 14, 2016

Jan 07, 2018

Aug 20, 2017

Jan 29, 2017

Aug 14, 2016

Jul 08, 2018

Jul 03, 2016

Oct 07, 2018

Oct 15, 2017

Nov 18, 2018

Nov 26, 2017

Jun 04, 2017

Nov 06, 2016

-5.0000%

-10.0000%

-15.0000%

-20.0000%

KSE-100 Weekly Price Return PAKT Weekly Price Return

KSE – 100 PAKT

2016 0.8464% 0.6353%
2017 -0.2058% 1.1463%
2018 -0.2246% 0.7855%

The average returns of PAKT for the years 2016, 2017, and 2018 as can be seen in the table
above, have first increased in 2017 and thereafter decreased in 2018. Since PAKT belongs to
the tobacco sector, it is most affected by the external environment. Hence the main reasons
for the fluctuation in prices is mainly the external environment. It is also a thinly traded stock.
In 2016, the illicit sector started rising and the Company lost it’s volume to the duty not paid
sector. It had high positive growth prospects since the company is a huge contributor to
national exchequer, the Government was also being affected by the loss of market share to
duty not paid sector. Therefore, return of 0.6353% can be seen in 2016. In 2017, the
government introduced fiscal reforms of Budget 17/18 which would help the Company
recover it’s lost volumes and result in profits. These reforms translated into profitability and
the Company regained it’s lost volumes in 2018. In 2017, despite of decreasing profitability,
a return of 1.1463% can be seen in stock which was due to the expectation of fiscal reforms
helping the company to get back the share from illicit sector in near future and increase
profitability of company. Following is the description of how the corporate and economic
events can explain the observed trends in stock returns:

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 2016
Corporate event: Resignation of the director.
The year started very low for the Company’s stock price as well as returns perspective as
the company was having troubles due to some other external factors also which will be
discussed as corporate event as whole in 2017. On June 30 2016, the Company’s MD/CEO
Mr.Graeme Amey resigned from his duty. Mr. Javed Iqbal was then appointed as the new
MD/CEO. There onwards the company started to grow by their return as well as by the
value of Company’s stock which rose from 37000 odd to 47000 odd in matter of 6 months
which shows the capability of the company if given the right leadership
Economic Event: Increase in excise duties
During 2016, the industry experienced excise increases that led the legitimate sector to
increase prices across portfolio. This price increase translated into higher revenues and
higher profits for the Company, thereby, creating a sentiment in investor of higher profits
that would translate into higher dividend yields. This explains the 0.6353% return of 2016.

2017
Corporate Event: Raids and activities on duty non paid sector & Revised Pricing
Both of these events had a positive impact on the Company’s revenue growth and
consequently on it’s profitability. Increased profitability would result in increased
dividends and this was reflected in the stock prices and returns of 2017 which increased in
comparison to 2016.
Economic Event: Fiscal Reforms – Budget 17/18
These reforms proved to be beneficial for the company in terms of profitability for the
company and therefore higher returns for the investors as after the reforms, in the second
half of 2017, the stock returns started increasing as now the company would regain the lost
volumes and profitability from the illicit sector.

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 2018
Corporate Event: Growth of Illicit Sector
The main reason for that was switching of consumer towards cheap duty evaded cigarettes.
Although In 2018, the Company delivered a growth in sales and during the first nine
months of the year, the Company was able to increase its market share which can be
clearly seen in the return of the company’s share and price. Despite this, during the year
2018, operating environment for legitimate tobacco industry remained challenging due to
the persistent high level of the illicit sector, and there was fear of the company losing it’s
volume and profitability to iliicit sector. This fear was reflected in the decrease in stock
returns of 2018 compared to 2016.

Economic Event: Inflation

The economic environment was unfavorable for the Company in 2018. Inflation had
adverse impact on the company through raw material which led to increase in costs. The
inflationary environment also impacted the investors’ purchasing power and their ability to
save and invest. This is reflected in the stock prices and decreased returns as compared to
2017.

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 RISK ANALYSIS

Beta
2016 0.395
2017 -0.436
2018 0.086

Knowing the risk of the stock is important because when you invest in a stock, you should
understand the risks and decide whether the risks of stock are in line with your risk appetite
before you buy a stock because there are always ups and downs in the stock market. A stock
price that changes quickly and by a lot is more “volatile”. So Beta is the systematic risk of the
stock, it is non-diversifiable risk and systematic factors involved such as the rate of inflation,
Federal Reserve monetary policy, and world oil prices. Most stock market investors want to
maximize their potential for profit, while minimizing their exposure to financial risk.
So in 2017 the beta is negative which indicates an inverse relation to the market, which is
possible but highly unlikely. Some investors argue that gold and gold stocks should have
negative betas because they tend to do better when the stock market declines.
The negative beta correlation means the investment moves in the opposite direction from the
stock market. When the market rises, a negative-beta investment generally falls. When the
market falls, the negative-beta investment will tend to rise. However, this negative beta
coefficient does not necessarily mean absence of risk. Instead, negative beta means
the investment offers a hedge against serious market downturns.
In 2018 and 2016 beta is Positive but less than one, between 0-1 so lower beta stocks with
less volatility do not carry as much risk, but generally provide less opportunity for a higher
return.
While a negative beta is better than a positive one since it means that the investment offers a
hedge against risk in the market, it also means that the market is negatively correlated with
the investment. In our stock, PAKT, changes in beta are due to risk or market fluctuations or
what is referred to as volatility of returns of investment since our company is affected by
uncontrollable factors such as the external regulatory environment, that causes fluctuations in
it’s profitability and therefore the stock prices also fluctuate.
Comparison with Standard Beta that is 1 :
A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a
beta less than 1.0 indicates a stock with lower volatility.
➢ β < 0 Asset moves in the opposite direction as compared to the index .
➢ β = 0 Movement of the asset is uncorrelated with the movement of the benchmark
➢ 0 < β < 1 Movement of the asset is in the same direction , but less than the movement of
the benchmark .
➢ β = 1 Movement of the asset is in the same direction as, and about the same amount.
➢ β > 1 Movement of the asset in the same direction, but more than the movement of the
benchmark.

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If Beta less than 0 :
The beta of 2017 is less than 0 i.e. -0.436 .
➢ A beta less than 0 indicates that it moves in the opposite direction of the market.
➢ Beta can also be negative, meaning the stock’s returns tend to move in the opposite
direction of the market’s returns.
➢ Generally, stocks that have a high or positive beta coefficient are riskier and more volatile
than those with a lower beta value. This does not mean, however, that stocks with a
negative beta coefficient have no inherent risks as PAKT has the inherent risk of changes
in external regulatory environment that creates a sensitivity in the share price of the
Company.

If Beta less than 1 :

In 2018 beta is 0.086, it means that 91.4% less risky than the market.
And in 2016 beta is 0.395, it means that 60.5% less risky than the market.
➢ A beta between 0 and 1 signifies that it moves in the same direction as the market, with
less volatility.
➢ A low beta value typically means that the stock is considered less risky, but will likely
offer low returns as well.

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 RATIO ANALYSIS

2016 2017 2018

A. Liquidity ratios
Working Capital Management 16,709,466 23,445,812 30,305,203
= CA-CL - - -
10,973,477 13,854,520 21,813,084
=Rs.5,735,989 =Rs.9,591,292 =Rs.8,492,119

B. Debt Management Ratios

i. Debt Ratio = Total Debt / Total 0 / 25,397,520 0 / 32,133,993 0 / 40,452,629
Assets = 0.00 = 0.00 = 0.00

ii. Debt Equity Ratio = Total Debt / 0 / 12,976,630 0 / 16,911,198 0 / 17,765,624

Total Equity = 0.00 = 0.00 = 0.00

C. Profitability Ratios
i. Return on Total Assets = Net 10,392,974 / 9,612,999 / 10,362,010 /
Income / Avg Total Assets 25,076,100 28,765,757 36,293,311
= 41.4% = 33.4% = 28.6%
ii. Basic Earning Power (BEP) Ratio 14,999,834 / 12,833,559 / 14,571,034 /
= EBIT / Total Assets 25,397,520 32,133,993 40,452,629
= 59.1% = 39.9% = 36.0%
iii. Return on Common Equity = Net 10,361,352 / 9,573,562 / 10,337,992 /
Income /Avg Common Equity 11,671,935 14,943,914 17,338,411
= 88.8% = 64.1% = 59.6%

D. Market Value Ratios

i. Price/Earnings Ratio = Price per 1,433.18 / 40.6 2,147.90 / 37.5 2,900.20 / 40.5
share / Earning per share = 35.3 times = 57.3 times = 71.6 times
ii. Market/Book Ratio = Market Price 1,433.18 / 50.8 2,147.90 / 66.2 2,900.20 / 69.5
per share / Book Value per share = 28.2 times = 32.4 times = 41.7 times
iii. Book Value per share = Common 12,976,630 / 16,911,198 / 17,765,624 /
Equity / Shares outstanding 255,494 255,494 255,494
= Rs. 50.8 = Rs. 66.2 = Rs. 69.5

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Liquidity Ratios:

Working capital management:

PTC has experienced a significant improvement in its working capital position, reaching a
positive Rs.9.6 billion in 2017 . This was largely due to the Company’s cash sales model,
growing profitability as well as highly efficient inventory and supplier management systems.
These factors signify efficient management and high growth prospects which can help
explain the returns increased in 2017 and also the comparatively lower risk than market.

Debt Management Ratios:

Debt ratio: The debt management ratios reflect the company’s ability to meet its financing
needs. Investors rarely want to purchase the stock of a company with extremely low debt
ratios. A debt ratio of zero would indicate that the firm does not finance increased operations
through borrowing at all, which limits the total return that can be realized and passed on to
shareholders. However, this also indicates the company’s ability to finance it’s operations and
investments through the income generated through it’s own operations and equity which is a
good sign and explains the lower risk of our stock.

Debt equity ratio: Higher leverage ratios tend to indicate a company or stock with higher risk
to shareholders. Debt to equity ratio is zero for past three years which is a good sign and in
line with our risk analysis which showed lower risk of our stock.

Profitability Ratios:

Return on total assets: the return on total assets has decreased over the years, which mean
that return has decreased and risk has increased. This falling from 41.4% in 2016 to 28.6% in
2018 which indicates that company might have over invested in assets that have failed to
produce revenue growth, not a good sign for the company.

Basic earning power ratio: Tax and interest is not only the reason in decrease in their income,
the cost of sale has increased over the years which leads to decline in basic earning ratio.

Return on capital equity: ROE rises and falls with net income. As income decreases over the
years, it results in decline in the return on common equity. Which is again, not a good sign
for company and helps explain the fluctuating return trend of our company.

Market Value Ratios:

Price to earnings ratio:
The price to earnings ratio of the company has been increasing in past three years. This
indicates that the company’s share is getting expensive. In 2018 the P/E ratio was 71.6 times,
which means that for Rs.1 of earning the shareholders had to pay Rs.71.6. But we must
compare this ratio to the industry average, if the industry average is higher than this
company’s ratio it means our company is not overvalued. As price earning increases over the

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years, it signifies that investors are willing to pay more for the stock and they are expecting
future earnings to increase which might translate into higher dividends. This expectation is
also depicted in the return trend over these 3 years.

Price to book ratio:

The price to book ratio of Pakistan Tobacco Company has been increasing. It indicates that
the shareholders are paying higher against the book value in the balance sheet. This again
explains the return trend and the expectations of investors about growth in future earnings.

Book Value per share:

Book value means the weight of shareholder’s equity against shares outstanding. Higher book
value means the shares have more liquidation value. PAKT’s higher book value is also
indicating towards more worth of shares. The book value of our company has been increasing
for past 3 years which is a positive sign and also explains the risk and return trend over the 3
years.

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 CONCLUSION

The stock appears to be a good choice based on our analysis. The returns are good as
compared to the benchmark – KSE100. And the systematic risk – beta, also depicted lower
risk compared to market except for 2017 where it was negative. It can be concluded as a good
investment opportunity considering the external environment moves in favor of the company
as that is what affects it’s profitability and consequently it’s stock returns the most. It is also
concluded to invest the stock to hedge the risk in a portfolio where there are stocks with
positive betas that are greater than 1. However, our analysis was limited to 3 years which is a
limited time period to analayse the risk and return trends as the risk depicted a somewhat
contradicting scenario with negative beta in 2017 and positive in 2016 and 2018. We need to
analyse the risk for a greater time period as it is a possibility that the negative beta was only
due to the external factors affecting the company that are short lived.

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 RFERENCES

https://www.psx.com.pk/

http://www.ptc.com.pk/

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