1. introduction to the report

Formula:

Net profit

Net sales

Significance:

• 
  The net profit margin ratio is a more specific measure of a company’s profitability from its sales.
  
• 
  It is a measure of the company’s profitability of sales after taking account of all expenses and income taxes.
  
• 
  It tells us the company’s net income per Rupee of sales.
  
• 
  Thus the higher the ratio the better it is.
  

R

	2004	2003		2002
NET PROFIT MARGIN/RATIO	2.61%	1.42%		2.04%
PERCENTAGE RISE / FALL IN 2004	Over 2003		Over 2002
	83.8%		274.90%

esults: Table 6.17



Graph 6.17 Net Profit Margin

Inference:

• 
  The net profit margin for 2004 is 2.61. It means that 2.61%out of every Rupee of sales constitutes PTC’s net income after taxes. And this is a good sign.
  
• 
  The net profit margin in 2004 is higher by 83.8% over 2003 and by 274.9% over 2002.
  
• 
  The huge increase in company’s net profit margin over the three years indicates that sales profitability has increased and is continuing to rise even further.
  
• 
  The difference between the company’s gross profit margin and net profit margin for the three years 2004-2002 respectively are 11.1, 11.3 and 10.2. These reflect the company’s recent reductions in Operating and Other expenses.
  

6.8.3 RETURN ON INVESTMENT (R.O.I):

Formula:

Net Profit after Taxes

Average Total Assets

= Net Profit Margin X Total Asset Turnover

Significance:

• 
  This is also called as the earning power on total assets and is used to relate profits to investment.
  
• 
  It tells us about how much of assets the company is employing to generate a Rupee of sales.
  
• 
  It combines the effect of both the net profit margin and total assets turnover ratio. The net profit margin ignores the utilization of assets, and the total assets turnover ratio ignores profitability on sales. Thus it removes both these problems.
  
• 
  The higher the ratio, the more the firm employs its assets to generate a Rupee of sales and the better it is.
  

R

	2004	2003		2002
RETURN ON INVESTMENT RATIO	9.29%	4.60%		6.26%
PERCENTAGE RISE / FALL IN 2004	Over 2003		Over 2002
	101.96%		48.40%

esults: Table 6.18


Graph 6.18 Return on Investment (R.O.I)

Inference:

• 
  The ratio for 2004 is equal to 9.29, which means that the company is earning about 9.29% on its total assets.
  
• 
  The ratio in2004 has increased by 102% over 2003 and 48.40% over 2002’s values. This shows that the company has improved its utilization of assets over the three years.
  
• 
  These results suggest the efficiency of company in employing of its assets to generate profits, because the company has recently adopted a policy of downsizing and even then its R.O.I has improved two folds.
  

6.8.4 RETURN ON EQUITY RATIO

Formula:

Net profit after taxes ­

Average total shareholders’ equity

Significance:

• 
  It is a summary measure of a company’s overall performance.
  
• 
  It tells us the earning power of shareholders book value investment.
  
• 
  The higher the ratio the higher the company’s acceptance of strong investment opportunities.
  

R

	2004	2003		2002
RETURN ON EQUITY RATIO	20.88%	11.14%		15.69%
PERCENTAGE RISE / FALL IN 2004	Over 2003		Over 2002
	87.4%		33.10%

esults: Table 6.19


Graph 6.19 Return on Equity (R.O.E)

Inference:

• 
  The ratio has a value of 20.88% in 2004 showing that the company has earned Rs 20.88 per one rupee of shareholders equity.
  
• 
  The ratio in 2004 has shown an increase of 87% and 33% respectively over 2003 and 2002.This high increase shows that the company is accepting strong investment opportunities and is effectively managing its expenses.
  

Summary of Financial Ratios:











CHAPTER#7
7. SWOT ANALYSIS
SWOT (Strengths, Weaknesses, Opportunities and Threats) shows the positive and negative resources of the company which my deteriorate the company’s position and set the company in really unfavorable climate. The SWOT analysis provides information that is helpful in making the firm’s resources and capabilities compatible with the competitive environment in which it operates. As such, it is instrumental in strategy formulation.

The following factors show how SWOT analysis fits into an environmental scan of Pakistan Tobacco Company.

7.1 STRENGTHS

7.1.1 Subsidiary of BAT Group:
PTC being a subsidiary of The British American Tobacco Group has got really a good image. The 100 years experience of BAT in tobacco industry is really a plus point for PTC to establish its business more smoothly and efficiently.
7.1.2 Strong Financial Condition:

PTC has a very strong financial condition. The main reason behind this is that it has got the financial support of BAT which has some 96% of its shares. Bat provides it with ample financial resources for the sustained growth of its business.

7.1.3 Highly Innovative Company:
PTC has the privilege of high experience in innovative ideas. It has always remained the first in introducing novel management practices, work processes and utilizing latest equipment. The introduction of EHS Policy, SAP and launching of Social Report are few of the examples of its innovativeness. New marketing tools like new tastes, new segmented brands and packaging styles are other examples.
7.1.4 Highly Research Oriented Company:
PTC is a highly research oriented company. It has its own research laboratory in which researchers remain busy in researching for new and high quality tobacco seeds, better methods of cultivation and agrarian practices .it also has a separate marketing research section for the development of new brands, tastes and packaging etc.
7.1.5 Market Leader in Premium Brands:
PTC has some very strong brands in its portfolio, making it the market leader in the tobacco industry in Pakistan. It has almost no match in its premium and high quality brands such as Benson & Hedges and John Players Gold Leaf (JPGL).
7.1.6 Motivated and Committed Workforce:
The company is providing the best training and development opportunities to its employees due to which PTC has an efficient, motivated and committed workforce.
7.1.7 Highly Professional Environment:
All the employees at PTC are highly professional and they always try to perform the job close to perfection. They have always welcomed new ideas and knowledge. They follow the philosophy of “doing the things right the first time”, one of the components of PTC’s quality policies.
7.1.8 Best IT Network:
PTC has a state of the art information technology system called the BATGEN which not only connects its five regional offices but also connects all these to the entire BAT network.
7.1.9 A Socially Responsible Company:
PTC is a socially responsible corporate citizen and is involved in a number of social welfare programs e.g. Afforestation Programme, Mobile Dispensaries, Vocational Training Learning Resources Centers (LRCs). The company is also playing a major role in eradicating the cultivation of Poppy.
7.1.10 Contribution to the National Exchequer:
PTC is committed to long-term growth strategy in Pakistan and is the major contributor to the national exchequer. The company has paid the government close to Rs 16billion in excise and sales taxes during the year 2004 and that amounts to over 50 million per working day.
7.2 WEAKNESSES
7.2.1 High Operational Costs:

PTC had been in losses for about six years (till 2001) with long lasting effects that the company is still facing. The main reason behind these losses was high operational costs which, although the company has controlled up to some extent, are weakness and a challenge for it.

7.2.2 High Level of Wastages:

The standard wastage level set by The British American Tobacco is at 1%, while PTC has a wastage level above this standard.

7.2.3 Poor Performance in Low Category Brands:

PTC for a long time has been unsuccessful in dominating the low brands category. As 26% of the people in rural areas are heavy smokers and competitors have captured the major share of this market.

7.2.4 Poor Distribution Network:

PTC has a poor distribution network as compared to its major competitor LTC (Lakson Tobacco Company).LTC can distribute the product in any city of Pakistan within 7 days and has 600 distributors as compared to 398 of PTC.

7.2.5 Weak Pricing Strategies:

The prices set by the company are not up to the satisfactory level of the retailers as well as the customers. The price of gold flake is higher than its close competitive brands. But since low income people are price sensitive so they do not easily switch to highly priced brands.

7.2.6 Restricted Hiring Policy:

The hiring policy of the company is hi9ghly criticized on the grounds of its qualification criteria. For the key posts and management positions the graduates of IBA (Karachi) and LUMS (Lahore) are given preference which is not in accordance with the EEO (Equal Employment Opportunity) practice. Thus intentionally marginalizing, the remaining stuff of the country.

7.2.7 De-motivation in Employees due to Downsizing:

Due to the company’s schemes of restructuring and downsizing through VSS (Voluntary Separation Scheme) in 2001, the remaining employees are getting de-motivated. During that scheme approximately 12000 employees i.e. one third of the workforce were affected.

7.2.8 Burden of Work on the Employees:

Due to the recent downsizing the remaining employees now have to bear the extra burden of work. They have to work long hours. Moreover the burden of work is also improperly distributed. One can easily observe some of the employees over-burdened, while others sitting idle after doing a little or no work.

7.2.9 Unsatisfactory On-Job Training:

The company claims about its human resources policy that it gives on-the-job training to its employees to make them efficient on their work. But the training given to the BSOs is, however, not a satisfactory one. Most of the employees cannot utilize this training properly because of their lack of educational capabilities and at times they take it as fun and for granted. Most of the low level employees are either a little literate or even illiterate; they even don’t know the purpose of the trainings given to them.

7.3 OPPORTUNITIES:
7.3.1 Ever Increasing Demand:

Although no official data on cigarette consumption is available, yet by using sales as a proxy, it seems that smoking continues to increase and so does the demand for PTC brands despite Government efforts to prohibit smoking in public places, offices, busses and trains etc. Moreover PTC has brands of international standards and has a high image so it is having an opportunity to further build its customer base.

7.3.2 Smoking is Addictive:
Due to the addictive nature of smoking PTC has no fear of any decline in the demand for its products. So demand can be increased by developing quality brands and good promotional campaigns.
7.3.3 Good Chances for Geographical Expansion:
It has an opportunity to further expand its market geographically because people of different areas have a good taste for PTC’s brands. For example, in the Punjab, “Embassy King” is liked by a majority of the people.
7.3.4 Good Chances Export:
PTC has some quality brands in its portfolio, such as JPGL, Capstan International and Wills etc, which are preferred for taste by the people of Middle Eastern countries and countries bordering Afghanistan. Thus PTC has an opportunity to increase its sales by exporting these quality brands.
7.3.5 A Single Competitor:
Currently PTC is facing a tough competition from Lakson Tobacco Company (LTC) which is its sole competitor in the market and about some 90% of the total market share is occupied by these two giants. Therefore PTC, not having to compete with so many competitors, has a chance to concentrate its efforts against only one competitor.
7.3.6 Government’s Efforts against Tax Evasion:
The government is taking serious actions against tax evasive producers. This would reduce the production of low category brand manufacturers and thus will help PTC to compete and capture the market more aggressively.
7.4 THREATS
7.4.1 Antismoking Campaign:
The increasingly active role of NGOs and other external bodies against the tobacco industry has, on one hand; lead to increase the negative feelings of the public against tobacco industry, while on the other hand it has also resulted in an increased external pressure on PTC.
7.4.2 Fierce Competition:
PTC is facing a fierce competition from LTC which is using offensive strategies to compete with it. Moreover PTC has a poor performance in low category brands, while the industry has no exit and entry barriers due to which many small non-tax paying companies have entered the market, thus making PTC face more competition in low category brands.
7.4.3 Heavy Taxation Policy:

The profit of any concern is highly dependent upon taxes. PTC’s profit and financial condition is badly affected by government’s tax policy.

7.4.4 Existence of Low Priced Brands in the Market:

PTC is the largest tax payer in tobacco industry that’s why its brands are priced a little higher. However, in the market there are some companies which are offering lower prices because of tax evasion. Though the government is taking serious steps to control it, yet tax evasion cannot be fully eliminated and this is posing a threat to the company.

7.4.5 Supply of Fake and Smuggled Cigarettes in the Market:

The increase ion supply of fake and smuggled cigarettes in the market has badly affected the goodwill and business of PTC. This is also decreasing the customer loyalty.

7.4.6 Dependency (of Tobacco) on Nature:

The prime direct material for PTC is the tobacco crop that is highly dependent on climate. But since the recent years have seen a number of unpredictable and unforeseen climatic changes therefore climatic conditions are offering a threat to PTC’s business. The attack of Tobacco mosaic virus on the crop is another uncertain factor of PTC’s external threats.

CHAPTER#8
8. FINDINGS AND RECOMMENDATIONS

PTC is one of the best organizational set ups in Pakistan; ranking 6^th in BAT companies. It is providing excellent working environment and opportunities to its employees, setting the example of excellent management in the area.

Finding flaws in such an organizational setup which is marching towards excellence is a difficult, if not impossible, task. But during our orientation of the various departments at PTC AKF, and after carrying out a SWOT analysis of the entire organization I have noted the following points which may not be flaws as such, however need some attention and improvement for the further growth of not only the whole company but the AKF factory as well.
8.1 RECOMMENDATIONS FOR THE OVERALL COMPANY:
8.1.1 DIVERSIFY ITS BUSINESS:

The diversification of business scope greatly reduces the risk therefore PTC should diversify its scope by entering new businesses because it is also facing many risks due to its involvement in a controversial business that is subject to rapidly increasing anti smoking campaigns. It is possible for PTC because it is operating in the world’s 9^th largest tobacco market thus having a great strategic importance for BAT’s business.

8.1.2 IMPROVE LOW CATEGORY BRANDS:

Having a poor performance in low category brands it is a big challenge for the company to capture a good share of the market in this category. Therefore, PTC should concentrate more on low brands by advertising and promoting them more aggressively. PTC can do this by calling year 2005, “the year of low category brands”. Thuds by modifying the tastes and prices can attract huge customers.

8.1.3 EXPORT ITS HIGH QUALITY BRANDS:
PTC has the privilege to have brands of export quality such as JPGL and Capstan thus PTC must export these brands Middle East and countries bordering Afghanistan where it has developed a good taste.
8.1.4 REDUCE HIGH OPERATIONAL COSTS:
The low profitability of PTC is due to the high operational costs and high cost of goods sold. PTC should devise ways to decrease the wastage level and keep a check on the leaf and other raw materials’ distribution, as most of the tobacco leaves are wasted during its delivery from the farmer to the factory warehouses. For example in production, by saving cost of Rs 6 per 1,000 cigarettes and having sales of 28 billion sticks PTC can save up to Rs 168 million.(i.e. some $2.7m).
8.1.5 IMPROVE DISTRIBUTION CHANNELS:
The sole giant competitor of PTC has a wide distribution network having almost 600 distributors allover the country as compared to 398 of PTC. Thus for a more active and efficient distribution of its products as compared to its competitor, PTC needs to set up more distribution channels to get access to its customers more swiftly.
8.1.6 FIGHT PRODUCT-COUNTERFEITING:
The company is facing a threat of loss of some of its market share due to product counterfeiting and availability of fake cigarettes in the market, thus the company must develop such quality cigarettes and packaging that could not be easily copied. The customers should also be informed about that quality of the product and features of the packaging to help them recognize the original product.
8.1.6 FORCE THE GOVERNMENT FOR AN AGGRESSIVE TAX POLICY:
PTC can overcome the threat of competition in low category brands by utilizing its strength of having good relations with the government as a regular & high tax payer, forcing the government to impose taxes on the tax evaders by dialogue and negotiation.
8.1.7 THE HIRING POLICY SHOULD BE FLEXIBLE:
PTC should make a flexible hiring policy based on the principles of equal employment opportunity. It should invite applications from all the recognized universities and institutes of the country. thus in this way it will not only improve its image as an organization with EEO but will also provide it with a diversified talent pool of which it often deprives itself by giving preference to only a few prestigious institutes.

8.1.8 PTC SHOULD REFLECT MORE CULTURAL VALUES:
Pakistan and PTC were both established in 1947 and so saw the same ups and downs in the economy, politics and the society. So PTC should introduce brands that reflect strong cultural value of the country. This would develop a favorable image for the company.