Pakistan Tobacco profit jumps 30% despite illicit trade surge

PAKT reports Rs14.3bn half-year profit as exports grow 350%, but management warns illicit market at 57% is undermining formal sector

Pakistan Tobacco Company (PAKT) reported strong earnings growth in the first half of 2025, with net profit after tax rising 30% year-on-year to Rs14.3 billion, supported by a surge in exports and improved margins. However, management warned that the dominance of the illicit cigarette market, now estimated at 57% of total industry sales, continued to squeeze the formal sector and limit much-needed tax revenues.Experts Call for Action Against Illicit Cigarette Trade

At a corporate briefing session held on Tuesday, the company said net turnover rose 19% to Rs69.4 billion compared with the same period last year. Earnings per share stood at Rs55.8, also up 30%. Gross profit margins expanded to 47.3% from 40.6% a year earlier, attributed to cost optimisation, pricing strategies, and higher margins from export operations. The management announced a dividend of Rs100 per share for the first half of 2025.

Exports were the standout growth driver, climbing 350% year-on-year to Rs10 billion, as the company expanded shipments to Greece and other European markets. Management said positive feedback on product quality had boosted orders, with second-quarter margins benefiting significantly from overseas demand.

Pakistan Tobacco has also been diversifying into smokeless products through its “Velo” brand, which now contributes 4–5% of total turnover. Introduced two years ago, Velo broke even this year and is expected to deliver stronger margins from 2026 onwards. The company currently exports Velo to seven countries, with the first shipment to Bahrain scheduled in the coming months. Management emphasised that Velo is part of a broader strategy to promote alternatives perceived as less harmful than traditional cigarettes.

Despite the financial improvement, the briefing highlighted persistent structural challenges. Cigarette consumption has remained stable at around 80 billion sticks annually for the past three years. However, more than half of the market is dominated by untaxed, low-cost illicit products, which significantly undercut legal players. Management reiterated its call for a reduction in excise duty to narrow the price gap and discourage consumers from shifting to illicit brands.

In the latest national budget, the government chose not to raise excise duties on cigarettes, but industry leaders said this had little impact on affordability. “The illicit segment continues to flourish because its products remain much cheaper than legitimate offerings,” officials told investors, noting that curbing smuggling and illegal manufacturing was critical to protecting the formal sector and state revenues.

The company also provided updates on the impact of recent weather events on domestic tobacco crops. Management said most of the crop in Khyber Pakhtunkhwa had already been harvested and stored before heavy rains and flooding, protecting much of the supply. In Punjab, where the crop is smaller, assessments are still underway, though initial findings suggest a large share had also been harvested in time.

Another challenge discussed was taxation. The effective tax rate on the company increased during the first half of 2025 as certain expenses were disallowed by the government, raising the overall burden. Management noted that tax compliance remained high among formal players, in sharp contrast to the illicit sector which operates outside regulatory oversight.

Industry analysts said the briefing underscored the duality of Pakistan Tobacco’s current outlook—on one hand, strong export-led earnings growth and cost efficiencies are boosting profitability, while on the other, the rapid spread of illicit trade continues to erode market share. The government, meanwhile, faces the paradox of high tax rates driving consumers towards untaxed alternatives, resulting in lost revenue despite one of the highest excise regimes in the region.

Pakistan’s cigarette industry has long struggled with the illicit trade problem. Official estimates have varied, but the 57% market share cited at the briefing represents one of the highest proportions on record. Historically, whenever excise duty has been raised sharply, smuggled and counterfeit products have surged, leaving legal manufacturers under pressure. Industry experts have repeatedly called for stricter enforcement measures, including monitoring of supply chains and curbs on unregistered factories, alongside balanced taxation to create a level playing field.

For Pakistan Tobacco, the strategy appears to be leaning heavily on international sales and product diversification to offset domestic pressures. The remarkable growth in exports to Europe, coupled with the expansion of Velo, points to a long-term pivot towards markets and categories less exposed to local affordability constraints and illicit competition.

Still, the company’s management warned that without effective policy interventions to address the 57% illicit share, the domestic industry would remain vulnerable, and state coffers would continue losing billions of rupees in potential revenue. The Senate Standing Committee on Finance has previously flagged illicit trade as a “national crisis” requiring urgent coordination between tax authorities, law enforcement, and regulators.

As of mid-2025, Pakistan Tobacco remains one of the country’s most profitable listed companies, balancing shareholder returns with investments in new categories. But the sustainability of this growth hinges on whether authorities can rein in the illicit market and create a stable regulatory environment. Without such reforms, management cautioned, the benefits of strong exports and efficiency gains may be undermined by continued domestic distortions.