CTC June net profit falls amid 25% volume slump

• 2Q net profit down 3% YoY Rs.2.95bn
• Total taxes to govt. up YoY and QoQ to Rs.28.1bn
• Total taxes for first half at Rs.52bn, up from Rs.45bn YoY
• CTC says potential would have been Rs.60bn
• Says smuggling thriving due to higher prices 

Ceylon Tobacco PLC (CTC), which holds a virtual monopoly over manufacturing and distributing of cigarettes in Sri Lanka, saw its net profit for the period ended June 30, 2017 (2Q17) falling 3 percent year-on-year (YoY) to Rs.2.95 billion amid dwindling volumes.

The company however was able to maintain higher pre-tax profit YoY for the quarter under review, which was dented by increased income tax payments that rose to Rs.3.1 billion from Rs.2.1 billion YoY. 

The company in a media statement said volumes fell 25 percent driven by significant price hikes of cigarettes during the fourth quarter of 2016 driven by the excise increase in October and the introduction of 15 percent value added tax (VAT) in November.  

Nonetheless, the company’s gross revenue for the quarter rose by little over 6.2 billion YoY to Rs.36.3 billion. 

The total taxes paid by the company to the government for the quarter rose to Rs.28.1 billion from Rs.22.5 billion YoY and Rs.23.8 billion quarter-on-quarter (QoQ).

The company paid Rs.23.3 billion in excise taxes, up from Rs.22.5 billion in YoY and Rs.4.8 billion in VAT. The total taxes paid by the company, except the income taxes, for the first half of FY17 amounted to Rs.52 billion, up from Rs.44.7 billion YoY.  

However, CTC said this was Rs.8 billion short of the potential of Rs.60 billion the government could have received from legal cigarettes if not for the drastic excise increase and imposition of 15 percent VAT.

 “It is anticipated that the government tax increase will continue to impact volumes for the remainder of 2017,” CTC said.

The company also said the dip in its volumes has been captured by alternate tobacco products such as illicit cigarettes and ‘beedi’, which grew significantly since the fourth quarter of 2016.

“Following the 45 per cent hike in the price of cigarettes last year, smuggling has become a booming business in Sri Lanka, with 40 million illicit cigarettes being detected and confiscated during the period. 

With only 1 in 10 smuggled cigarettes being detected by law enforcement agencies, we estimate around 360 million illicit cigarettes to have infiltrated the market causing a Rs.16 billion dent to government coffers,” a CTC spokesperson said.

In addition to this, under-regulated and low taxed products such as ‘beedi’ remained a key threat to Government revenue from the tobacco industry due to the widening price gap between the cheapest legally manufactured cigarette and ‘beedi’, the spokesperson pointed out. Meanwhile, CTC’s earnings per share for the quarter under review deteriorated to Rs.15.79 from Rs.16.28. The company has announced a first interim dividend of Rs.16 per share to be paid by the 30th of August 2017.  British American Tobacco Holdings (Sri Lanka) BV had 84.13 percent stake in the company as of June 30, 2017.