Table of Contents

INDUSTRY ANALYSIS OF TOBACCO .................................................................. 2 Structure of industry ............................................................................................... 2 Potential of industry ................................................................................................ 2 General introduction ............................................................................................... 2 No of firms ................................................................................................................ 2 Key Highlights .......................................................................................................... 3 Farming Sector ......................................................................................................... 3 Manufacturing Sector .............................................................................................. 3 Distribution & Retailing Sector .............................................................................. 3 Contribution to the Government Exchequer ........................................................ 3 Full Time Employment (FTEs) ............................................................................... 3 Volume sales slow ..................................................................................................... 4 New tax expected ...................................................................................................... 4 Leading players lose volume sales .......................................................................... 4 Illicit trade in evidence ............................................................................................ 4 Forecast period challenges expected ...................................................................... 4 Type of competition ................................................................................................. 5 Capacity Vs demand ............................................................................................ 5 Actual production ................................................................................................ 5 Investment & market share ................................................................................ 5 References ................................................................................................................. 7

INDUSTRY ANALYSIS OF TOBACCO

Structure of industry
Tobacco Industry comes in the categories of Oligopoly firms. An oligopoly is the market structure of a few large firms which dominates the industry. The number of sellers in an oligopoly market is very less compared to the number of buyers. Although oligopoly is just dominated by a few firms, Market concentration of Oligopolists is very high . Some industry is producing differentiated products or homogeneous products. Homogeneous products are goods that with no preferences; differentiated products are goods with a lot of variety and with preferences. In a simple way, homogeneous are products that are close substitute to each other and are an identical product

Potential of industry
Tobacco is an important cash crop for many countries around the world. Although Pakistans share in the total world production is relatively low (1.45%), rigorous research has led to considerable improvement in both quantity and quality of the produce. Food and Agriculture Organization (FAO) estimated that nearly 3.9 million hectares of land throughout the world were under tobacco cultivation during the year 2009. Global production of the crop exceeded 7.1 million tons at the same time. Tobacco production of the world is largely dominated by China, Brazil, India and the United States. Pakistans aggregate tobacco production during the same year was nearly 105,000 tons.

General introduction
The tobacco industry plays a critical economic role in Pakistan by generating income and employment in the tobacco farming, manufacturing, distribution and retailing.

No of firms
Three firms are listed in KSE -100 for tobacco. Among them are Pakistan Tobacco Company, Phillip Morris International, Khyber tobacco Company

Key Highlights Farming Sector

Employment Generated (Direct Indirect) Income Generated in FY 2009 300,000 people & Source of Livelihood 80,000 farmers Rs. 8.5 billion

Manufacturing Sector
Employment Generated (Direct Indirect) Income Generated in FY 2009 260,000 people & Source of Livelihood 70,000 people Rs. 10 billion

Distribution & Retailing Sector

No. of Outlets Selling Tobacco Products Source of Livelihood 500,000+ 700,000 people Employment Generated (Direct Indirect) Income Generated in FY 2009 200,000 people Rs. 12 billion &

Contribution to the Government Exchequer

Duty Paid Cigarettes Illicit Tobacco Industry 70 billion sticks 15 billion sticks Contribution to Government Exchequer Loss to Government Rs. 50 billion Rs. 8.5 billion

Full Time Employment (FTEs)

Employment Generated Direct 8,000 72,000 Total Indirect 80,000

Volume sales slow

Rising awareness among the masses, financial constraints, illicit trade, the law and order situation and narrow margins affected volume sales of tobacco over the review period, with declining growth continuing in 2012. The controversial water pipe known as sheesha remains a cost effective substitute for tobacco, but its future remains uncertain, as in some parts of the country the sheesha is already banned. Volume sales were also adversely affected by the purchasing power of the masses, which fell due to the prevailing law and order crisis, high taxation, inflation and unemployment.

New tax expected

In order to fill the short fall in revenue the Government of Pakistan is expected to implement a new tax on cigarettes to raise the Federal excise tariff on cigarettes, which will generate PKR10 billion in taxes. Currently, taxation in Pakistan is still low compared with international standards.

Leading players lose volume sales

The dominant companies ruling the tobacco market of Pakistan are Pakistan Tobacco Co Ltd and Philip Morris (Pakistan) Ltd. These players continued to dominate in 2012, but due to negative sentiments and growth in illicit trade both companies lost volume sales in 2012.

Illicit trade in evidence

The narrower margins for retailers and distributors and higher taxation are factors contributing to increased illicit trade. Illicit trade provides greater profits for such players. The legal market is vulnerable to illicit trade due to the lack of strong implementation of laws and policies. Pakistani Government policy seems to focus on the overall reduction in consumption of tobacco, even though the tobacco industry remains a significant source of tax revenue for the government. The law enforcement agencies seem to have failed to take any appropriate action to tackle such trade, which remains a threat for the future growth of the industry.

Forecast period challenges expected

For the forecast period immense challenges are expected, as the anti-tobacco law increases grip, new taxes will be imposed which will put further pressure on the tobacco industry. Simultaneously, fragile regulations regarding illicit trade and the increasing popularity of water pipes are threatening the tobacco industries of Pakistan. Alongside the recovery of the Pakistani economy, income increases leading to greater spending power among consumers will directly boost future share of legal trade in the tobacco industry of Pakistan in coming years.

Type of competition
Capacity Vs demand
Pakistan is the 7th largest Flue Cured Virginia tobacco producer in the world. Tobacco is one of the few crops in Pakistan that has yield per hectare which is comparable internationally. Less than 60% of the tobacco leaf produced in Pakistan is used to manufacture duty paid cigarettes. The remaining amount is used to produce duty non-paid cigarettes, and unregulated products such as bidi, naswar and hookah.

Actual production
Tobacco manufacturing industry generates annual income of more than Rs. 10 billion and is a source of livelihood for nearly 260,000 people in Pakistan.

Investment & market share

The total investment in tobacco manufacturing units in the form of plants, machinery, equipments, etc. exceeds Rs. 15 billion. Both regulators and tax compliant tobacco industry have a common interest to reduce the level of illicit cigarettes from the current 18% of the market

GlaxoSmithKline (GSK)

GlaxoSmithKline plc (GSK), incorporated on December 6, 1999, is global healthcare group, which is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products. GSK International is a United Kingdom-based pharmaceutical, biological, and healthcare company. It is the world's second largest pharmaceutical company and a research-based company with a wide portfolio of pharmaceutical products covering anti-infective, central nervous system (CNS), respiratory, gastro-intestinal/metabolic, oncology, and vaccines products. It also has a Consumer Healthcare operation comprising leading oral healthcare products, nutritional drinks, and over the counter (OTC) medicines.

It product portfolio includes prescription medicines and vaccines. Its prescription medicines range across therapeutic areas such as anti-infectives, dermatology, gynaecology, diabetes, oncology, cardiovascular disease and respiratory diseases. It also offers a range of vaccines, for the prevention of hepatitis A, hepatitis

B, invasive disease caused by H, influenza, chickenpox, diphtheria, pertussis, tetanus, rotavirus, cervical cancer and others.

The Company operates in three primary areas of business: Pharmaceuticals, Vaccines and Consumer Healthcare. On January 31, 2012, the Company completed the divestment of brands in the United States and Canada to Prestige Brands Holdings. The brands included BC, Goodys, Beano, Ecotrin, FiberChoice and Tagamet. In August 2012, it acquired Human Genome Sciences. On January 30, 2013, GSK acquired additional 29.3% interest in GlaxoSmithKline Consumer Healthcare Ltd. In May 2013, GlaxoSmithKline PLC acquired Okairos AG.

In December 2013, Suntory Beverage & Food Ltd fully acquired Lucozade Ribena Suntory Limited from GlaxoSmithKline plc. GSKs Pharmaceuticals business develops and makes available medicines to treat a range of serious and chronic diseases. The Company operates in geographical segments that combine these two businesses: its Consumer Healthcare business functions as a global unit, as does ViiV Healthcare, the specialist HIV Company. . Its Vaccines business produces paediatric and adult vaccines against a range of infectious diseases. In 2012, the Company distributed 900 million doses to 170 countries. The Company competes with Abbott Laboratories, Amgen, AstraZeneca, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, Novartis, Pfizer, Roche Holdings, Sanofi, Takeda and Teva Pharmaceuticals.

GlaxoSmithKline Pakistan Limited was created January 1st, 2001, today as the largest pharmaceutical company in Pakistan. GSK are committed to the mission of providing patients quality products to help improve their lives. Suppliers of pharmaceutical industry of Pakistan are the originators and large research based companies located in developed countries. They are a few in numbers as compared with pharmaceutical companies in Pakistan. Therefore they have strong bargaining power with them. It is very sensitive to switch from one product to another because it is a life concern so customers cannot switch easily from one reliable product to the other. On the other hand there are many pharmaceutical companies offering a wide range of products. So, the bargaining power of customers is at moderate level. Pharmaceutical industry of Pakistan is growing rapidly and there is still significant potential for growth. There are chances of some new entrants but this threat is at moderate level. It is not easy to establish a new pharmaceutical company in Pakistan due to requirement of huge investment. Research and development are the essence of pharmaceutical industry. Every pharmaceutical company in Pakistan is making efforts for the betterment of their research and development department. Still there is a significant

threat of substitute products because of rising discoveries and pacing research and development in the whole world.

Porters five Forces Model is used for industry analysis and it implies that risk adjusted rates of return should be constant across firms and industries. According to numerous economic studies it has affirmed that different industries can sustain different levels of profitability, part of this difference is explained by industry structure. External threats and profits move into opposite direction. So far as industry analysis is concerned it implies that rivalry among existing firms in pharmaceutical industry is almost at moderate level. Pharmaceutical companies are competing on the basis of quality, cost, product range and research and development. Gsk pharmaceutical company showed a good recovery from 2008-2009 slumps as the compare the price from last year the stock price of the gsk was Rs. 98 and 9 months ago the stock price was 107 and 3 months ago the gsk stock price was 118 and now the price of the stock of gsk is 133.28. The avg eps of the gsk is 7.68 and its quite low as compare with the sector average eps which is 19.88. the company total dividend paid during last four quarters is Rs. 4.00 and again its also low as compare with the sector average dividend paid which is 13.17 its also indicates that this company paid less dividend and give good capital gain in future or have good opportunity for investment so company want to maintain some cash.

References
http://www.ptc.com.pk/group/sites/PAK_7SHBXN.nsf/vwPagesWebLive/DO7SHC4 R?opendocument&SKN=1 http://tribune.com.pk/story/302317/tobacco-production-beating-the-average-globalyield/ http://www.euromonitor.com/tobacco-in-pakistan/report