Profit E-Magazine Issue 31 by Profit (by PT)

8 Weekly Roundup 10 Readers Say 11 Aisha Steel Mills Ltd- Yet another business case built on protectionism

12 12 Should you put Dalda in your portfolio? 22 Spotting the fake Quaid in M1 28 Wearing made of Pakistan on its sleeve

32 It all boils down to simple arithmetic 35 A perfectly legit bugbear 38 Native lame ducks abound

Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Contributing Editor: Farooq Tirmizi l Business Editor: Agha Akbar Editor Reporting: Farooq Baloch l Reporters Aisha Arshad l Arshad Hussain l Usman Hanif l Syeda Masooma l Ahmed Ahmedani Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l ZulďŹ qar Butt (Lhr) l Mudassir Iqbal (Isl) Design & Layout: Rizwan Ahmad l Illustrator: ZEB Photographers: Zubair Mehfooz & Imran Gillani Publishing Editor: Arif Nizami Contact: proďŹ t@pakistantoday.com.pk

CONTENTS

WELCOME

DALDA GOES PUBLIC ith our financial capital markets as nascent as they are, any discussion of a major company going public is going to be half parts a discussion on the specifics of the company and half parts a discussion of the markets themselves.

The Pakistani stock marketÊs valuation mantra, I feel, mirrors that of PakistanÊs other boom, the property sector. Consider the property sector for a moment: the rental yields of property in Pakistan is absurdly low. A stark contrast from how astronomically expensive property has become. These high values are to be seen not only in the major metropolises, but places like Okara, Swabi and Mirpur Khas. Even the most staid of financial institutions would offer a much, much better return on investment. Why are PakistanÊs property prices flying in the face of conventional economics, then? The answer is simple. Pakistanis used property as a store of value. And it is a self-fulfilling prophecy, since many people do believe in its utility for that purpose. Their rates will rise, even if the yields themselves remain as low. One cannot help but feel that about the stocks rocketing up the Pakistani stock market. Is this a gut feeling? Not at all. An analysis of the high price-toearning ratio of star Pakistani stocks reveals a situation similar to the property markets. The estimates of future earnings (all shares are a claim to those future earnings) are not reflected at all in the prices. The high prices of these stocks and corresponding capital gains maybe because of the same self-fulfilling prophecy as we saw in the property markets;

FROM THE MANAGING EDITOR

enough people believe in it and the people donÊt seem to be bothered as much about future rental yields and EPS. Now, onto Dalda itself. The company has seen stellar growth in the past. That growth seems to be slowing down now, even by the companyÊs own (optimistic) estimates. The companyÊs bookbuilding process, however, reveals that it wants to be priced like a high-growth company. However, there just might be a couple of tricks up their sleeves. Though in his capacity as the Chairman of the edible oil industryÊs leading association, Westbury owner Bashir Janmohammed makes all the right talking points against the Punjab Food AuthorityÊs upcoming clampdown against banaspati ghee (too much Transfat, says the Authority) but his own Dalda brand wears its status as „Virtually Transfat Free (TVF)‰ like a badge. The Only brand in the country that can boast that. By that measure, if this regulatory directive were to take place by 2020, and the rest of the brands are not able to undertake the retooling and restructuring required to reduced their Transfat levels, Dalda will have the entire market to itself. If that happens, our general view of the overpriced status of Pakistani stocks notwithstanding, the stock is going to be a good buy. If not, think of it only as a store of value, the way you would any other stock.

Babar Nizami

“The Gwadar port should be connected with sea ports of Oman for mutual benefit” Minister for Development, Planning and Reform Ahsan Iqbal

QUOTE

BRIEFING

“Economy is strong enough to withstand minor strains, including the one in our relations with the US” Advisor to the Prime Minister on Finance, Revenue and Economic Affairs, Miftah Ismail

increase in production of electric fans was registered during first four months (JulyOct) of the year 2017-18 as compared to same period of last year. During the period under review, as many as 901,857 units of electric fans were produced while 716,806 units were manufactured during the same period of previous year. According to latest data released by Pakistan Bureau of Statistics (PBS), on a year-on-year basis, the production of electric fans also increased to 183,398 units in October 2017 from 162,440 units in same period of the year 2016, thus showing an increase of 12.9 per cent. However, the export of electric fans from the country witnessed a decline of 14.84 per cent during JulyNovember 2017-18 as compared to July-November 2016-17. During the period under review, 297,000 electric fans worth of $ 7.529 million were exported while export of 446,000 units valuing $ 8.841 was recorded during the same period of last year. On yearon-year, and month-on-month basis, the export of electric fans during November 2016, surged by 69.46 per cent and 117.67 per cent when compared with the export during October 2017 and November 2016 respectively.

25.82pc

is the figure of Pakistan’s total debt, which is 78.4 percent of Gross Domestic Product (GDP) according to Ministry of Finance (MoF). The MoF’s representative gave these statistics during the meeting of Senate’s Standing Committee on Finance and Revenue, saying that the volume of debt in 2013 was $ 140.20 billion, 60 per cent of GDP. Terming the huge volume of debt “alarming”, committee’s Chairman Saleem Mandviwalla said that it was in violation of the Constitution to get debt more than 60 per cent of the GDP. “Why the parliament was not informed about the alarming number of debt percentage when it crossed 60 per cent?” he asked the ministry’s officials. “Taking parliament into confidence before crossing the limit was mandatory,” remarked the committee’s chairman. Other members of the committee also showed serious concerns over the volume of debt received by the government so far. The MoF also informed the committee that government was to pay $ 6 billion in this financial year out of which at least $2.40 billion have been paid so far. In reply to a query, the ministry’s officials informed that deficit in the current fiscal year will be $ 14 billion.

$210.40b

$9.7b were remitted by overseas Pakistanis in the first six months (July to December) of 2017-8, compared with $ 9.505 billion received during the same period in the preceding year. It increased by 2.4 per cent or $ 240 million in first six months. During December 2017, the inflow of worker’s remittances amounted to $ 1.724 billion, which is 9.31 per cent higher than November 2017 and 8.72 per cent higher than December 2016. The country-wise details for the month of December 2017 show that inflows from Saudi Arabia, UAE, USA, UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman) and EU countries amounted to $ 431.97 million, $ 396.74 million, $ 234.76 million, $ 223.3 million, $ 188.76 million and $ 54.87 million respectively compared with the inflow of $ 475.75 million, $ 339.95 million, $ 182.19 million, $ 181.85 million, $ 203.63 million and $ 35.09 million respectively in December 2016.

BRIEFING

“The govt is wellpositioned to meet all its debt and liabilities, but we have to take loans for development” Minister of State for Finance and Economic Affairs Rana Muhammad Afzal Khan

QUOTE

17pc

rise in banking sector advances was recorded in 2017, according to a Topline Security report. According to the brokerage report, lower interest rates helped the hunger of funds for industrial sector expansion and rose 17 percent compared to Rs5.57 trillion in 2016. The report stated Advances to deposit ratio grew to 53 percent during 2017 compared against 50 percent in 2016. During 2017, bank’s deposits rose 10 percent to touch Rs12.36 trillion against growth of 20 percent in 2016. Credit to private sector recorded an increase of 11 percent during first eleven months of 2017 compared to corresponding period of 2016 when it grew 6 percent.

dip has been recorded in country’s direct investment to $ 1.382 billion during the first half of the current fiscal year compared to $ 1.421 billion in the same period last year. Out of the total investment, Chinese companies invested $ 969.1 million in Pakistan during last six months. In December 2017, the country has received $ 197 million only, in the head of DI compared to $ 692 million in the same period last year. The country received inflows of Foreign Direct Investment (FDI) of $ 242 million, while investors pulled back $ 45.2 million in the same period. Foreign private investment of the country stood at $ 1.253 billion up by only 7.4 per cent in July-Dec compared to $ 1.167 billion in the same period last year. During the first half of 2017, SBP recorded inflows of $ 2.450 billion under the head of Foreign Public Portfolio Investment (debt securities), increasing by 145.4 per cent during July-Dec this year which stood at $ 998 million in the same period last year, the data said.

2.8pc

worth of mobile phones, tablets have been seized by raiding team of Collectorate of Customs Appraisement West seized four containers from Al-Hamd International Container Terminal (AICT). According to details, Collector Customs West Shehnaz Maqbool received a tip-off that huge quantity of mobile phones and others have been cleared from the port by misdeclaration. The cost of the smuggled handsets and tablets is reported to be worth over Rs 1 billion. The collector customs appraisement west constituted a raiding party headed by Deputy Collector R&D Imran Rasool which kept the suspicious containers under watch and lastly seized the same in the presence of officials of intelligence and other security agencies. The containers belonged to Messers Arham & Co Lahore, Rana Enterprises the initial investigations revealed. The raiding party opened all the four containers and found that the containers were stuffed with mobile phones and tablets of different brands while the Bill of Loading B/Ls declared the containers to have garment accessories, refrigerator parts and disperse dyes.

Rs1b

equity investment will be made by Dawood Hercules Corporation Limited (DHCL) in in Edotco Pakistan (Pvt) Limited. The notification read “the Board has decided that an Extra Ordinary General Meeting of the Company be convened to authorize and approve the Proposed Transaction by way of a Special Resolution in terms of Section 199 of the Companies Act, 2017 read with the Companies (Investment in Associated Companies or Associated undertakings) Regulations, 2017.” At end of August 2017, Dawood Hercules Corporation Limited (DHCL) in partnership with Edotco entered into an agreement with Veon Pakistan Limited to acquire its wireless tower business in Pakistan for $940 million.

Rs17.453b

11.24pc rise in exports was recorded during first six months (July-Dec) of financial year 201718, touching $11.007b. Despite all efforts of the federal government to reduce the country’s foreign import by imposing huge taxes on 731 items, the imports of the country increased by 19.11 per cent to $ 28.970 billion in July-Dec 2017-18 compared to $ 24.323 billion in the same period last year, however it increased by 0.24 per cent compared to November 2017. The country’s exports slightly enhanced by 11.24 per cent to $ 11.007 billion during July-Dec 2017-18 compared to $ 9.895 billion in the same period last year. However, it increased to $ 1.977 billion in December 2017 compared to $ 1.974 billion in November 2017. Meanwhile, the trade deficit slightly enhanced to 24.50 per cent to $ 17.963 billion compared to $ 14.428 billion in the same period last year.

BRIEFING

OPINION

Readers Say Article worth reading. One usually doesn't find such well researched material on Pakistani public sector enterprises.My concern is regarding the hope expressed in ML1 upgrade under CPEC. Recently, this project has been taken off the medium term plan by China.To me, it doesn't make much sense since it costs many times more to ship goods via trucks as compared to trains, let alone the environmental benefits of a much smaller carbon footprint. Apropos: Could Saad Rafique end up fixing much more than the railways? Iftekhar Mahmood, Director Center for Advanced Studies in Engineering Creation of NLC destroyed Railways. All over the world Passenger fares are kept low and they earn through good transportation. NLC took away wheat transportation and they also wanted to buy their engines too leaving Pak Railway to bear all expenditure on maintenance. Apropos: Could Saad Rafique end up fixing much more than the railways? Nazar Rauf Rathore, Director Rural Support Programmes Network Railway is the backbone of industrialization however transport mafia has easily destroyed railways as a result country is overpopulated with trucks and roads are ruined due to continuous heavy traffic of trucks and busses. Apropos: Could Saad Rafique end up fixing much more than the railways? Farooq Ishaq

How to ContaCt

facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com

During last govt's tenure, when Bilour was railway minister, railway was on brink of collapse. All of the freight service was stopped because of his incompetence and his desire to make his trucking fleet profitable. At least Saad Rafique has made the railway operational and is currently profitable. Give credit where it's due. Apropos: Could Saad Rafique end up fixing much more than the railways? Comment: Faisal Iftakhar

This is better than most articles but needs more research. Taking interviews from top guns never work as they tend to exaggerate. You have to ask neutral experts. Apropos: Could Saad Rafique end up fixing much more than the railways? Comment: Fiaz Khan (Profit website) Good article. With all the negativity around this is one department that happens to be a shining light. Apropos: Could Saad Rafique end up fixing much more than the railways? Comment: Ch Ahmed Uzair Basraa Nothing wrong with unbranded milk if it is served hygienically. Most milk and water factories in Pakistan have proven to be infested with bacteria. Apropos: Losing to loose milk Comment: Farooq Ishaq World over investors adhere to local standards and regulations, this should not be different in Pakistan . It is poor management on the part of investors to subvert regulations in the name of profit maximisation. The local farmer is an investor as well. Apropos: Losing to loose milk Comment: Taymur Mirza With the infrastructure development in Pakistan particularly completion of ongoing Motorways/ Highways, and increase in purchasing power of certain class of society, trend to have two or more cars with each family, a trend prevalent in western countries, future of motor vehicles seem very bright in Pakistan giving room to various Korean, European companies to enter in competition with the Japanese giants. Apropos: Will KIA be third time Lucky? Comment: M.Aslam Chaudhary Opportunity is already lost with Sharif's love for roads. Apropos: Apropos: Could Saad Rafique end up fixing much more than the railways? Comment: Anas_Younus (Twitter)

By: Arshad Hussain ocated at Bin Qasim Industrial Park in Karachi, Aisha Steel Mills Limited (ASML) is aiming to more than triple its production before the end of 2018. Post this expansion, car manufacturing companies in Pakistan would have access to indigenously produced highquality Cold Rolled Coil (CRC) steel sheet – at the moment being imported to manufacture bodies of cars and other vehicles. For the first time in this country, Aisha Steels is going to produce CRC of the kind of grading that is good enough to fabricate the outer body or skin of any car or vehicle all over the world – of a standard similar to Japan, Europe, and the United States come 2019. “We are already producing high-grade

L STEEL

‘IF THE GOVERNMENT DID NOT PROVIDE A LEVEL PLAYING FIELD TO COMPETE IN THE INDIGENOUS AND INTERNATIONAL MARKET, THE LOCAL INDUSTRIES WILL COLLAPSE AND, AS A CONSEQUENCE, UNEMPLOYMENT IN THE COUNTRY WILL INCREASE’ Muneer Ahmed, CEO Aisha Steel Mills Ltd (ASML) cold rolled coil steel sheet being widely used in local manufacturing and engineering products, including cars and motorcycles, but after the expansion of our plants, the company will be able to produce a complete range of products by the end of 2018, or March 2019 at the latest, that could be used in all type of engineering products including the car industry,” said Muneer Ahmed, Chief Executive Officer (CEO) Aisha Steel Mills. Listed under the conglomerate Arif Habib Group – incorporated as a public limited company on May 30, 2005 and listed on the PSX since Aug. 2012,

with its share now just under Rs20 a pop. in 2017, it posted a profit of Rs1.02 billion compared to a Rs 157 million loss it posted the previous year. “We can safely claim that 80 percent motorcycles manufactured in this country, including brands like Honda, Super Power, and other Chinese versions, are dependent upon locally made CRC to make chassis and other parts. Actually, except the engines, all motorcycle accessories across the aforementioned brands are being made of our locally-produced CRC,” said Muneer Ahmed, in an exclusive conversation with Profit. On top of that, currently, the native vendors and car manufacturers are using Aisha’s CRC in car flooring, seats and other accessories. The expansion underway is nearly half of its total investment in the venture so far, Rs11.5 billion topped up with Rs5.4 billion now. And it is likely to pay off every which way – good for the company and its profitability, superb for the car manufacturing and many other major and minor industries for they would get international quality indigenously and for the country, for it would contribute towards import substitution in a big way.

Transformation in volume and class ollowing Aisha’s transformation in terms of volume and class, “Pakistan can save hundreds of millions of dollars in foreign

‘WE CAN SAFELY CLAIM THAT 80 PERCENT MOTORCYCLES MANUFACTURED IN THIS COUNTRY, INCLUDING BRANDS LIKE HONDA, SUPER POWER, AND OTHER CHINESE VERSIONS, ARE DEPENDENT UPON LOCALLY MADE CRC TO MAKE CHASSIS AND OTHER PARTS’ 12

exchange presently being consumed on the import of car bodies”, said Muneer Ahmed. Though the breakdown of data is unavailable, according to a rough estimate, presently Pakistan ends up spending nearly $470 million (₨50 billion) annually on the import of raw materials for cars, including bodies and other accessories. The existing production capacity of the Aisha Steel Mills is around 220,000 metric tonnes of cold roll coil and galvanized coil but after expansion of the plants this capacity would be jacked up by more than threefold, to around 700,000 tonnes annually, the CEO informed. Another company, International Steel is also involved in the production of CRC and Galvanized Coil in Pakistan. The total production of both currently stands at around 750,000 tonnes. The International Steel is also expanding its plants in the Landhi Industrial area. “Total local production capacity of the CRC and the galvanized coil may touch 1.7 million tonnes by the end of first quarter 2019, while our country’s demand would be 1.2 million tonnes,” he claimed. “The export of excess productions of 500 tonnes would add to our foreign exchange earnings,” said the CEO. “As manufacturing has hit the growth trajectory, the demand for CRC worldwide is high at the moment.” Keeping excess production in view, Aisha is now gearing up to export the surplus as the high demand can fetch windfall profits.

The CPEC challenge xactly a year ago, the federal commerce ministry had imposed 12-19 percent Anti-Dumping Duty on the import of CRC and galvanized coil from China and other countries, removing a major hurdle that had the potential to make life difficult for the local producers to compete. The share price of ASML had literally doubled at that time, rising from Rs 15 to approx. Rs 30/ share. However after the frenzy was over the share price gradually settled at Rs 19-20 level. In future, the China Pakistan Economic Corridor (CPEC) could be a major challenge for the local industries as industrialization under the CPEC umbrella would have import duty exemptions and other benefits from the federal government. “If the government did not provide a level playing field to compete in the indigenous and international market, the local industries will collapse and, as a consequence, unemployment in the country will increase,” said Muneer, while replying to a question. With vast experience in this field, Mr Ahmed further maintained, the local production cost of CRC is much higher compared to China which is believed to be dumping its excess steel capacity in other countries. So, the present or future governments would have to decide for the sake of the nation on saving the local industry by

A wide array of uses The CRC and galvanized coil’s main consumers are home Appliances and components, such as refrigerators, washers, dryers, stove liners, air conditioners and water heaters, fan blades, lawn mowers, lighting fixtures, and hinges. In the automobiles sectors, the auto vendors are making motorcycle fuel tank, exhaust pipes, frame, fender, muffler, chain cover, rim, seat pan, shock cover, precision tubes, auto door panels, pillars, brackets. In furniture industry, its material is being used in office furniture, filing cabinets, tables and chairs. In kitchen uses, it produces electronic cabinetry, metal containers and frying pans The vendors are making various kinds of drums – to store oil and lubricants as well as food grade items. In the construction industry, people make steel profiles for ceiling and roofing, building components like steel racks, corrugated sheets, shipbuilding parts, wall and ceiling mount kits, bearings, hardened washers and brushes, telecom towers, shelters, filters, and pipes. On completion of the expansion, ASML is expected to contribute over Rs10 billion to the government revenue, and save precious foreign exchange worth $500 million every year, as well as providing fresh employment to nearly a 1,000 people, if not more. providing low taxes compared to industries set up under the CPEC. CRC products would be on offer to the industrial, engineering and manufacturing industry as a premium raw material for transformation into any number of value-added products for the domestic and export markets. “We are at this point in time unable to export our products as the local demand of CRC and galvanized coil is high and the company’s capacity is below the requirements of local customers,” said the CEO.

THE PROCESS The Mills offers a wide range of products from processing steel with superb press formability to high-strength sheets instrumental in weight reduction, to name a few, in order to meet the patron’s requirements. HRC is imported as raw material for conversion into the final product, CRC. Before processing into cold rolled steel, it is necessary to pickle the steel to eliminate the black oxide scale on the surface, subsequent to which, the hot rolled flat steel is cold rolled to the required final thickness at room temperature. In cold rolling, the hot rolled coil is rolled into thinner gauges of the required size by a further passage in rolling stands, he explained. Cold rolled steel possesses better surface, enhanced strength, and better dimensional characteristics than hot rolled steel, he claimed. The product passes through an electrolytic cleaning line for removal of oil, iron powder and other foreign materials. The steel is then annealed, involving slow heating and cooling to improve workability. Skin Passing is done to improve and normalize the mechanical properties and to get the specified surface finish, hardness and flatness, after which the finished product is passed through a recoiling line to adjust the width by edge trimming, coil weight by dividing a large coil into small coils to meet the requirement, inspect dimensions, surface quality, flatness, and remove defective parts and to apply rust-preventive oil.

Tied to the international market oth ISL and Aisha Steel, increased prices of CRC twice in last one month. The company chief said, we import hot rolled coils (HRC) from various countries, including Japan and others, which is the main raw material. That is why the price of the local product depends on the raw material. “The international market sets the price of local products as the value of raw material goes up abroad, the local would automatically witness an increase. Cold Rolled steel and coils are extensively used as a basic material in automobiles, electric appliances, steel office equipment, various types of containers, and numerous other products closely connected to our daily lives. As more sophisticated products are in demand for being more economical, in a wider range of uses that also offer more advanced technology, the quality and performance required for cold-rolled steel sheets and coils have become more refined and diversified, the CEO said.

STEEL

A must read curtain raiser to Pakistan’s favourite cooking oil brand, Dalda’s upcoming IPO n the surface, Dalda Foods looks like the kind of company that has characteristics investors would salivate over: the owner of a decades-old set of brands that are household names and hold a leading market share in a large category of consumer spending, rapid revenue growth fueled both by organic expansion as well as successful acquisitions, a management team with impressive credentials built up over decades at well-run multinationals, and an ownership structure that includes both the top management team as well as a hands-off financial sponsor. What is not to love? But look carefully and you will notice that many of those favourable factors are backward-facing: they tell you more about the company’s past than its future. And if you are a prospective investor in Dalda’s stock, history is nice, but not what your money is meant to purchase. A stock, after all, is literally a claim to a share of the company’s future cash flows. So that then begs the question: are Dalda’s best days behind it already? Or does the company still have a compelling growth story left to tell investors? The timing of the initial public offering (IPO) of Dalda Foods’ shares is not yet certain since the company has decided to wait for a more favourable

INVESTMENT

set of conditions in the equity markets, following the bearish sentiment that took hold over the Pakistan Stock Exchange in 2017. But while investors wait for the IPO book building process to resume, they have an extra few months to pore over the company’s financial statements and its position within the Pakistani economy and decide just how much they are willing to pay for the company’s stock. At Profit, we decided to take the liberty of examining some of the questions investors should ask themselves before considering Dalda Foods as part of their equity portfolios.

The original banaspati ghee t is hard for anyone alive to remember now, but before Dalda, there was no such thing as banaspati ghee. For most households in South Asia, cooking involved using coconut oil, or desi ghee (clarified butter), which was an expensive ingredient that had to be used sparingly. A Dutch company named Dada & Company started selling hydrogenated vegetable oil (banaspati ghee) to the South Asian market in the early part of the 20th century, and the product – cheaper than desi ghee – soon began to grow in popularity. In the early 1930s, Lever Brothers (one of the predecessor firms of Unilever), was also looking to enter the banaspati ghee business, and had incorporated a subsidiary Hindustan Vanaspati Manufacturing Company for this purpose in 1931. That same year, rather than investing in building a brand from scratch, Lever Brothers decided to purchase the rights to manufacture and sell Dada ghee in British India. Dada agreed to sell those rights, on one condition: that the name Dada be re-

“THE CHALLENGE FOR DALDA IN THE INITIAL YEARS WAS TO DRIVE HOME THE POINT THAT IT TASTED JUST LIKE DESI GHEE, HAD DEEP-FRYING PROPERTIES LIKE IT, BUT UNLIKE GHEE, IT WOULDN'T FEEL HEAVY EITHER ON THE POCKET OR THE PALATE” Sagar Boke, head of marketing at Bunge India tained. Lever Brothers, however, wanted to give the brand its own touch and decided to put the L from Lever Brothers in the middle of the name, making it Dalda. The company started manufacturing and selling the product in 1937. But of course, it is not enough to sim-

ply start manufacturing the product. For a new category of products like banaspati ghee, consumers have to be convinced to try the product. “The challenge for Dalda in the initial years was to drive home the point that it tasted just like desi ghee, had deep-frying properties like it, but unlike

ghee, it wouldn't feel heavy either on the pocket or the palate,” said Sagar Boke, head of marketing at Bunge India (the current owners of Dalda in India) in a 2015 interview with Indian financial newspaper Business Standard. To get around that problem, Lever Brothers began what is believed to be one of the first multimedia advertising campaigns in South Asia. “In cities, roadside stalls had men preparing tasty snacks using Dalda and offering them to the passers-by. Short films were screened in theatres. An intriguing, round-tin-shaped van roamed the streets. Attractive leaflets were handed out and small tins of banaspati sold. People were encouraged to smell, touch and taste the product. In villages, wandering storytellers were roped in to talk about Dalda. Different customers were targeted using different pack sizes – hotels and restaurants were offered large, square tins and individual consumers small, round tins,” writes Malathy Sriram, in the Indian business publication, BusinessLine. The marketing campaign, designed by the firm Lindas, worked, and Dalda became a household name throughout South Asia, and largely remains so today.

THE JANMOHAMMED BROTHERS HAVE MADE IT A POINT TO RETAIN ALMOST THE ENTIRETY OF THE Unilever sells off Dalda n 2003, Unilever made the strategic SENIOR UNILEVER TEAM, TRUSTING NOT JUST IN decision to sell of the Dalda brand in THE TEAM THAT KNEW THE BRAND BEFORE both India and Pakistan. At the time, Dalda accounted for just under 19% of WESTBURY BOUGHT IT, BUT ALSO IN THE Unilever Pakistan’s revenues, so the sale GENERALLY HIGHER QUALITY OF HUMAN CAPITAL meant a significant reduction in the size of FOUND AT THE LOCAL SUBSIDIARIES OF the company’s business in the country. Nonetheless, Unilever was determined and WESTERN MULTINATIONAL COMPANIES retained HSBC as their investment bankers

to manage the transaction. Needless to say, the chance to acquire the biggest brand of edible oils in the country was not something that went unnoticed in Pakistan’s business community. No fewer than 19 entities bid for Dalda Pakistan, a list that included some of the biggest names in the food and consumer goods business in Pakistan, including Saffola Group, Candy Land, Habib Oil Mills, Lakson Group, Avon, Fauji Foundation, and Zulfiqar Industries. The winning bidder, however, was none of these. The bid that won the auction came from Westbury Group, which, while well-known in Karachi’s trading and financial community, was not known to be a manufacturing or consumer goods powerhouse. The group is owned by two brothers from Karachi, Bashir Janmohammed and Rasheed Janmohammed. Prior to acquiring Dalda, Westbury was primarily a commodities trading business based in Karachi, which also – at the time – owned a brokerage licence on the Karachi Stock Exchange. While they traded in many commodities, their biggest businesses was palm oil, the main raw ingredient for banaspati ghee. Indeed, at the time of the acquisition, Westbury was the largest importer of palm oil into Pakistan. Before the acquisition, analysts had been expecting the winning bid to be between Rs900 million and Rs1 billion. Westbury’s winning bid was Rs1.33 billion. The transaction closed in July 2004. (Incidentally, Dalda India was sold to Bunge, a US agribusiness company, for INR 1 billion, which was approximately equal to PKR 1.6 billion at the time.) The deal included the rights to the Dalda brand name and almost all of the edible oils and fats business of Unilever Pakistan, except Blue Band margarine. However, while the newly incorporated, Westbury Group-owned Dalda Foods

“WE BELIEVE, GIVEN RELATIVELY DEEP POCKETS OF WESTBURY AND DALDA FOODS TO INVEST IN THE BRAND, ‘CUPSHUP’ IS EXPECTED TO TEST TARANG’S DOMINANCE IN THE TEA WHITENING SEGMENT” Muhammad Ibadur Rahman, a research analyst at Elixir Securities would not own the Blue Band brand name, it would continue to manufacture the margarine as an outsourced manufacturer for Unilever Pakistan. It was not just Wesbury’s willingness to bid higher that won them the auction. Indeed, Habib Oil Mills actually had a slightly higher bid at Rs1.35 billion. However, unlike the other bidders, Westbury al-

lied itself with the Dalda management team at Unilever Pakistan and included them as shareholders in their bid. (Note: In a sellside auction process, there are often bidders who put in a high bid, but may not have the intention or ability to close the transaction, so the seller often prioritises other factors and may end up selling a company to a buyer who had a slightly lower bid, but can demonstrate keen interest in actually closing the trans-

action, such as having the current management team as shareholders.)

The Westbury approach he Janmohammed brothers have a business philosophy that is still somewhat unusual in Pakistan: they are smart enough to know what they do not know, and confident enough to trust the people they hire to do the job. While they had been in the commodity business for decades and knew it inside out, they were less familiar with the business of manufacturing and selling a directto-consumer product. So they made sure to retain the Unilever management team that had been running Dalda before the 2004 transaction. That bet appeared to have mostly paid off: Dalda’s revenues have grown from Rs4 billion for the financial year that ended June 30, 2005, the first full year after the Westbury acquisition, to Rs33 billion in fiscal 2017, an annualized rate of 19.1% per year. Inflation during that time has averaged 9.1% per year. People familiar with the company’s affairs say that, when it comes to day-today affairs, the Janmohammed brothers let the management run the show. And they have made it a point to retain almost the entirety of the senior Unilever team, trusting not just in the team that knew the brand before Westbury bought it, but also in the generally higher quality of human capital found at the local subsidiaries of Western multinational companies. Every single one of the executive directors of Dalda Foods is an ex-Unilever

INVESTMENT

employee. This includes not only the CEO, Perwaiz Hasan Khan, but also the directors for finance and information technology, sales and distribution, human resources, marketing, and technical operations. Small wonder, then, that the management is able to claim that the Dalda corporate culture is similar to that of Unilever Pakistan. “Our organizational values are our very own, but perhaps not very dissimilar from Unilever Pakistan,” said Perwaiz Khan, in an interview with Profit. “The culture change, if any, has not been stressful.”

Growing the business oon after the acquisition, the newly incentivized management team (the top management are all shareholders in the company) began an aggressive expansion plan that relied. “The company’s growth trajectory has combined organic growth as well as growing through acquisitions and diversification,” said the CEO. The first initiative was to try to sell more of Dalda’s products to the large expatriate Pakistani population in the United Kingdom, Canada, and the United States, which the company was successfully able to do starting in 2005. Dalda management is particularly proud of this achievement since it meant being able to meet the relatively high food quality standards of the European Union, no mean feat for a company that was used to catering to Pakistani consumers. The second initiative was the launch of another brand of cooking oil named Manpasand. The Dalda Foods management felt that Dalda itself was a brand that largely catered to the needs of the upper middle class, and that the company was missing out on the growing market below that income level. “We launched Manpasand in 2006 to cater to the needs of the large middle segment of the market,” said Perwaiz Khan.

The next major phase of growth came through the acquisition of a controlling stake in Wazir Ali Industries in 2007, a struggling publicly listed manufacturer of edible oils that owned the brand name Tullo, which added another household brand to the Dalda Foods portfolio. “Tullo has been fully nurtured back to health and has made a successful and dramatic turnaround to become one of the fastest grow-

ing brands in the edible oils category,” said the CEO. The year 2007 was the peak of the economic boom under the Musharraf Administration, and middle class incomes were rising rapidly, and Pakistan was finally beginning to have a sizeable upper middle class that could truly be counted as part of the global middle class. This income strata was not satisfied with Dalda’s existing brand offerings, and so Dalda Foods launched it olive oil business,

IT SEEMS BOTH THE MANAGEMENT AND FINANCIAL SPONSOR ARE DONE WITH TRYING TO GROW THE BUSINESS AND ARE NOW CASHING OUT, AND INDEED, USING THE COMPANY’S CASH FLOWS AS THEIR ATM FOR THEIR MONTHLY EXPENSES 18

branded as Dalda Olive Oil, and imported from Spain. It was not just brands and acquisitions, however. The company also invested in the less glamourous, but nonetheless highly important, areas of manufacturing capacity. In 2011, Dalda Foods completed work on a new edible oil processing plant in Karachi, which increased the company’s manufacturing capacity by another 300 tons a day. And in 2012, Dalda added a new edible oil neutralization and bleaching plant, with a capacity of 100 tons per day. “This further improved the company’s ability to use indigenous sunflower seeds,” said Perwaiz Khan. In short, the first eight years after the acquisition from Unilever were a flurry of activity geared towards growing the business, and one that yielded results. Between 2005 and 2012, Dalda Foods’ revenue grew by an average of 28.1% per year, a period during which inflation averaged 11.8% per year, and hit Rs22.6 billion in 2012.

Running out of steam fter 2012, however, the company began to lose steam. Revenues continued to grow, but at a much more tepid pace. Between 2012 and 2017, the company’s revenues have grown by 7.6% per year. Inflation averaged 5.5% per year during that same period. It is not as though Dalda Foods has stopped trying to grow its business. In 2013, the company commissioned a new

edible oil seed extraction factory in Port Qasim, which has a capacity of 300 tons per day. The problem, however, is that the edible oil business itself stopped growing. Dalda management relies on estimates published in Dawn that suggest that the edible oil market may be worth as much as Rs500 billion a year, and growing at approximately 7% per year. Interestingly Bashir Janmohammed gives a much lower figure. “With growing population, edible oil consumption is expected to rise by 3 to 5% on yearly basis making it an even more attractive market”. Perwaiz Khan says that they estimate that a little over 60% of that market is domestic consumers, with the remainder taken up by industrial consumers. If Perwaiz Khan is correct, that would imply that the consumer market is worth just over Rs300 billion a year. However, we at Profit utilized data from the Pakistan Bureau of Statistics to calculate the size of the consumer market for edible oil and came up with a larger figure of Rs403 billion in 2017. Assuming the 60-40 split be-

tween consumer and industrial is correct, the total size of the edible oil market should be around Rs671 billion. Our estimates for the market’s growth between 2002 and 2017 were an average rate of 11.1% per year. However, that number masks a more disturbing reality for edible oil manufacturers. Between 2002 and 2012, the domestic consumer edible oil market grew at an average of 17% per year, but between 2012 and 2017, it only grew by 0.2% per year. Put differently, in inflation adjusted terms, the average Pakistani household is spending less on edible oils than they were five years ago. We suspect that the industrial market for edible oil is probably operating differently than the consumer market. Nonetheless, given the dominance of the consumer market, it does not bode well for the industry to see ordinary households using less of their product on a per-capita basis.

Diversification versus dividends t some level, it appears that the management is well aware of the slowdown in the market for their core product and have begun to diversify away from edible oils. In 2015, for instance, Dalda Foods completed work on a factory to produce Cup Shup, a new brand of tea whitener, an important food category in a country obsessed with tea. And in 2017, the company launched a brand of snack foods called Knock Out. And at some level, the market expects Dalda to succeed at its diversification strategy. When it launched its tea whitener brand, for instance, the current market leader in that category, Engro Foods, was forced to respond by dramatically increasing its marketing spending on television commercials for its Tarang brand of tea whiteners. At the time, analysts had high hopes

“OUR ORGANIZATIONAL VALUES ARE OUR VERY OWN, BUT PERHAPS NOT VERY DISSIMILAR FROM UNILEVER PAKISTAN. THE CULTURE CHANGE, IF ANY, HAS NOT BEEN STRESSFUL” Perwaiz Khan, CEO Dalda Foods for Dalda’s foray into this space. “We believe, given relatively deep pockets of Westbury and Dalda Foods to invest in the brand, ‘CupShup’ is expected to test Tarang’s dominance in the tea whitening segment,” wrote Muhammad Ibadur Rahman, a research analyst at Elixir Securities, an investment bank, in a note issued to clients on September 29, 2015.

Dalda does not yet break out its revenues by category of products its sells, so it is hard to judge the success of this venture. But judging by the fact that revenue growth has yet to pick up, at the very least, it may be too early to tell how much success the company is likely to have in moving away from its core business of edible oils. However, beyond the challenges of a slowing market in its core products, Dalda’s ability to grow is being hamstrung by a decision that is very much within the purview of its board of directors: the decision on how much to pay out in dividends. Between 2012 and 2017, Dalda Foods has paid out an average of 80.4% of its net income in dividends to its existing shareholders. And the dividend payout ratio only appears to keep growing over time. For each of the last three years, the company has paid out over 95% of its net income in dividends. In fiscal 2016, the company actually paid out a dividend an

INVESTMENT

astonishing nine times in just one year. That kind of behaviour on the part of a company’s board – dominated as it is by the management and its financial sponsors, all of whom has significant shares in Dalda Foods – suggests that both the management and financial sponsor are done with trying to grow the business and are now cashing out, and indeed, using the company’s cash flows as their ATM for their monthly expenses. Such a policy may be acceptable in the case of a private company, but is unlikely to be welcomed by public company shareholders.

Caveat emptor: sponsors and management cashing out nd, judging by the structure of the offering, the management and the Westbury Group are not done cashing out. If the IPO goes through as it is currently structured, over 63.6% of the cash generated from the stock offering will flow not into the company to fund its expansion plans, but to existing shareholders of Dalda Foods’ holding company, which is primarily the Westbury Group, but also the current management team. That existing set of shareholders would be selling 19.4% of their current shares in the business. At the current floor price of Rs85 per share (likely to go up if there is sufficient investor demand), Rs2.55 billion (of at least Rs7 billion to be raised) would go to the company to provide most of the funds for its Rs3 billion project to expand its seed extraction plant and increasing its seed crushing capacity by an additional 500 tons per day. This would allow the company to reduce its costs and increase profit margins (the company does not disclose by how much). When asked to comment on what the transaction structure reflects about the

“WITH GROWING POPULATION, EDIBLE OIL CONSUMPTION IS EXPECTED TO RISE BY 3 TO 5% ON YEARLY BASIS MAKING IT AN EVEN MORE ATTRACTIVE MARKET” Bashir Janmohammed, Chairman Dalda Foods management and sponsors' views of the company's future, CEO Perwaiz Khan said,"the company has been doing well, is doing well, and Insha Allah will continue to do well. The company is in robust financial health and growing at a fast and steady pace. Our pipeline of future projects is good and sensible. The investment needs of those projects are quite adequately fulfilled by the proposed IPO structure."

retirement and will be getting a large cash payout as a result of the structure of the offering. Of course, there is absolutely nothing wrong with sponsors selling their shares in a company at the time of an IPO. But when they do that, they must present to the investing public a clear plan for succession of key management personnel, and for how

LOOK CAREFULLY AND YOU WILL NOTICE THAT MANY OF THOSE FAVOURABLE FACTORS ARE BACKWARD-FACING: THEY TELL YOU MORE ABOUT THE COMPANY’S PAST THAN ITS FUTURE At Rs85 per share, the company is valuing itself at 12.6 times its 2017 earnings. The median valuation for the publicly listed food companies Dalda identifies as its peers is 24.4 times trailing twelve months’ earnings. Almost none of those companies, however, offers as high a dividend payout ratio as Dalda is offering, and most have higher revenue and profitability growth. Meanwhile, the overall stock market trades at a multiple of 10.1 times trailing twelve months’ earnings. So, in a nutshell, Dalda Foods is asking investors to value it like a high-growth food and consumer goods company even though, for the last five years, its management has been plowing most of its profits into dividends rather than reinvesting that cash into its business. Meanwhile, most of the management team is already quite senior and some key personnel are likely to be close to

the company plans to continue growing its business after its existing sponsors cash out part of their stake in the company. Dalda’s prospectus leaves much to be desired on that front. Nobody would begrudge the current Dalda management team any possible retirement plans (none have yet been announced), nor should anyone suggest that they and the current shareholders do not deserve the cash that is coming their way. They have certainly worked hard to earn it and deserve congratulations on the successful business they have built. But the last five years suggest that Dalda has struggled to grow its business, and that a lot of work needs to be done in order to ensure that the business remains as vibrant as it was in the years immediately following the acquisition from Unilever. Who will do that work, and what work will they undertake are details the company should offer with greater clarity if it expects investors to clamour for its shares on the stock exchange. n

SPOTTING THE FAKE QUAID IN M1 SBP is determined to remove fake notes from the money supply but it is an uphill task as counterfeit currency continues to fool the naked eye of the common man

By: Bilal Hussain ana Saif, a housewife, recently opened an account in Meezan Bank and made a visit to her branch, adjacent to her apartments, to make her first transaction from the account. To her awe, one of the thousand rupee note she wanted to deposit, was a counterfeit note. She had been saving the money for a few months in a money box and decided to open a bank account and put the savings there for safety. The cashier while counting the money rubbed one of the note in question and revealed that Quaid-e-Azam’s picture on the note had been tampered with. “A fake note consists of two pieces of paper, glued together over one another. When it is rubbed with wet fingers, one of the sides separates from the other. An original note does not react this way because it is made of a single piece of paper,” the cashier explained. “I wish I had not taken that particular note to the bank. I should have bought something with it rather than having it marked as cancelled by the back on account of it being a counterfeit,” Ms Saif said. As per the government’s policy of treating a counterfeit note, it was marked as cancelled by the cashier, at six places. Profit acquired the note from Ms Saif and asked a couple of shopkeepers if they could have spotted it as a fake note if it were not marked. “It seems quite real. The paper quality is the same. Borders are rough, just as real notes. I would have definitely accepted it if Quaid-e-Azam’s picture was not tampered with and it was not marked as cancelled,” Umair Hanif, a medical and general storekeeper said. A grocery store owner, Saifuddin Qureshi, was also of the same view. “This fake note looks completely real,” exclaimed

WHICH IS WHY INCIDENTS OF COUNTERFEIT STILL OCCUR” Abid Qamar, Chief spokesperson SBP Qureshi after he was told that the note was not real. “Generally, we catch around one or two counterfeit notes on a daily basis. The frequency is higher during Eid season,” said the cashier of the bank, who discovered the note to be counterfeit.

Tariq Road in Karachi, has also been keeping a fake thousand rupee note, which his brother took from a customer at the shop. “My brother has been working for a pharmaceutical distribution company for many years and he deals with cash on daily

A fake thousand rupee note cancelled by the bank During Eid season, the demand for new notes is very high because it is customary in Pakistan for adults to give money, fondly called ‘Eidi’, to children in the family. Shahadat Hussain, who runs a laundry shop called Karakurram Dry Cleaners at

AN ORIGINAL NOTE DOES NOT REACT THIS WAY BECAUSE IT IS MADE OF A SINGLE PIECE OF PAPER

basis. If he failed to detect a counterfeit note then I don’t think any common person can,” Hussain said.He added that after realizing the note was fake he has kept it separately. He keeps it separately in his old accounts book. “God will give me more. I don’t want to inflict my loss on anyone else. Otherwise, I could have easily used it. I am a businessman. I would recover it. But I was thinking if it was received by a person earning around thousand rupees daily, he must have gone through a lot,” Hussain added. According to Pakistan’s law book regarding counterfeit notes, it is the responsibility of the bank to put a stamp labeled ‘Cancelled’ and also keep the note with them.If bank of-

MONETARY POLICY

ONE OF THE FACTORS THAT CAN CAUSES INFLATION IS EXCESS MONEY IN CIRCULATION WITH NOT ENOUGH GOODS TO SPEND THAT MONEY ON TOO MUCH MONEY CHASING TOO FEW GOODS” Kaiser Bengali, economist note and that would take up a lot of our time as well,” the source said. Another banker, who also spoke on condition of anonymity, explained that once a counterfeit note is marked ‘Canceled’, it is removed from circulation. “It therefore makes little sense to pursue the issue further,” he said. The cash in the economy or the cash in circulation (money supply) is the basic instrument with which a government tries to apply its monetary policy. The money supply is managed by the State Bank of Pakistan (SBP) and at any given point in time it knows the exact amount in circulation, provided all the currency is genuine. However, when counterfeit currency is put into the economy the effectiveness of the government’s monetary policy is affected. The level of impact depends on the amount of counterfeit currency circulating in the economy. “If the amount of counterfeit currency is high then the first impact on the economy is inflation. One of the factors that can causes inflation is excess money in circulation with not enough goods to spend that money on - too much money chasing too few goods. If there is counterfeit currency in the economy then there is cash in excess of the official currency in circulation. So the inflation is higher than the official number because of excess cash,” renowned economist Kaiser Bengali told Profit. He added that people, who incur losses due to counterfeit currency, will become skeptical when accepting that particular denomination of currency. “If a person received a fake Rs 1000 note once he will invariably become apprehensive A laundry shop owner in Karachi towards Rs 1000 notes and stop dealshowing a fake thousand rupee note ing in it.”“This is called a white col-

ficials suspect that an effort was made to deliberately pass on the fake currency, they have to to report it to the relevant law enforcement authorities. Subsequent prosecution can result in hefty fines and a term in jail too. A banker, on condition of anonymity, said that generally banks just put a ‘Cancel’ stamp and return the note. “We want to run our conventional day to day banking affairs. If we start reporting every incident to the police it would take up most of our time during the day. So, generally we don’t report it to police. The police would try to follow the complete trail of the

lar crime and FIA deals with this,” Bengali said. Chief spokesperson SBP Abid Qamar said that in order to control counterfeit currency, the central bank has tried to create awareness in the general public through its campaign "Rupay ko Pehchano" – recognize the currency. Back in December 2015, SBP launched videos and a smartphone application on security features of currency notes as a part of this campaign. The aim of the videos and smartphone application was to enhance public awareness regarding counterfeit notes. It also explained the security features in Pakistani currency notes in order to enable the general public to differentiate between a genuine and a fake note. “We have also made sure that counterfeit currency does not pass through the banking system. Every bank must have at least one sorting machine in one city. It’s mandatory that all notes put into an ATM have gone through that machine, which checks whether the notes are genuine or not,” Qamar said. He added that Law Enforcement Agencies (LEAs) regularly arrest people involved in this crime. “But the criminals are adopting more advanced methods in this practice of forgery which is why incidents of counterfeit still occur.” he explained. Essentially a victim of counterfeit currency should report it to the police. In Pakistan’s police system it is quite difficult to get a case registered. Most victims therefore avoid going through that hassle. “Will I be refunded if I go to the police station?” questioned Sana after she was told that she has to report the incident and register the fake note to a police station. n

MONETARY POLICY

‘trust’, ‘playing ke li s rd o w h tc a w o ls And a ‘ingenuity’ d n a ’ ty li a u ‘q , k’ o o b e it by th By: Syeda Masooma stablished as a manufacturing and retailing unit some 32 years ago, in 1985 to be precise, Sefam was efor embroidered fabrics made in pakistan. The first brand for the company was Bareeze, followed by eleven more: Leisure Club, Minnie Minors, Chinyere, Bareeze Home Expressions, Kayseria, Urban Culture, The Working Woman, Bareeze Man, Rang Ja, Shahnameh, and Super Squad. Urban Culture was eventually dropped when the management saw it failing to keep up with the market as well as other brands in the family. All these brands cater to the target market of SEC B+ and upwards. Sefam is not involved in any major exports, but the brands are catering to international market through online sales, and are also operating in Dubai through Sehas LLC Textiles. The Senior General Manager of the company, also the de facto CEO, Omer Chaudhry is directly heading production, marketing and related responsibilities of two of these brands: Shahnameh and Leisure Club (LC). Kayseria and The Working Woman are also being operated from the same headquarters where Omer sits and manages his two brands, in addition to his responsibilities as the CEO. Profit sat with Omer to discuss the 40 years of apparel retail industry in Pakistan, and LC’s effort with its tagline “Made of Pakistan.”

At best a slowdown pparel retail industry in Pakistan is in a fix, with many renowned brands including Khaadi and Nishat Linen agreeing that increased operational costs and cut-throat competition are the prime reasons for it. To Omer, however, there is not a decline, but a slowdown at best, and that too for different reasons entirely. “The millennials are a generation that spends, instead of saving their incomes. The previous generations used to spend as needed, meaning that if they bought clothes on sale it was for the rest of the year. The present generation wants experience along with the product, so they can share it with others. The ones who failed on the experience-front are losing out. The brands have to adapt with as much speed as changes in consumer behavior. Keeping up with the market and the pace with which you adjust to the market is known as ingenuity and that's one of our values, in addition to quality, compassion, and integrity.” Omer, however, conceded that competition has made it tougher to operate in the market. “The number of brands making an entry every year is more than the new customers entering the market. Everyone wants to create a niche and many try to do that through launching a clothing brand. So the competition is also a reason for many brands experiencing a downfall.”

Then the culture of discounts and sales has also led to lower margins for almost all brands so even if one is operating as well as it did before, its margins are falling. The recent protests by the retailers against management because of operational expenses of operating in malls going through the roof, Omer said, it was, in fact, a great sign for Pakistan’s retail industry. “This is the first time that big and small retailers have united to argue their case. This unity is very important, as Lahore’s retailers have not been this organized ever before. This is a good sign, the retailers are moving in the right direction irrespective of their size or market share.” However, he takes the argument of malls experiencing low footfall with a pinch of salt. “Packages has lower customer inflow than Emporium for our outlets, but the measurement of total footfall is not something that we account for. There are several agencies providing the service of counting the footfall: while some measure it through the heat sensors, others go for the persons passing through movement sensors and so on. Each of these has its own challenges, for instance, the movement sensors version has to be divided by two since everybody going in will also come out, the biggest issue being the staff movement. At malls, the shops have lots of employees, and it represents a considerable number already having been accounted for from the staff and not from customers.”

Changing perceptions he government, he says, needs to go softer if they really want to see the retail industry grow. “The government saw the growth and their first reaction was to slam it with taxes. That’s one area where government can assist by providing rebates or incentives. If the government facilitates retailers, this industry can grow massively.” To him, political instability and gen-

eral uncertainty in the country is another major factor holding the retail industry back. “Massive growth comes from a huge influx of customers, and the way to do that is through tourism. Pakistan has everything to invite and attract tourists if only its image can be improved. “Things are very bad in other countries as well. If you go to Barcelona, for instance, the first thing you get is a travel warning, saying beware of pickpockets, don't go into this alley, don't do this, don't do that or you'll be in danger etc. Pakistan is comparatively much safer and it is a fantastic market. If we want to change, we need to put forth that image. This is why the logo for LC promotes Pakistan.” Elaborating on this seemingly incorrectly phrased tagline, Omer said, “It probably appears to you as a grammatical error but that is why it will stay in your mind. We want to project that we are the sons and daughters of Pakistan. Made in Pakistan would just mean manufactured in Pakistan but Made of Pakistan means that it is Pakistani by all means.” Pointing to Pakistan’s flag badge on

his coat, he added, “People in our office wear this badge throughout, especially when we are traveling. When I am abroad, people ask, why am I wearing this badge and I tell them that because I am an ambassador for my country. When you are out there and you talk to people in some manner and own your identity, it becomes an icebreaker, and helps you change their perception of your country.” “We as a company have invited many people over from other countries just to change their perceptions – not as tourists but just as guests on a wedding function. In Scandinavia, there is a travel advisory and people from there cannot get insurance to come to Pakistan. We invited them, telling them, they are our responsibility. The people in Pakistan are extremely hospitable to the visitors. We open our doors, we feed them, we clothe them, and those foreigners get to see how different the people are then from the image they have had. For us, it is our culture but they get impressed. “Things are changing slowly and gradually now and that is what we require.”

‘THE PRESENT GENERATION WANTS EXPERIENCE Bareeze, still the ALONG WITH THE PRODUCT, SO THEY CAN SHARE IT top performer oving on to the brands under him WITH OTHERS. THE ONES WHO FAILED ON THE as the CEO, he shared that BaEXPERIENCE-FRONT ARE LOSING OUT. THE reeze is the highest performing of the group, with year-onBRANDS HAVE TO ADAPT WITH AS MUCH SPEED year growthbrand nearing 15-20%. “There is obAS CHANGES IN CONSUMER BEHAVIOR’ viously a generation gap but people still are

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‘IF THERE ARE AN ENTIRE EXPERIENCE AND TRUST ASSOCIATED WITH THE BRAND, PEOPLE PREFER TO CONTINUE BUYING THE PRODUCT INSTEAD OF FALLING FOR LOWER PRICES’ Omer Chaudhry, Senior General Manager (de facto CEO) SEFAM Private Limited buying it; even if you can't see it in the shops, it does not mean that the brand is not doing well. Compared to other brands, the growth for Bareeze is astronomical.” Many of SEFAM’s brands overlap in different age groups and compete with each other. “It is deliberate. Our company decided that we will come up with brands that at any given time compete against each other, and they all improve and grow because of it. “Already there are many competitors, so one more competing to make you better is not the reason for us to duck away from that. Every brand has its separate profit and loss account, they have totally different operational fields and we treat them as completely different entities.” However, to

maintain all brands at par, SEFAM sometimes drops low-performing ones (Urban Culture), or merge different categories within brands. According to Omer, it is done to keep the brand life cycles ‘in the now’.

Coded in the DNA: Playing by the rules alking about the competition he said, “Outfitters, Breakout and a few others are competitors for Leisure Club. But there is no other brand with as much philosophy and building up of a brand behind it. Leisure Club started 21 years ago and it was based on the ideology of family's fashion destination. It started off as a brand for children but then it kept growing and

things started becoming complex. Brand traction matters a lot. The older ones always have a higher trust and more strength. People started building their brands around LC’s ideology, but no one else has the matching measure of maturity.” “We keep our people very informed about the changes in prices, taxes, and other matters. It is our policy to maintain that trust. In Bareeze, we informed our customers when the taxes were increased and when these were eventually reversed, we sent text messages to our customers, asking them to take that money back. We have employees who know generations of the same customers. I cannot claim that whole hundred percent of the people would have gotten the payments back but that is how we strive to pay back our patrons. At our end, the intent was to repay each and every customer.” This policy of keeping the customer trust has allowed the company to grow massively. “When we started Bareeze we came across a major issue of dyeing clothes. We had a lot of fabric and we decided to start our own facility to provide that service as well, and that facility, Sarena Dyeing & Finishing is one of the most sought-after companies.” “We also pay taxes in full. People sometimes tell us that it is stupid but this is coded in our DNA. We play by the rules irrespective of what others do or say, and it pays off. We are promising quality and when the customers know that they are going to get their money's worth they are okay even with higher prices.” It is one of the major reasons for customer loyalty as well. If the product is only floated at prices, any com-

petitor with slightly lower prices can take the customers away, but if there is an entire experience and trust associated with the brand, people prefer to continue buying the product instead of falling for lower prices.

Building international trust, reputation nother benefit accrued to SEFAM from their customer-oriented practices is international brand’s trust in them. Currently, SEFAM operates as the sole representatives for three international brands in Pakistan, including Entertainer, Polo Ralph Lauren, and Armani. “These people also come to you after doing a thorough research on your market and your business philosophy. So by being good and honest here, we have also built an international reputation for ourselves.” Speaking about positioning his own brands to the competition posed by these international brands, Omer said, “We learn from them. We constantly try to make ourselves better instead of shying away.”

Speaking about the new ventures introduced by SEFAM, and LC, in particular, Omer said, “We started kids fashion week in Pakistan. For our advertisements, we used to rely on kids from within the family. Then we started doing it on a proper scale and the first kids’ models introduced in Pakistan were from the Leisure Club.”

Wearing Pakistan on its sleeve he Leisure Club continues to wear it’s being a Pakistani brand on its sleeve. “While marketing ourselves, we always try to project Pakistan. Once we had a major sale so we called it Wehshi sale and we had Sultan Rahi in the promotional posters, with a gandaasa and everything related to that image. On Eid Al Azha, we used a bakra in our posters with the slogan, “Eid Mubaaaaarak.” About Shahnameh, the second brand under his direct management, he said, “We have a separate outlet for it in Karachi, but in Lahore, we showcase it in shop-n-shop.

It’s only 5-6 years old, so it cannot be compared to Leisure Club. The energy of a young brand and an old one are very different.” To him, as of now, Shahnameh does not have any competition either. But he believes that it has more independence to play with its image, unlike LC – an old and mature brand that cannot suddenly shift its path or market direction. Concluding on LC’s focus on Pakistan once again, Omer said, the campaign – ‘Clothing a Million Smiles’ – is constantly running with a basket placed in every outlet for customers to drop clothes for charity. “Some people buy new clothes and drop them in those baskets because they trust us that we will indeed send them to charity. The used clothes, we wash, sterilize, rebrand, pack and label them according to age groups and then distribute them. “In times of flooding or fire hazards, we donate clothes on our own accord too. We are trying to play our part in making Pakistan’s image better and hope that one day it will be better, not just for Pakistanis but also all over the world.” n

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17 million motorbikes, 40 million smartphones By: Aisha Arshad

here are 17 million motorbikes and 40 million smartphones in Pakistan,” Muneeb Maayr, CEO Bykea – a ridehailing (and more) app – told Profit in a recent interview. “These are the only two assets our lower middle and lower economic groups possess and we want to utilize these assets to turn them into an opportunity [for them, and for us],” said he, enunciating his vision.

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‘The facT ThaT careem has Themselves launched moTorbikes recenTly validaTes The facT ThaT we have been righT all along regarding The demographics of The counTry’ Muneeb Maayr, Founding CEO Bykea During his tenure at Daraz.pk, which he co-founded in 2012, Maayr dealt with a huge number of clients who mostly belonged to affluent economic groups, like upper and uppermiddle class. It was during, what can be called his last days at the online shopping site, that he decided to come up with a venture that would facilitate or rather cater to masses belonging to the large lower and middle income group of Pakistan totaling over 90% of the population with wealth less than $10,000 (Credit Suisse 2015 Report). “I wanted to go out and build something for the masses, so last year in the summer I left Daraz,” said the CEO of the newly-found app. “There were two things I had in mind. One, the delivery side of the business where people needed to rely on conventional means and waited 24-48 hours before a parcel was delivered. We felt the need to solve that. Two, when we saw the adoption of GPS by upper class after Uber and Careem launch, we thought how the first issue could be solved”, said Maayr.

transportation to the ordinary people and employment opportunity to the same economic group that mostly relies on bikes as their means of transport, said Maayr. The entrepreneur was joined by Rafiq Malik as Chief Operating Officer, Abdul Manan as Product Development Head and Ishaq Kothawala as Chief Strategy Officer. The foursome set out to launch operations of what can be called Pakistan’s first ever bike

“w

hile the company continues to be popular for its two basic services – bike ride and delivery – the portal has over the 10 months introduced about 10 more additional features that include restaurant delivery, ticket booking, utility bill payments and grocery purchase – all to be carried out by Bykea riders. The app has also launched a classified section for job and buy and sell postings in addition to the bike service. But why the startup focuses on bikes solely, why not rickshaws? According to Maayr, motorbikes are widely owned in this country of 220 million people whereas there’s only less than a million rickshaws, and the latter are not suitable for delivery. For the ride-hailing segment with the launch of Careem and Uber – international ride-hailing services – there has been a tremendous growth in their respective customer bases. However, a large number of commuters still find it unaffordable to spend a bare minimum of Rs240 on a two-way trip (average of base fare of the two apps). Bike is overwhelmingly considered an affordable and cheaper way for their convenient everyday travel.

problem-solving through what people possess: e could only solve a problem and cater to our fellow citizens with what was easily accessible to them, what they essentially possess,” said Maayr, bringing into play the potential of sheer number of motorcycles in the country. With the said intent and vision, Maayr launched Bykea, an on-call and online service for bike ride hailing and delivery in December last year, in Karachi. The idea behind the venture was to provide an affordable mode of

addition of 10 new few features

A view of Bykea's head office Karachi ride hailing service. “Har zaroorat ki sahulat, Bykea” (Bykea, the facility for every necessity), so claims the app tagline. Living up to its lead slogan, the team ventured into more than what was initially conceived and expanded its operations to Islamabad, Rawalpindi and Lahore in the meantime.

‘The idea behind The venTure was To provide an The aﬀordability issue he mass market in this country affordable mode of TransporTaTion To The requires affordability,” the ordinary people and employmenT opporTuniTy CEO said. “When Careem launched, we said that inTo The same economic group ThaT mosTly relies evitably it’s going to come down to motoron bikes as Their means of TransporT’ bikes and everyone said no, that’s not

“T

sTarTup

happening,’’ said Maayr. “The fact that Careem has launched motorbikes recently validates the fact that we have been right all along regarding the demographics of the country,” he added. Probably on the back of these demographics Bykea has been able to achieve half a million downloads of its app in ten months and the management hopes to soon cross the 1 million benchmark – a significant indication of an online service’s success. “The need is to create an ecosystem and because of the slow internet penetration in the country, there’s still a long way to go,” maintains the team. Even though the ecosystem is not fully developed and new entrants are emerging every day in the ride-hailing sphere of the country, for Bykea both Careem and Uber and TCS are serious competition – well-entrenched and strong all three of them. And Bykea has already done enough to stir the hornet’s nest, alarming the big boys on the block with its ambition – by aiming to deliver literally ‘everything’. “Until recently, we had no competitor in sight,” said the CEO candidly, adding, “but now in ride-hailing we have Careem because they just jumped in by adding bikes to their realm.” On the delivery side, there are still no rivals. “You would only consider somebody a competition if they were doing even one percent of the business you were doing. And our competitors are not there,” asserted Maayr. Competition to him is a very bad thing for business, for it spawns price wars – “not healthy” for any business. “In the ultimate analysis, one has to identify what one was solving that no one else was. And if one can do it better than others, then one has a market,” said he. “The thing is that we want to be a single app for a multitude of services and we see ourselves as solving the hyper local needs for a consumer in a city and in few weeks you’ll see us enhancing our features and services in

Team Bykea

that direction,” said Maayr, explaining his strategy to counter against the potential competition.

Women, out for the moment owever, as per the same demographics of the country which enabled Bykea to attain popularity, a large portion of the population – the 48% constituting women – due to socio-cultural taboos are still not keen customers of Bykea. The management’s counter is that around 50-100 women were using the Bykea app on everyday basis for travelling purposes. But it is definitely the male gender from where Bykea gets its business in the main. The constraint does not deter the Bykea management. “Only a few years ago, women would not sit in a car with unknown men but today when we see customers of international ride-hailing apps, women are there in sizable numbers”, said Maayr. “If women can sit in a rickshaw with unknown, untraceable men, then we are sure we can bring them to sit with Bykea riders who

‘WHILE THE COMPANY CONTINUES TO BE POPULAR FOR ITS TWO BASIC SERVICES – BIKE RIDE AND DELIVERY – THE PORTAL HAS OVER THE 10 MONTHS INTRODUCED ABOUT 10 MORE ADDITIONAL FEATURES THAT INCLUDE RESTAURANT DELIVERY, TICKET BOOKING, UTILITY BILL PAYMENTS AND GROCERY PURCHASE’ 34

are thoroughly verified and can be tracked back in all circumstances,” added Rafiq Malik, the COO. According to the Team Bykea, the need is to create trust and awareness amongst the people for all online-based services that intend to create convenience in everyday lives.

Rigorous background check hen asked about verification process and eligibility criteria to become a part of Bykea’s large rider team of 7,500, the management told Profit that all riders are obliged to submit their original CNIC to the company, their license is verified, then a third person is also sent to verify the home address of the said rider only after which he’s eligible to come on board as a member of the Team Bykea. After the rigorous background check, of the 7,500 registered Bykea riders, nearly 2,500 are working on a daily basis and on average earning around Rs1,500 every day. The startup follows the same model of 75% and 25% partnership with the rider and operates on the 1/4th commission like other online ride-hailing apps. “Our demand far exceeds our capacity,” said the CEO. To cater to the tens of thousands of bookings – for ride, delivery and other services – the app receives every day the number of riders is still insufficient by far. For this very reason, the startup is entirely focusing on promoting and marketing the app among the riders instead of expanding its 30-40% monthly growing customer base.

STARTUP

By: Usman Hanif or long years, the local automobile tyre manufacturers had whined about 2.5 million pieces being smuggled every year. While the smuggling has subsided, to their great dismay and detriment, it has been replaced by a perfectly legit bugbear: the Chinese-manufactured auto tyres. Apart from there being nothing illegal about their import, the cheap Chinese tyres flooding the market nevertheless pose a potent threat to the indigenous manufacturers. Not only inexpensive, compared to the local or smuggled brands, their quality too is first-rate – endearing them to importers and buyers alike. Such is the plight of the indigenous tyre manufacturers that in the huge local market, their share is now just a puny 25 percent. Preferring the Made in China tyres over the smuggled ones, importer Rashid Khan says, the latter though competitive in terms of prices, undergo rain and shine over long distances. “Exposure to such diverse weather impacts quality,” said Rashid, maintaining that

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the Chinese tyres are value for money. The All Pakistan Tyre Importers and Dealers (APTIDA) reports that the Chinese variety is not just a bargain at Rs2,000 apiece less, it competes with the smuggled ones and is definitely superior to the locally produced tyres.

Intense competition he competition in the replacement market is getting more intense day by day. The overall annual countrywide consumption is over 10 million pieces, whereas General Tyres’ optimum production-capacity is about 2.4 million – with the yawning gap between demand and supply, is filled through imports and smuggling. According to estimates, the percentage split is approximately, 55% import, 25% local manufacturing and 20% smuggling, as noted in a report containing analytical data by General Tyre and Rubber Company’s marketing department and replacement market. In 2013-14, about 2 million units – 25 percent of total demand

– was produced locally, 48 percent of 3.8 million tyres were imported while the rest 27 percent were smuggled. Of the total imports, the Chinese tyres had a market share of around 50 percent while in truck bus radial tyre 90 percent imports were from China. The discrepancies further make it difficult to keep pace with the competition, said Fahad Zaki Farooqui, Category Manager, General Tyre claiming that importers of Chinese tyres resort to under-invoicing to reduce duty cost. “When we order the same tyre to the Chinese companies they offer us actual rates – invariably higher than those of what importers quote here in Pakistan,” said Fahad Zaki Farooqui. “Dumping was commonly practiced by foreign manufacturers and for a long time this was done mainly through smugglers who took advantage of high tariffs imposed on tyres and tubes. China also took advantage of the situation and dumped lowpriced and moderate quality tyres into the Pakistani markets. Importers blamed the government for being lenient towards China,” reads a report posted at General Tyres web portal. According to All Pakistan Tyre Importers and Dealers (APTIDA) report issued in 2000, tyres of Indian and Japanese origin have inundated the local market and around 770,000 tyres were being smuggled annually, causing an estimated loss of Rs2,100 million annually.

“WHEN WE ORDER THE SAME TYRE TO THE CHINESE COMPANIES THEY OFFER US ACTUAL RATES – INVARIABLY HIGHER THAN THOSE OF WHAT IMPORTERS QUOTE HERE IN PAKISTAN” Fahad Zaki Farooqui, Category Manager, General Tyre The dealers state that the Japanese variety is cheaper by Rs1,000 apiece compared to locally made and imported tyres while the Chinese are lower in price by Rs2,000 – their superior quality over locally manufactured ones an additional advantage. According to Pakistan Customs’ reports smuggling causes Rs20 billion loss to the national exchequer, out of which Rs6.5 billion to Rs7 billion was caused by tyre smuggling as 2.5 million units were smuggled into the country every year. India, China, Korea, Japan, Indonesia, Thailand, Turkey, and Russia are the tyreproducing and exporting nations. “Smuggling is going on unimpeded, facilitated by lax enforcement and detection, tax anomalies, lack of patronization to the local industry by the government agencies etc. Due to the prevalent adverse circumstances in

which the local industry operates, three out of the five tyre-manufacturing factories including Atlas Tyres, King Tyres, and Delta Tyres have ceased to exist,” says General Tyres. The knock-on effect of the underground economy means decreased tax revenues, depressed GDP and grave socio-economic issues. The low Import Trade Prices (ITP) are creating an uneven ground, the local industry claims. “The duty on truck, bus radial tyres from China is at zero percent while it is five percent on imports from other regions.” The government should increase duty on tyre imports as it will also help its goal of Gross Domestic Product (GDP) of seven percent by 2018. “As things stand, the government’s present policy of lower import duty is hurting its own stated objective”, said the industry expert, Javed Rashid, CEO J Rashid & Company Lahore. “The government can put 20 to 25 percent increase in the ITPs of tyres imported from China, as it would assist the government in increasing revenue and minimizing the size of tax evasion”, said a General Tyre Company spokesman. It also hurts government’s macro plans to generate employment in the large scale manufacturing sector as further foreign investment to setup plants will decrease owing to the absence of level playing field.

Not fit, weather-wise ccording to traders there are 70 shops in Rawalpindi Saddar’s main tyre market and each one of these deals in the smuggled tyres. Traders rewrap the tyres and paste the

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‘SUCH IS THE PLIGHT OF THE INDIGENOUS TYRE MANUFACTURERS THAT IN THE HUGE LOCAL MARKET, THEIR SHARE IS NOW JUST A PUNY 25 PERCENT’

sticker of well-known manufacturers to dodge the customer. These tyres expire way earlier, hurting the consumers in the pocketbook and, being substandard, also can cause accidents. Some smugglers even bring used tyres made for colder climes, not suited to our weather conditions. “The compounds used in winter tyres are not suited to our climate where temperature starts rising in spring, leave alone summers, when the mercury can hover around or beyond 50 degrees Celsius in the plains, making the tyres highly dangerous”, said Javed Rashid, an importer. The Western countries dispose of these tyres through contractors from whom smugglers bring these over to Pakistan. Traders of locally-produced tyres have demanded of the government to pass a law that if a tyre tread depth reaches 1/6 of original tread depth it should be changed – a standard practice in developed countries. Traders have also suggested to the government to make a check post at every 100 kilometers on highways leading to consumption areas from smuggling hubs, like Chaman and Landi Kotal. To them, stern action against smugglers is a must to create a sense of deterrence.

Importers lobby prevails? FBR imposes duty, commerce ministry defers The Federal Board of Revenue (FBR) officials during a recent meeting of Senate Committee on Finance, claimed that the decision of the FBR to increase regulatory duty (RD) has been deferred over the objections raised by the federal commerce ministry. The issue of tyres would be resolved in the new summary to the Economic Coordination Committee (ECC) on RD. With that, it seems, that the tyre importers lobby’s string-pulling capability has been able to hold sway with the commerce ministry as well as the senate’s standing committee on finance. Earlier, FBR, by imposing 15 to 20 percent RD on tyres imports, claimed that since border management system has been strengthened, the gap for rampant smuggling has been plugged. The Board was of the view that although tyre was an essential item but it was being produced locally, so imposing regulatory duty would promote local production. The local manufacturers were working under-capacity so they would find a chance to enhance their output. However, Pakistan Tyre Importers and Dealers Association (PTIDA) claimed that Pakistan was not producing radial tyres, so imposing RD on imports would enhance price and would ultimately affect the common people. The senate committee also demanded of the government to immediately withdraw the RD on the import of tyres. One committee member, Senator Kamil Ali Agha, said, the FBR should take parliament’s approval before imposing any taxes. –Ghulam Abbas

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Face to face with international topnotchers, the Pakistani companies are least equipped to provide much of a contest

By: Syeda Masooma

he renowned German multinational engineering and electronics firm, Bosch, entered Pakistan with its first liaison office in Lahore in February 2016 – meant to serve for the company’s automotive aftermarket, power tools and security systems business divisions. Almost two years later in December 2017, Bosch inaugurated two outlets to showcase its home appliances on two successive days, one apiece in Lahore and Islamabad – with expansion plans slated for the near future. Bosch spent the time between establishing its liaison office to the showroom launch researching into the economic and political dynamics of Pakistan. At the eve of Bosch’s first entry, the then German envoy to this country, Ina Lepel, said, “with a young and growing population of nearly 200 million people, Pakistan remains an interesting market, which cannot be ignored in the long-run by multinational companies. Two years later, at the time of showroom launch, BSH Home Appliances FZE CEO Tomas Alonso concurred by saying, “It is a low inflation, high growth economy and there is a growing affluent consumer base, which is expected to increase by around 6 per cent annually. Both factors are having an overall positive effect on local purchasing power, which makes business sense for Bosch to start operating here.” In addition to increasing population, lower cost of logistics, labor and transportation combined with high demand given the high temperatures, make Pakistan an attractive destination for Bosch.

Sizing up the market he two-year long research allowed Bosch to calculate the total size of the home appliances industry in Pakistan, and to decide their marketing approach while reaching collaboration agreement with MegaHome Pakistan. The

BSH Home Appliances FZE CEO Tomas Alonso company’s Regional Sales Manager Khubaib Khan also said that Bosch adapted its products to the needs of the Pakistan’s market and acquired compatibility before opening its showrooms. In this $1.5 billion industry, Bosch brought an investment of around $5 million as its starting point. According to Alonso, Bosch neither plans, nor hopes to take over the market as a leader, rather operate in a niche, targeting the elite with the ability and desire to own products offered by this German multinational giant.

Filling a vacuum, profitably lonso said, that he did not find any renowned European brand in the Pakistani market and to him that is a gap that Bosch can fill profitably. Khubaib added that all local brands including Haier, Gree, PEL, and Dawlance are all producing locally, while the few international brands like LG and Samsung are also dependent on SKD (semi-knocked down) for home appliances. “They bring

‘ACCORDING TO ALONSO, BOSCH NEITHER PLANS, NOR HOPES TO TAKE OVER THE MARKET AS A LEADER, RATHER OPERATE IN A NICHE, TARGETING THE ELITE WITH THE ABILITY AND DESIRE TO OWN PRODUCTS OFFERED BY THIS GERMAN MULTINATIONAL GIANT’

them in Pakistan to save taxes and then produce locally as well. That results in 30-40 percent cost savings for them. We will do the same in the near future.” While it may be safe to assume that Bosch has taken into consideration all challenges posed by the local brands, the question remains whether they will be able to overcome the biggest threat to this industry on the verge of extinction in Pakistan – smuggling. And if they do, how will the local brands fare – for they are already faced with a plethora of problems including rising cost of production, high inflation, eroding rupee value, lack of financing from banks, declining purchasing power, as well as apathy of the government adding to the bankruptcy of the industry. Bosch plans to take a single view of the market, confining to the upper crust. A subliminal statement coming from Alonso hinted that there are customers who value luxury and brand names over lower prices, and they will be the ones to shop at these new showrooms. While this may not affect the local brands directly by a great deal, but it would take away some customers. And some of them might revert to smuggled goods for lower prices and better quality. Until now even those customers who can afford more expensive products were buying the local primarily because of unavailability of brands like Bosch – helping the natives in maintaining prices and com-

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pete between themselves over quality. With the quality conscious customers with the ability to purchase expensive products moving to Bosch and away from local brands, these brands will also likely fall victim to price wars to attract customers who make their decisions solely based on bargains. In February this year State Bank of Pakistan (SBP) imposed restriction of mandatory 100 percent cash margin at the time of import of electronics and home appliances, while on October 16, 2017 the government of Pakistan also imposed regulatory import duty of 20-30%. Amidst power crisis and unavailability of loans, the two moves steeply raised the cost of production. While at one hand, it affects the local producers directly by reducing their customers due to higher prices or cutting down margins due to competition, on the other hand it also means that the local producers will be selling lower quality appliances as compared to international brands without a major difference in price, leading to the local products becoming less competitive and possibly local production becoming unviable altogether. DWP Group Senior Manager Marketing Services Shoaib Younus said, “Low quality brands which offer low prices are a big challenge for those who are providing quality products in a justifiable price. Consumer when finds low price they rarely think about quality which is always compromised in low rates.” With lower prices out of the picture, higher quality international brands will punch down the local brands.

closer to the ones put up by multinationals, with quality nowhere close to it. Those customers who can afford these products at higher prices will also naturally prefer getting higher quality with their extra bucks. The combined effect of lower quality and higher prices will cause local brands to become less competitive and the industry as a whole to become unviable. On top of it all this industry is heavily dependent on imported components because the local industry has failed in establishing basic manufacturing units i.e. steel mills and petrochemical units. A majority of compressors used in refrigerators, deep freezers and air conditioners are also smuggled into Pakistan as scrap. It is one of the reasons that local production of compressors has remained economically unviable. While the share of many of the leading European, Japanese and American brands in on the decline, Korean and Chinese bands are becoming popular. According to Khubaib Korean refrigerators and ACs might be Bosch’s biggest competitors as well. Producing efficient and durable products, Bosch’s 2016 R&D budget was $8.2 billion – five times the size of our entire home appliances industry. “Facing power shortage issue, it’s imperative for Pakistan that hundreds of millions of daily usage household appliances consume less energy to save the power,” said Considering that the local products might fail to be at par with the international giant means that native industry is staring at a bleak future. The Chinese and Korean appliances also found acceptance initially for their lower costs.

Same cost, lower quality renders locals unviable

Slow at adapting to new technologies

hile higher prices directly translate into lower sales, it also means that the new tags at the local brands would be

ccording to a study conducted by the National Engineering Exports Development Strategy (NEEDS), Pakistani domestic appliances sec-

‘UNTIL NOW EVEN THOSE CUSTOMERS WHO CAN AFFORD MORE EXPENSIVE PRODUCTS WERE BUYING THE LOCAL PRIMARILY BECAUSE OF UNAVAILABILITY OF BRANDS LIKE BOSCH – HELPING THE NATIVES IN MAINTAINING PRICES AND COMPETE BETWEEN THEMSELVES OVER QUALITY’

Regional Sales Manager Khubaib Khan tor has matured. Pakistan’s electronics and home appliances industry – like many others in the country – is also known to be slow in adapting to new technologies prevalent around the world. This makes it more vulnerable to modern tech players like Bosch. Proof of that can be seen when local industry coming to a grinding halt when split air conditioners were introduced globally. While we were still stuck on window type, the world had moved on to split type energy efficient air conditioners. With split ACs now having inverter technology with cooling and heating options, our industry is at a crossroads again. The air conditioners produced here are actually only assembled on CKD/SKD to avail the gov-

ernment incentives on offer. It is unsurprising then that Alonso does not seem worried by market saturation. He said, “We are bringing better and more efficient technology and we are hopeful that people will still buy it from us.” As far as the local industry is concerned, without any innovation and considerable advantage over the previously available products, industry saturation might also play a hand against it. Then there is this unceasing demon of smuggling. In June 2014 the Directorate of Intelligence and Investigation-Customs confiscated four trucks loaded with smuggled goods, including electronics, worth Rs80 million in Lahore. In July the same year, the customs seized electronic appliances worth Rs3 billion near Islamabad Airport. In 2016, electronic goods valued at Rs15 million were apprehended. In Sep-

‘ALL LOCAL BRANDS INCLUDING HAIER, GREE, PEL, AND DAWLANCE ARE ALL PRODUCING LOCALLY, WHILE THE FEW INTERNATIONAL BRANDS LIKE LG AND SAMSUNG ARE ALSO DEPENDENT ON SKD (SEMI-KNOCKED DOWN) FOR HOME APPLIANCES’ tember 2017, the Customs reported electronics worth Rs10 billion being smuggled into the country. This is a vice eating out at the roots of the country’s industry. Smuggled items through the borders of Iran, Afghanistan, China, and the Afghan Transit Trade form a major part of the informal economy volume of which by some estimates ranges between 50 to 60 percent of the formal economy. It is on record that almost 90% of the appliances imported through Afghan Transit Trade never cross the border.

The demon of smuggling he volume of trade through smuggling is estimated at about Rs2 billion, harming the local industry as well as government’s tax collection. The manufacturers find themselves at a disadvantage, and the government’s capacity to support the local industry is also diminished. With such issues as ever-rising cost of production, smuggling, and weak basic manufacturing, there is little hope for Pakistan’s indigenous electronic appliances industry to compete with the likes of Bosch. So, while Alonso might be focussing only at the affluent, as mentioned earlier, Bosch’s method may yet land it the coveted numero uno position. “We are targeting to become the number one home appliances supplier in Pakistan by doubling the turnover year-on-year.” As and when Bosch eventually becomes the market leader, the home appliances may also join the category of products affordable for the few – and not the many.

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