Profit E-Magazine Issue 318

09 Under Najam Sethi’s watch, Mitchell’s has turned profitable again. How much of the turnaround is his doing?

12 Tax fraud as a service

16 Has PKIC’s interest rate arbitrage finally ended?

21 The State Bank’s Treasury Bill buyback: smart move, or money printing by another name?

24 The changing investment thesis for National Foods

27 Cocomo has a big chunk in Pakistan’s biscuit market despite not quite being a biscuit. What happens now that it is also becoming a cereal?

Publishing Editor: Babar Nizami - Editor Multimedia: Umar Aziz Khan - Senior Editor: Abdullah Niazi

Editorial Consultant: Ahtasam Ahmad - Business Reporters: Taimoor Hassan | Shahab Omer

Zain Naeem | Saneela Jawad | Nisma Riaz | Mariam Umar | Shahnawaz Ali | Ghulam Abbass

Ahmad Ahmadani | Aziz Buneri - Sub-Editor: Saddam Hussain - Video Producer: Talha Farooqi Director Marketing : Mudassir Alam - Regional Heads of Marketing: Agha Anwer (Khi) Kamal Rizvi (Lhe) | Malik Israr (Isb) - Manager Subscriptions: Irfan Farooq

Pakistan’s #1 business magazine - your go-to source for business, economic and financial news. Contact us: profit@pakistantoday.com.pk

Under Najam Sethi’s watch,

Mitchell’s has turned profitable again.

How much of the turnaround is his doing?

After 9 years of consistent losses, the company has posted its first profit. How did Najam Sethi steer his in-laws out of the storm?

By Zain Naeem

In early 2020, the Mohsin family of Renala Khurd was about to pocket a small fortune. For the past six decades, the family had been operating a 720 acre operation in this small corner of Okara that was the home base of Mitchell’s Fruit Farms.

One of the most iconic and recognisable retail brands in Pakistan, the family that owned it was in final stage negotiations to sell it. The market was buoyant. Mitchell’s stock price had soared from a low of Rs195 per share on October 11, 2019 to Rs 344.99 per share on January 27, 2020 – a stunning 77% jump in the stock price in just over three months – around the time the transaction was announced.

At the time, the company had a market capitalization of close to Rs 2 billion, and the Mohsins would have made over Rs 1.2 billion from the sale if they managed to get a price even close to this. Then the deal fell through. The Covid-19 pandemic jolted the world economy, and the offer made by Bioexyte dropped dramatically. The sale fell through.

And the news was not taken well by the family.

Mitchell’s was struggling. Established in 1933 by Francis J Mitchell, it had been purchased by Syed Maratib Ali, the father of Syed Babar Ali, in 1958 and given to his son-in-law S M Mohsin to run. For decades, this branch of Syed Maratib Ali’s family turned Mitchell’s into an impressive company. Over time, S M Mohsin was joined by his son Mehdi Mohsin. But persistent losses since 2015 had brought the family to a point where they wanted out. When the deal fell through, fingers were pointed towards Mehdi

Mohsin and the family decided to go in a different direction.

Enter Najam Sethi.

Chief Minister, Cricket Boss, journalist, publisher, CEO, and now son-in-law extraordinaire. Mr Sethi is the husband of Syeda Maimanat Mohsin, better known as Jugnu Mohsin. Even though the company was being run by S M Mohsin and his son Mehdi Mohsin, S M Mohsin’s two daughters also have an equal share in Mitchell’s at just over 20% each. So when Mehdi was ousted, Najam Sethi became the Chairman of the Board for Mitchell’s.

In the four years since, Mr Sethi has gone one to establish his control on Mitchell’s. He appointed a loyalist from his days at the cricket board as the CEO, before resigning from the Chairmanship of the Board to take up the CEO job himself. And this year he has managed to oversee an event that last took place in 2015: Mitchell’s posted a profit. This is despite the fact that the financial year 2022-23 had presented a bleak picture, with Mitchell’s posting a loss of Rs 5.9 crores, and its short-term liabilities exceeding its short-term assets by Rs 37.1 crores. That’s not all: the accumulated losses were such that the company’s reserves were depleted, and it was negotiating with banks to renew loans.

So what happened to turn that around?

And how does Najam Sethi figure into all of it?

The prodigious son (in law)

Even before Mitchell’s went up for sale, Najam Sethi was involved in the business. Kind of.

In 2018, he was appointed as a

non-executive director to the company’s board. It is a position essentially created for son-in-laws of rich business owners. And while he may have been Chief Minister, Chairman of the PCB, and the editor of a national newspaper (admittedly this last one isn’t as impressive, but it means something to those of us in the news industry), he had never really been part of the business.

Mr Sethi’s real involvement begins, as we have noted, in 2020 when he becomes chairman of the board. At the time, the understanding among the Mohsin family was that Mehdi Mohsin had failed to see through the sale of the company, and someone else should be at the helm while they found another buyer. As Chairman of the Board, Sethi was in charge but he was allowing his CEO to run the show.

The situation, however, did not seem to change as the company kept making losses. Things came to a head in 2022 when the company registered its biggest loss in history, going down by Rs 62.2 crores. Something had to give. That is when he decided to get into the driver’s seat himself, resigning as Chairman of the Board and becoming the company’s CEO.

After taking charge, he promised to make

the company profitable again. After just one and a half years, the company has recorded a profit of Rs 45.6 crores. Considering that the company has been making losses since 2015, this is a significant development as a financial milestone for the company. Should Sethi be taking a victory lap for this achievement? The answer might be a timid maybe for the time being. But why do we advise this caution? The answer is in some of the finer details of Mitchell’s performance in the past two decades.

Before and After Sethi

The financial performance of the company has to be seen in context to before Sethi and after Sethi. From 2009 to 2020, gross profit margins were averaging around 22%. By 2022, this had plummeted down to 8%. Sethi has not only seen gross profit margin return back to 24% in 2023 but has been able to grow it to almost 30% in 2024. Similarly, operating profit margin from 2009 to 2020 averaged at around 4% seeing a low of -16.5% in 2018 and a high of 9.3% in 2012. By 2022, the ratio fell to a low of -22% in 2022 and has recovered back to 22% in 2024.

The problem that has plagued the company since 2015 has been consistent losses. Before 2016, the company was recording steady profits with an average net profit margin of 4% from 2009 to 2015. After 2016, the loss of the company started to rack up leading to a net profit margin of -18% in 2018 which had returned to -2.6% in 2020. The worst was still to come when the company saw a net loss margin of 25% in 2022. Since Sethi has taken over, the net losses have reduced and Mitchells saw its net profit margin rise to 17% in 2024.

To really see how bad things had gotten for the company, the valuation of the equity of the company has to be considered. Just before the losses started to hit the company, the company had an equity of Rs 57.3 crore in 2015. As losses started to accumulate, the company saw its equity fall to Rs 74 crores, marking a decrease of 87%. Between 2019 and 2020, the company suffered losses of Rs 55 crores, which meant that accumulated profits went from Rs 38 billion to losses of Rs 14 billion. Due to the steady hemorrhage of profits, the company started to lose equity and had to supplement it with the use of additional liabilities.

As assets remained similar, the company had to borrow, leading to its short term liabilities growing from Rs 53.1 crores in 2015 to Rs 1.1 billion in 2019. This increase in liabilities was carried out in order to fund the operations and the working capital of the company as it could not be supplemented with profits. One of the biggest components of these liabilities was the loan that was procured from the shareholders of the company who lent around Rs 20. crores to the company in order to fund its working capital

needs. There was a linear relationship that was seen as equity started to fall, these loans were used in order to plug the working capital gap that started to emerge at the company.

The management change

Once it was decided to bring in a new management, the shareholders started by injecting new equity into the company. This was done by carrying out a right issue of 190% at a premium of Rs 40 per share. This meant that an individual with 1 share of the company was given 1.9 shares and had to invest Rs 40 per share in order to exercise the right and get additional shares in the company.

The company saw its share capital rise from Rs 7.9 crores to Rs 22.9 crores due to the share issue. The company was also able to get a share premium which increased its capital reserves from Rs 90 lakh to Rs 60.9 crores. This injection was vital in order to help the company get additional funding which could be used for working capital needs and other requirements that the company had. Rather than depending on additional loans and liabilities, the company could sustain itself based on the investment that was carried out. This can be seen as a vote of confidence from the company as they saw the prospects getting better in the future and shareholders were willing to invest further in the company. When the old management left in August of 2020 and Sethi was made the chairman of the board, one of the initial changes that was made was that the new board appointed Naila Bhatti to replace the previous CEO. Armed with additional funding and fresh blood, it was expected that the company would be able to change its own fortunes. Sadly, things got worse before they got better. Any signs of profits returning to the company soon subsided when in 2022 the company recorded the highest losses in its history of Rs 62.2 crores. Much of the equity that had been raised was wiped out. It was felt that another change was needed and so Sethi decided to roll up his sleeves and jump in.

The Sethi effect

The appointment of Sethi seems to have paid off for the time being. Sethi was not only able to halt the slide that the company was experiencing but even turned the company profitable. He was able to turn losses of Rs 62.2 crores to Rs 5.9 crores in 2023 and has been able to earn profits for the company of Rs 456 million in 2024. Comparing the performance of the company in 2023 and 2024 shows that Sethi has been successful in his initial mission. The performance of the company has shown that one of the biggest cost centers of the company has been its cost of sales which

were 92% in 2022 and have averaged 78% from 2009 to 2023. This can be seen in the fact that revenues were quite similar in 2023 of Rs 2.7 billion and Rs 2.6 billion in 2024, however, gross profits increased from Rs 64.8 crores to Rs 78.9 crores in a year. Sethi has been able to decrease these costs and has brought them down to 70% in 2024 which is the lowest it has been for the last 15 years. Similarly, in an environment when many companies are seeing their costs rise, Mitchells has been able to decrease its distribution and administrative costs from 31% in 2022 to 20% in 2024. This was reflected in the amounts which were Rs 63.2 crores in 2023 and decreased to Rs 51.9 crores in 2024. Due to cost savings, the company saw an increase in profits from Rs 1.5 crores to Rs 27.1 crores. This points towards the efforts of the senior management.

Other operating expenses of the company also decreased from Rs 6.4 crores to Rs 5.4 crores. This shows that Sethi does deserve a pat on the back as he has been able to increase profits by Rs 25.6 crores for the company which was primarily making losses just 18 months ago. But is it all due to his efforts? Maybe not so much.

One of the biggest generators of revenues has been Rs 37.2 crores which is part of other income for the company. It has been seen that the company is writing back many of its liabilities. In other terms, a liability is written back when it is settled for an amount less than the one that was originally recorded at. A loan of Rs 100 is recorded at cost. If at a later date, it is settled for Rs 80, the Rs 20 is seen as an income for the company. It seems that Mitchells has seen something similar. In 2022, other income only clocked in at around Rs 4.8 crores which increased to Rs 10.8 crores in 2023 and Rs 37.2 crores in 2024. Out of the Rs 10.8 crores seen last year, Rs 8 crores were liabilities written back. The amount seen in the latest year also points towards something similar taking place as the company saw other income of Rs 3 crore until March of 2024 which has increased 12 folds in a matter of three months. Once detailed accounts are released, this hypothesis will be confirmed as it will be seen that the company has been able to settle its debts at a lower cost.

So where do we stand? On one hand, we can credit Sethi for making the company leaner and more efficient. Seeing a turnaround in a matter of months does go to show that he has been successful in bringing a change at the company. But that is only half of the tale. It can also be seen that the company is depending for half of its performance on writing back liabilities as the company looks to settle or clear its liabilities and debts at a lower price. The journey of the turnaround will start to become clearer in the next year or so when it can be seen which of these reasons wins out and whether the company stays in the black under Sethi’s leadership. n

By Ahmad Ahmadani

On the 13th of August this year, Shoaib Ahmed was in for a bit of a surprise. Early in the morning, agents from the Federal Board of Revenue (FBR) burst into his shop located at the Pak Centre on Teak Chan Odhadhas Road in Karachi’s Saddar.

The agents were looking for Muhammad Junaid, the owner of an unheard of company called Al-Junaid Impex. As the agents explained, little old Shop number 16-A was listed as the main address for Al-Junaid Impex. But as Shoaib Ahmed explained, he had never heard of a Muhammad Junaid or a company called Al-Junaid Impex. The shop the FBR had been led to was a small operation from where he printed cards on a commercial scale.

It was an understandably frustrating day for the FBR agents that found themselves at the wrong address. After all, they were trying to trace what could possibly be a tax evasion racket responsible for billions of rupees in revenue losses for the federal government. Following the sparse paper trail of Al-Junaid, the FBR went to another address listed for the company. This one, Offices No 404 (A&B) on the fourth floor of the New Challi Trade Centre on Shahra e Liaquat in Karachi, was another dead end. Muhammad Junaid was nowhere to be seen. The offices were occupied by Burhannudin Mukkaram, who was using them to run a sanitary products business. He too had never heard of Muhammad Junaid or Al-Junaid Impex.

Who is Muhammad Junaid, and what does Al-Junaid Impex do? On paper it is a middle-man company that provides coal to different cement manufacturers. But according to allegations from an investigation by the FBR, it is actually a phony company set up to create fake invoices to help certain players in Pakistan’s cement industry. The FBR claims to have uncovered a network of phantom companies, created to issue fake invoices, allowing major players in the cement industry to evade taxes with shocking efficiency worth over Rs11 billion.

This investigation has led the board to Power Cement, a significant player in Pakistan’s cement industry that falls under the umbrella of the Arif Habib Group. But this might just be the tip of the iceberg. According to the FBR itself, they have only been able to trace tax evasion

worth Rs32 crores by Power Cement and even that claim is up for litigation. What about the rest of the Rs11 billion evaded in taxes? Is it a case of the FBR not being able to prove more, or are there others that might have taken advantage of this?

The anatomy of a scam

What we have here is a good example of how an over-invoicing scam works. Here’s how it unfolds.

The key to understanding it is recognizing the loophole within Pakistan’s unique taxation system, which deviates from the more globally prevalent Value-Added Tax (VAT) model. In most countries with a VAT structure, the government collects taxes at every stage of the supply chain. This means that each time a product changes hands— whether from a raw materials supplier to a manufacturer, or from a manufacturer to a retailer—taxes are paid on the value added at that particular stage. It is a system that discourages underreporting by creating multiple points of accountability.

In Pakistan, however, the system works differently. Instead of taxing each stage of the supply chain, the government collects the bulk of its tax revenue at the very start. The reason: given the weaknesses in the efficiency of the government’s tax collection system, the government of Pakistan prefers to collect as much tax as possible when it can literally hold goods hostage until the tax on them is paid, which it can at the port in Karachi and Port Qasim. It can then either adjust or refund any excess tax collected at this stage.

For instance, when coal, a key component in cement production, is sold by an importer to a cement manufacturer, the manufacturer pays a tax-inclusive price to the coal supplier. In this case, this single-point taxation model is precisely where the system has been exploited. If cement sales, particularly those meant for export, are exempt from sales tax, the sales tax they paid on their inputs is refundable. The refundability of the tax is what creates the opportunity for fraud.

A case in point: Al-Junaid Impex, a company supposedly involved in coal trading, issued numerous invoices for coal sales to cement manufacturers. Yet, when the FBR investigated, they discovered that the company’s listed addresses were nothing more than a facility used to print calling cards, and the offices of a sanitary equipment supplier. Al-Junaid Impex was not in the business of coal, but in the business of creating paper trails for companies looking to dodge their tax obligations.

The trail gets hotter

According to the tax code, Al-Junaid is mandated to pay a sales tax-included price to the company it buys from and then claim a credit for this tax payment when they make sales to Power Cement. Consequently, Power Cement pays the sales tax to its supplier and then claims these taxes back from the customers. It is being alleged that Al-Junaid was generating fake invoices to allow Power Cement to claim these taxes without any physical movement or trading being carried out.

When either companies were asked to provide the money trail for the movement of funds being made for the purchases, they failed to provide any trail which led to the accusations being made.

Following the money trail, the FBR discovered that Al-Junaid Impex had been buying coal from another company, Trader Zone. The problem? Trader Zone, like Al-Junaid Impex, was a phantom entity. It existed only on paper, generating fake invoices. In fact, the Trader Zone was that first piece in the supply chain puzzle from which the government was supposed to collect all of the tax from the cement value chain. According to the receipts from Trader Zone, the company had revenue worth over Rs66 billion, and owed the FBR taxes in the amount of Rs11 billion. Yet, no money ever made it into government coffers.

Naturally, the focus shifted from Al-Junaid Impex to Trader Zone. This company was registered in 2021 to an individual named Muhammad Ajmal. The only problem was that the owner of this company with sales worth Rs66 billion was a retired employee of WAPDA drawing a government pension of Rs10,000 a month. Oh, and in case you thought this was a heartwarming story of a pensioner making it big in business in his retirement, Muhammad Ajmal passed away in 2019 two years before the company was established.

This intricate scheme allowed cement manufacturers to claim they had already paid taxes on their coal purchases through invoices issued by companies like Al-Junaid Impex and Trader Zone—companies that, in reality, were simply paper constructs. One of the most notable names implicated in this investigation is Power Cement, a publicly listed giant in Pakistan’s cement industry.

The FBR alleges that they have traced around Rs32 crores in tax evasion back to Power Cement. In the FBR’s internal document, they point out at least three instances in which Power Cement used this company to create receipts. On the first occasion, they claimed to have made a purchase worth Rs10.2 crores in May 2022 with a tax value of Rs1.7 crores. The second occasion was from November 2023 to February 2024, when sales

receipts worth Rs1.5 billion were found with a tax value of Rs28.9 crores. This total tax evasion of Rs31.6 crores is a small fraction of the Rs11 billion discrepancy linked to Trader Zone’s fake invoices. The question remains: where did the rest of the money go?

The magnitude of the scam raises serious concerns. Has the FBR only scratched the surface of Power Cement’s alleged tax evasion? Or are there other players in the cement industry—or possibly other industries—using this same network of fake companies to skirt their tax responsibilities? The revelations thus far suggest that the problem may extend well beyond one company.

Implied in the FBR’s investigation is that these paper companies are effectively offering “tax fraud as a service”. A paper company with relevant registrations with relevant regulators, the FBR, bank accounts, etc. whose sole purpose is to help companies exploit the loophole in the government’s systems and avoid taxes. Not just serving one company, but many, perhaps many in the same sector.

This is not just a case of tax evasion; it is a systemic exploitation of a flawed tax collection system. The fact that such large sums of money can be siphoned off by creating a few fake invoices speaks to weaknesses in regulatory oversight and the challenges the FBR faces in combating white-collar crime. More specifically, it is an opportunity for fraud created specifically because of the FBR’s guilty-until-proven-innocent approach to taxation: creating a single point of failure for tax collection and tax fraud rather than allowing taxes to be collected at every stage of the supply chain.

Power Cement’s exact involvement

For Power Cement, the public fallout could be severe, as the company’s reputation may now be tarnished by allegations of fraud and deception. For the broader cement industry, this scandal could lead to tighter scrutiny and increased regulation. As the investigation unfolds, more companies may be named, and more individuals could find themselves under the microscope of the FBR.

Let us take a step back. The investigation could not solve this quandary as to how an individual earning only Rs10,000 was able to run a business making sales of around Rs66 billion. Just like Al-Junaid, the company did not have any physical assets it could use in its business operations and did not have any records of transactions or money trail to back its claim.

Trader Zone was claiming that they were getting their supplies from another company called Saeed & Co which has already

been blacklisted by the regulatory body. Based on revenues of Rs66 billion, Trader Zone should have deposited a tax of Rs11.3 billion which was liable on them. This never took place.

Talking specifically about Power Cement, the allegation is that it was making fake purchases from Al-Junaid Impex valued at around Rs10.3 crores and from Al-Junaid Impex valued at Rs1.5 billion for the period under review. These sales should have raised sales tax of Rs1.75 crore and Rs29 crore respectively.

The alleged scheme also showed the convoluted nature and the series of fake companies that were used. For example, Power showed fake purchases from MSN Enterprises of Rs5.3 crore. MSN Enterprises was carrying out its purchases from Shahroz Ali who was buying from Mudassar Hussain. The circle was completed when it was seen that Mudassar Hussain was buying from Trader Zone and other proxies in relation to it.

In order to make sure all claims are being made against actual transactions, FBR asks for money trails and a physical record of movement of goods being carried out. In this case, no such movement or money trail could be provided which led FBR to believe that fake purchases were being carried out on paper rather than reality. The FBR estimates that the scheme was able to cause a loss of Rs31.6 crores to the national exchequer as the actual amount of “trading” was valued at Rs1.6 billion.

Legitimate taxpayers as ‘tax frauds’?

There is something a little strange here as well. For starters, the FBR is not above harassing tax payers. Whether it is sending notices to filers or carrying out arbitrary audits of filers, the tax body is known for being heavy handed in their treatment of tax filers. Even in this case, the cement association has stated that the cement manufacturers are being threatened and intimidated with the filing of FIRs against sponsors and key management personnel.

Whether it has the power to do so or not, going after an individual in a limited liability company does feel like the individuals being harassed beyond the norm. In the last year, Power Cement deposited Rs3.68 billion in terms of income tax, excise duty, sales tax and other Government levies. This was preceded by Rs2.57 billion paid out in 2022. Why would a company look to save Rs31.6 crores when it is already paying ten times that amount in taxes?

The company’s financial performance has fluctuated considerably in recent years. From 2018 to 2023, the company will shrink gross margins which became -3% in 2020.

The alleged scheme also showed the convoluted nature and the series of fake companies that were used. For example, Power showed fake purchases from MSN Enterprises of Rs5.3 crore. MSN Enterprises was carrying out its purchases from Shahroz Ali who was buying from Mudassar Hussain. The circle was completed when it was seen that Mudassar Hussain was buying from Trader Zone and other proxies in relation to it.

Since then, the company has been able to bring them back to 22% in 2024. The company has also seen its operating profits go through the same trend hitting a low of -24% and clocking in at 9.6% in 2024. The company has suffered massively in terms of its net profit margin seeing it go as low as -96% in 2022, recovering to 0 in 2023 and going back down to -8.7% in 2024.

The primary reason for this decline has been the fact that the company carried out an expansion of its production line which came online in 2020. In order to fund this expansion, the company took on debt which has proven to increase the finance cost being borne. Due to this finance cost, the company has consistently seen losses. The recent accounts show that the company earned revenues of Rs31 billion which translated to Rs6.8 billion of gross profits. Operating profits were around Rs3 billion, however, due to finance cost of Rs 5 billion, the company suffered a loss of Rs2 billion before tax.

Of course, would a company already in financial trouble want to take such a risk? In either case, as the FBR would argue, hubris and desperation can both bring one to this point. After all, the ability to exploit it is built into Pakistan’s taxation system.

Profit reached out to the management of Power Cement to try and understand their point of view as well. A representative of the Arif Habib Corporation, their VP of Communications Saher Mangi, stated that “In 2022, the cement industry, including Power Cement Limited, transitioned to local coal due to escalating international coal prices and freight costs. This strategic shift ensured continuity of operations and conserved significant foreign exchange for the country. Due to the Russian invasion of Ukraine, Pakistan saw their import from these countries fall due to supply issues while the price of international coal skyrocketed. Facing dual challenges, local manufacturers chose to change their suppliers. The Federal Board of Revenue (FBR) has initiated inquiries into local cement vendors suspected of sales tax evasion through fraudulent invoices. As part of their standard procedure, FBR is

examining the entire supply chain.”

It was further stated that “Power Cement Limited reaffirms its unwavering commitment to compliance and is confident in its ability to provide comprehensive documentary trails for all transactions related to coal purchases and consumption. We assert that our domestic and export sales volumes vividly justify the volume of coal purchased during these periods. All transactions with local coal vendors were conducted through banking channels, and inputs claimed have been through the FBR portal, evidencing the declaration of sales by the vendors. This transparent and documented approach underscores our adherence to regulatory requirements. For further clarity on the cement industry’s stance, please refer to the All Pakistan Cement Manufacturers Association’s (APCMA) letters dated January 25, 2024, to the Special Investment Facilitation Council and February 20, 2024, to the Minister of Finance, Revenue & Economic Affairs.”

The press releases claim the FBR is looking to target the cement industry. A letter was sent back in February 2024 where the industry complained to the then Finance Minister, Dr Shamshad Akhtar, and the Special Investment Facilitation Council Secretariat that the cement manufacturers were being targeted.

“The recent investigation should be seen in light of the letter that was sent earlier which stated that there was a tsunami of inquiries and harassment which was being seen in the cement industry at the hands of a few individuals at the FBR. The inquiries were being made in relation to coal purchases being carried out from local vendors. The association felt that its earlier letter sent to the SIFC had not been taken seriously and they were now putting the complaint in front of the finance ministry. The industry contributes Rs185 billion in the form of taxes and generates exports of $200.”

The result of this investigation and legal proceedings will be carried out over the next few months to come. Which side comes out victorious in the end still has to be seen. n

By Mariam Umar

The years 2022 and 2023 marked a transformative period for Pakistan’s financial sector.

Amid high policy rates and monetary tightening, banks and financial institutions experienced unprecedented growth and profitability. However, this economic climate also catalysed significant shifts in business strategies across the industry.

As previously reported by Profit, commercial banks have pivoted away from traditional lending practices. Instead, they’ve increasingly adopted investment firm-like approaches, favouring secure government securities over riskier private sector investments. Surprisingly, this trend has extended beyond commercial banks, permeating sectors traditionally focused on underserved markets—areas often overlooked by mainstream financial institutions.

Development Finance Institutions (DFIs) and Microfinance Banks, originally designed to bridge financial gaps, have found

Has PKIC’s interest rate arbitrage finally ended?

Pakistan’s largest DFI has had an underwhelming 2024 so far as its investment strategy backfires

themselves swept up in this strategic shift.

A prime example is Pak Kuwait Investment Company (PKIC), Pakistan’s largest DFI. After operating akin to a hedge fund for two years, PKIC is now in the midst of a strategic realignment. This change comes on the heels of challenging financial results, with the company reporting net interest income losses in both the first and second quarters of 2024.

To fully grasp the implications of these industry-wide changes and PKIC’s evolving strategy, let’s dive deeper on how the past 24 months have played out.

DFI landscape of Pakistan

In Pakistan’s financial landscape, DFIs are categorised into two distinct groups: broad objective and specific objective institutions. Broad objective DFIs, also known as joint venture financial institutions, are established through collaborative efforts with bilateral partners. These institutions are majority-owned by national governments

and serve as key instruments in implementing foreign development policies. Typically, their shareholding structure consists of a 50-50 split between the Government of Pakistan (represented by either the Ministry of Finance or the State Bank of Pakistan) and the partner foreign government’s relevant institutions.

One of the significant advantages of these broad objective DFIs is their enhanced creditworthiness, often bolstered by government guarantees or access to international development funds. This privileged position enables them to raise substantial capital from international markets at highly competitive rates, further amplifying their impact on the country’s economic development.

In contrast, specific objective DFIs are created to address the development needs of particular sectors. A prime example is the Pakistan Microfinance Investment Company (PMIC), established as a key component of the National Financial Inclusion Strategy (NFIS). Founded through a collaboration between the Pakistan Poverty Alleviation Fund (PPAF), Karandaaz Pakistan, and the KfW Develop-

ment Bank, PMIC embodies a partnership dedicated to empowering Pakistanis at the bottom of the economic pyramid by supporting microfinance institutions that serve underserved communities.

For the purposes of this story, our focus remains on the joint venture DFIs in Pakistan. The country boasts seven such institutions: Pak Kuwait Investment Company, Pak Oman Investment Company, Pak China Investment Company, Pak Brunei Investment Company, Pak Libya Investment Company, PAIR Investment Company, and Saudi Pak Industrial Agricultural Investment Company. These entities form the backbone of Pakistan’s development finance sector, each playing a unique role in driving economic growth and fostering international partnerships.

which is the latest period for which financial reports are available)

Decades old presence

Established in March 1979, Pak Kuwait Investment Company (PKIC) is a joint venture between the governments of Pakistan and Kuwait. The institution is equally owned by Pakistan through the State Bank of Pakistan (SBP) and Kuwait via the Kuwait Investment Authority (KIA). Like other Development Finance Institutions (DFIs), PKIC was created to support economic growth and capital formation in Pakistan.

Over the years, PKIC has made several significant investments. The most notable ven-

March 2022, it signed an MoU with R.J. Fleming and Company Limited to jointly establish a private equity fund. PKIC will provide seed capital, with additional funding to be sourced from both local and international investors through R.J. Fleming’s network. The fund aims to provide growth capital to Pakistani entrepreneurs and potentially facilitate international listings or sales.

The DFI also ventured into the tech sector by acquiring an equity stake in Planet N, a platform that invests in over 40 tech startups. This move adds a technology-focused component to PKIC’s investment portfolio.

Financial performance

Amongst these DFIs, PKIC is the largest with an asset book of more than Rs 1 trillion. Pak Oman and Pak Libya follow with an asset book of around Rs 414 billion and Rs 511 billion respectively as of June 2024

“All DFIs are relatively small except for PKIC. PKIC’s advantage lies in its 30% stake in Meezan Bank, from which it receives dividends of around Rs 12-13 billion. Hence, PKIC’s profitability compared to other industry players will be significantly different due to these high dividends,” explained an industry source.

(Note: Pak China Investment Company’s annual reports are available for the year 2022 only. The asset book figure corresponds to total assets un the year 2022

ture has been its investment in Meezan Bank, Pakistan’s largest Islamic bank. PKIC holds approximately 30% of Meezan’s shareholding, which has proven to be a profitable stake for the DFI.

PKIC’s involvement in Islamic banking extends further. The company has received in-principle approval to establish Raqami Islamic Digital Bank Limited, in which it holds a 73% equity stake. This digital bank is expected to offer Sharia-compliant digital banking solutions, potentially influencing the country’s banking sector.

In addition to its banking investments, PKIC is expanding into private equity. In

Between 2018 and 2023, PKIC has demonstrated significant financial growth. The company’s total revenues have increased by approximately 51% over this five-year period. This growth is fairly evenly distributed between net interest income, which grew by 48%, and non-interest income, which increased by about 51%.

PKIC’s revenue structure is notably influenced by its investment in Meezan Bank. The revenue chart indicates that non-interest income, primarily consisting of income from shares in associates (mainly from the Meezan Bank investment), is a major driver of PKIC’s revenues.

While the share of net interest income in total revenues has remained relatively stable over the years, 2023 saw a remarkable increase in this category.

Net interest income jumped by 140%, rising from Rs 2.5 billion to Rs 6 billion in a single year. But how did the DFI manage such exponential growth?

An abrupt shift in strategy

Over the past two years, Pak Kuwait Investment Company (PKIC) has implemented an aggressive growth strategy, which began to take shape in the latter half of 2022. This shift in strategy was largely influenced by changes in government borrowing dynamics and broader financial context.

Historically, when the government

needed funds, it could either borrow from banks or directly from the State Bank of Pakistan (SBP). The SBP had the ability to create new money to purchase government bonds at low interest rates, particularly when banks were not offering favourable rates in bond auctions.

This landscape changed significantly with the implementation of an IMF pushed SBP autonomy act, the door for directly borrowing from the central bank was permanently closed. This decision was motivated by concerns over inflation, as direct borrowing from the central bank led to increases in the money supply.

Yet, the government figured out a work around in the shape of Open Market Operations (OMO). OMOs are a central bank tool used to regulate interbank market liquidity through the buying and selling of government securities.

dealers.

These operations can be either mop-ups (reverse repos) or injections (repos). Post the autonomy act, the SBP, on the government’s behest, started injecting liquidity by lending money to commercial banks in exchange for government securities. The banks then used these repo borrowings to further invest in government securities.

This created a tripartite arrangement where the SBP lent to commercial banks to enhance their liquidity for purchasing government securities, effectively channelling the initial injection to the sovereign.

In June 2022, this benevolent scheme was extended to the DFIs as well by allowing them to participate in OMOs as primary

PKIC, seeing the opportunity, wasted no time and started borrowing heavily through OMOs to fund its government securities investment. As a result, both PKIC’s investment portfolio and its borrowings expanded sixfold.

In simpler terms, PKIC adopted a cyclical strategy: it used its funds to purchase floating-rate government securities, such as T-bills and PIBs. These securities were then used as collateral to borrow money through repos (OMOs) from the SBP. With the borrowed funds, PKIC bought more government securities and repeated this process.

Financial institutions like PKIC, in this whole arrangement, acted as intermediaries to facilitate the lending to the government by SBP and in return earned a meagre spread of around

0.5% to 1%. However, the DFI was particularly eager on capitalising on this opportunity as by the end of 2023, it held almost 21% of all outstanding OMOs by SBP.

But PKIC was not alone in this

PACRA’s recent report (June 2024) on DFIs highlights significant growth in the sector. The asset base of joint venture DFIs grew by approximately 79% in 2023, reaching Rs 2,231 billion. This growth was primarily driven by a 73% increase in investments, which constituted 87% of joint venture DFI’s asset base by the end of December 2023, up from 81.6% at the end of December 2022. Total assets grew by 63.3% year on year during 2023 and further by 38.8% year on year in the first quarter of 2024.

PKIC, however, was central to this growth, comprising 51.8% of total investments in the category at the end of 2023, with its investments rising to Rs 1,046 billion, a 44.0% increase from the previous year.

PKIC’s investments continued to grow in Q1 2024, reaching Rs 1,067 billion and forming 63.4% of the sector’s total investments. The sector’s overall investments grew by 1.4 times in Q1 2024 compared to the same quarter in the previous year, primarily on the back of higher investments in government securities.

This investment strategy, while profitable, comes with significant risks. The repo rate driving this strategy is directly tied to the SBP’s policy rate. While government treasuries are also heavily influenced by the policy

rate, they are subject to market sentiment in the secondary market as well. PKIC and other banks benefited from the yield differential between government securities and the borrowing rate. As a result, PKIC’s net markup income increased substantially, reaching Rs 6 billion in 2023 from Rs 2.5 billion in 2022. However, despite the rise in net interest income, margins remained slim due to the high borrowing rate nearly matching returns on government securities. This necessitated a volume-driven approach to boost profitability. This strategy was not unique to PKIC. Other DFIs, such as Pak Libya Investment Company, also saw significant increases in their investment portfolios. Pak Libya’s investments grew from Rs 27 billion in 2021 to Rs 107 billion in 2022, and further quadrupled to Rs 419 billion by 2023. This trend reflects a broader shift among DFIs, all capitalising on the SBP’s liquidity injections and essentially operating like hedge funds by leveraging borrowed funds to increase exposure to government securities.

opment finance. Instead of channelling funds into long-term economic projects, DFIs have focused on lending to the government through securities.

While this volume-driven strategy had resulted in healthy profitability and growth for DFIs, as increased transactions paid off, it came at the cost of DFIs straying from their core mission—serving as catalysts for devel-

Downside risks materialising

The rapid growth and profitability of financial institutions like PKIC proved to be short-lived. As the market began anticipating progres-

sive rate cuts, yields in secondary markets, for government securities, started to decline. This yield compression put pressure on net interest margins, as borrowing costs remained tied to the SBP policy rate while returns on government securities dropped.

This scenario exposed a potential mismatch in PKIC’s asset-liability management. With investments predominantly in interest rate-sensitive assets and borrowings not adequately matched, the company faced challenges in managing interest rate risk.

The spread for PKIC and many other institutions eventually turned negative, with borrowing rates surpassing returns on government securities. Consequently, net interest margins fell into negative territory. By the first quarter of 2024, PKIC reported a net interest income loss of approximately Rs 4 billion, which doubled to Rs 8.4 billion by the end of the first half of 2024, marking a sharp reversal from previous gains.

An important aspect of this situation relates to bond valuation principles. Typically, declining yields lead to upward revaluation of these securities, which would be reflected in a company’s income. However, PKIC, like most financial institutions in Pakistan, categorised its investment in government securities as “Available for sale.” This accounting treatment requires that revaluation gains or losses are parked in Other Comprehensive Income (OCI) and only transferred to the profit and loss statement when the security is sold or paid off at maturity.

A closer examination of PKIC’s financials reveals a revaluation gain of Rs 3.8 billion on government securities in the second quarter of 2024. However, this gain couldn’t be transferred to the profit and loss statement due to limited opportunities to sell these securities in

the secondary market in a rapidly declining interest rate environment.

In response to these challenges, PKIC implemented strategic changes in the second quarter of 2024. For the first time in six quarters, both its investments and borrowings declined. Borrowings reduced by 10%, while investments dropped by around 9%. This shift represented PKIC’s efforts to mitigate the risks of negative interest margins by scaling back its exposure to government securities and reducing reliance on borrowed funds.

What compelled PKIC?

According to an industry source, the involvement of DFIs in the purchase of government securities was crucial. Their participation prevented commercial banks from exploiting the situation and demanding excessively high rates. Without DFIs, aggressive bidding by banks could have potentially driven the policy rate to an alarming 25-27%, rendering government borrowing costs unsustainable.

It’s also worth noting that DFIs like PKIC operate under partial government ownership, which inherently limits their autonomy. Moreover, unlike their counterparts in other countries, Pakistani DFIs lack access to concessional lending schemes for development objectives. Instead, these favourable schemes are predominantly utilised by commercial banks, leaving DFIs without preferential treatment.

Looking ahead, the current interest rate of 17.5% remains prohibitively high for project financing, continuing to skew assets towards government securities. Market risk is expected to escalate further, as evidenced by the government’s recent rejection of all bids for floating-rate Pakistan Investment Bonds (PIBs). This move signals the government’s anticipation of declining interest rates and its strategy to secure lower borrowing costs in the future by avoiding long-term commitments at current rates.

However, this approach introduces new uncertainties for DFIs like PKIC. As yields on government securities potentially shrink, these institutions may face further margin compression and limited near-term profitability. In response to these challenging market dynamics, PKIC has begun adapting its strategy. It’s probable that other DFIs will follow suit, indicating a broader shift in the financial landscape as institutions navigate this complex economic environment.

The State Bank’s Treasury Bill buyback: smart move, or money printing by another name?

The house is divided on the repurchase transactions as some call it a confidence boosting measure while it is business as usual for others

By Ahtasam Ahmad

The Government of Pakistan is currently experiencing an unprecedented surge in liquidity, both domestically and in its international reserves. This favorable position is partly due to the International Monetary Fund’s recent disbursement of a $1 billion loan tranche. More notably, the local liquidity situation received a significant boost from a record Rs2.7 trillion dividend announced by the State Bank of Pakistan (SBP).

This substantial dividend was made possible by the central bank’s extraordinary profit of Rs3.4 trillion, marking a staggering 200% increase from the previous year. The root of these enormous figures lies in the SBP’s generous lending to financial institutions at record interest rates through open market operations.

Ironically, most of these funds were subsequently invested in government securities at even higher rates, creating a circular

arrangement where the government of Pakistan essentially enabled its own profitability and is now reclaiming the same funds.

While the focus of this article is not to critique this unconventional arrangement, it aims to elucidate the sequence of events leading to the buyback and its future implications. The stage for higher dividends was set during last month’s post-MPC analyst briefing when the SBP governor hinted that the government’s share of SBP’s profits would likely exceed budgeted expectations.

This prediction materialized in the form of the Rs2.7 trillion dividend, providing the government with a temporary liquidity surge, which it promptly utilized to announce a buyback of its securities.

The first of what may be a series of buybacks occurred last week, with the SBP intending to repurchase Rs500 billion of T-bills but ultimately securing Rs351 billion worth. This context leads us to a crucial question: Why is the government suddenly so keen on buying back its own securities?

The rationale

The government’s strategy is straightforward: it aims to reprofile its debt by swapping expensive securities for lower-cost alternatives. The recent buyback transaction illustrates this approach. The Rs351 billion worth of T-bills repurchased were set to mature in December and had been issued at high interest rates of around 20%21%. With current yields at approximately 16%, the government seized the opportunity to avoid these exorbitant interest rates, resulting in debt servicing cost savings of about Rs 11.61 billion.

“The government’s primary objective is to reduce its debt servicing costs. They are repurchasing high-yield securities (with returns of 19%-20%) and perhaps plan to refinance these with new, lower-cost issuances later. At present, the focus is on buying back 6-month to 1-year Treasury bills. Further buybacks are anticipated,” opined Naveen Ahmed, a Karachi-based investment banker.

“Regarding longer-term instruments,

Post-buyback market sentiment is likely to favor rate reduction, supported by the current 6.9% CPI reading. Expect progressive rate cuts in upcoming MPCs. However, increased private credit remains contentious due to significant government financing needs. This will likely eventually redirect surplus liquidity towards the sovereign, albeit at lower rates

Adnan Naqvi, Head of Investment Banking at Pak-Brunei Investments

Pakistan Investment Bonds (PIBs) are predominantly floating-rate securities, benchmarked against the 6-month Karachi Interbank Offered Rate (KIBOR). Only about 20% of these are fixed-rate bonds. Consequently, there’s no necessity to repurchase securities of other maturities, as their yields will automatically adjust downward in tandem with falling T-bill rates,” she added.

However, the strategy extends beyond mere cost savings. Nearly Rs9.5 trillion of conventional market debt, roughly 25% of the total, is due to mature between October and December 2024. Faced with such substantial upcoming maturities, the government has opted to buyback short-term debt and issue bonds and bills with maturities of one year and beyond.

“The government currently enjoys a liquidity surplus due to the recently announced SBP dividend. They aim to utilize this excess liquidity to optimize the domestic debt profile by repurchasing high-cost short-term bills and replacing them with more affordable long-term debt,” remarked Mustafa Pasha, Executive Director and Chief Investment Officer, Lakson Investments.

The Ministry of Finance has been striving to extend the maturity profile of its market debt, but unfavorable market conditions in recent years have hindered this effort. The current market expectation of approximately 4% in rate cuts by January 2025, driven by falling inflation (latest figure 6.9%) and a balanced current account, has finally presented an opportune moment.

This climate allows the government to issue longer-term fixed-rate bonds, complemented by long-term floating-rate bonds, thus achieving its goal of debt reprofiling and maturity extension.

Reading between the lines

The government’s buyback transactions serve a dual purpose: managing debt and reining in banks’ strongholds on the market. Through these

buybacks and the anticipation of further policy rate cuts, secondary market yields are plummeting. This marks a significant shift from the past two years when the government had to acquiesce to banks and other financial institutions to meet its liquidity needs at exceptionally high rates.

Now, with the advantage in its court, the government is asserting its position. Recent T-bill auctions, where all bids for the 3-month tenor were rejected, exemplify this new stance. However, the sustainability of these buybacks as a recurring feature remains questionable.

In the short term, more buybacks are likely as the government aims to replace maturing debt with longer-tenor securities. The next buyback auction, scheduled for October 10th, underscores this strategy. Yet, extending this approach beyond December 2024, when major maturities occur, seems improbable.

“This buyback strategy is unlikely to become a regular practice, given the substantial fiscal deficit we continue to face. It’s primarily a signaling mechanism through which the government seeks to lower market expectations for returns on future debt issuances and influence secondary market rate,” Pasha reiterated.

This perspective aligns with Pakistan’s fiscal outlook. With the country projecting a significant fiscal deficit for FY 2025 and the Federal Board of Revenue (FBR) falling short of its first-quarter tax target, the government may need to explore alternative means to address the fiscal gap.

Amidst these developments, the State Bank of Pakistan (SBP) governor’s recent statement about increased private credit flow due to buyback-induced liquidity injections also raises questions.

Adnan Naqvi, Group Head Corporate & Investment Banking at Pak-Brunei Investment, offers a nuanced view: “Post-buyback market sentiment is likely to favor rate reduction, supported by the current 6.9% CPI reading. Expect progressive rate cuts in upcoming MPCs. However, increased private credit remains contentious due to significant government

financing needs. This will likely eventually redirect surplus liquidity towards the sovereign, albeit at lower rates.”

The government’s buyback strategy is not intended to operate in isolation. Instead, these buybacks will be coordinated with T-Bills and PIBs auctions, aiming to replace short-term debt with longer-term securities. Even if the government doesn’t fully offset the buybacks, the market has the potential to reduce its leverage position of Rs 9-10 trillion.

However, this strategy comes with a caveat. Market observers might notice a surge in private sector lending over the next quarter, but this increase would likely be unrelated to the liquidity injection claimed by the SBP governor. Instead, it would be driven by banks striving to achieve an Advance to Deposit Ratio (ADR) of 50% by year-end to avoid additional taxation.

This tactical approach is already evident, with recent lending transactions offered at rates up to 6% below KIBOR to encourage short-term borrowing in the private sector. However, similar to the pattern observed in 2022, this lending is expected to reverse after the year-end.

For sustainable growth in private sector credit, the risk profile of this segment needs to improve. With only 300 to 400 large blue-chip borrowers available in the country, many of whom are grappling with a slowdown in aggregate demand, near-term changes in private credit are likely to be more about complying with ADR regulations and avoiding penal taxes rather than genuine economic expansion.

Therefore, the final quarter of the calendar year is poised to maintain a high level of activity in Pakistan’s financial markets. Multiple auctions are anticipated, with a focus on long-term Pakistan Investment Bonds (PIBs) featuring maturities from 2 to 30 years, while simultaneously retiring significant amounts of short-term debt (3 to 12-month T-bills).

Concurrently, shifts in private sector credit are expected to contribute to this momentum, with the year likely concluding amidst a series of policy rate reductions. n

The changing investment thesis for National Foods

A New York-based hedge fund has taken a 12% stake in the consumer foods company, long a darling of foreign investors, but its thesis may be different from those that came before it

By Zain Naeem

ANew York-based hedge fund acquires a 12% stake in National Foods, one of Pakistan’s most recognized consumer foods brands and a company widely regarded as having corporate governance standards that most foreign investors believe they can trust.

If this story were published in the latter half of the Musharraf era, or even in until about 2018, one would have chalked it up to a desire from a sophisticated global investor to profit from the rapidly expanding Pakistani middle class. But this is 2024, and that Pakistani middle class has seen its purchasing power absolutely battered. So why is Millville Opportunities Management, a $200 million hedge fund (small by American standards), investing in National Foods now?

It is because National Foods has figured out a way to profit from the expansion of purchasing power of dual-income Pakistani households, regardless of whether that Pakistani household lives inside or outside Pakistan. In other words, Pakistanis inside Pakistan are struggling under the weight of skyrocketing inflation, and many are leaving in droves, but National Foods has decided it will not give up its share of their wallet even as they leave Pakistan and will continue to serve them abroad, particularly Pakistanis who migrate to Canada.

Here is what is going on.

The origins of National Foods

National Foods began in 1970, founded by a former Pakistani cricketer and a textile technologist. The company started to take off when it was taken over by Waqar Hasan and Abdul Majeed

and entered the packaged spice business.

Up until the 1970s, Pakistani cities were not materially different from Pakistani villages in terms of the cooking habits of people. You could not buy flour, you bought raw weight, and then went to a small flour mill in the neighbourhood market to get it ground into floor. You did not buy spices that were ground. You bought them raw and went to a mill to have them ground. Life moved much more slowly, and it could afford to because every household had very few people who worked outside the home, and many more people who were home all day.

Life started picking up pace, at least for a small segment of the urban middle class, in the Zia era, and companies like National Foods realized that there was a market for the spices to be sold in ground form rather than whole form. It was part of the vanguard of the convenience food movement in Pakistan, and has been in this business line ever since.

By the 1980s, it had become a small supplier to McCormick, the American spice giant, and by the 1990s, it expanded into pickles and sauces, hitting the Rs 1 billion sales mark by the 2000s. But as recently as 2017, less than 15% of the gross sales of the company were exports. National Foods lived up to its name and largely sold to Pakistani households living inside Pakistan.

It is not as though National Foods products were not available outside the country. Walk into any grocery store in Dera in Dubai or even a Patel Brothers (Indian grocery chain in the United States) in Chicago, and one would find virtually the whole line up of National Foods products well stocked. But these were a relatively small part of the company’s sales.

That changed with an acquisition made it late 2017 that transformed the company from being a mostly domestic company to one that started taking its export market quite seriously.

Emigration and exports

The educated middle class of Pakistan has been emigrating from the country in substantial numbers for decades, but the trend truly picked up in the mid2010s, particularly as Canada made immigration for educated young people from all over the world to be able to directly apply for Canadian permanent residency. National Foods spotted an opportunity and decided to capitalize on it.

In 2017, they bought a 60% stake in A1 Cash and Carry, a Canadian wholesale chain. A1 Cash & Carry is a restaurant wholesaler and distributor specializing in B2B wholesale of commercial kitchen supplies, food packaging, cleaning supplies, meat, seafood supplier, takeout containers wholesale, fruits, vegetables, spices, frozen foods, beverages. It is headquartered in Mississauga, Ontario, a suburb of Toronto well known for its large concentration of Pakistani immigrants. A1 is not just a place from where Pakistani households can buy their spice supplies. It is the place from where Pakistani – and Indian and Bangladeshi – restaurants in the Toronto metropolitan area and the wider Ontario region can buy their supplies from. National Foods quite literally moved up the value chain and bought out one of their biggest distributors and used that ownership to ensure that they are able to distribute much more of their product in the North American market than before.

This is not just a new business line that happens to be doing well for National Foods. This is a fundamental transformation of what National Foods is as a company, and therefore changes the investment thesis of what it means to own National Foods stock.

Until 2017, no more than 15% of National Foods’ gross revenue in any given year was exports. In the financial year ending June 302, 2024, that proportion had risen to 52.3%. National Foods is now an export business with a lo-

cal side hustle, rather than a domestic brand that exports a bit to nostalgic overseas Pakistanis.

This is a story not just of the success of its export business, which has grown its revenues by an average of 41.3% per year in Pakistani rupees (20.2% per year in US dollars) in the six years between 2018 and 2024 to $191 million in gross revenues in 2024, more than three times the $63 million it generated in 2018.

It is also a story of the fact that its domestic business has stalled out when measured in USD terms. In Pakistani rupees, Nationals Foods’ domestic revenue grew by an average of 15% per year between 2018 and 2024, which sounds reasonable until one realizes that the rupee depreciated by an average of 17.6% per year during that period, meaning that National Foods’ domestic revenue line shrank by an average of 2.1% per year during that period, shrinking from $198 million in gross revenue in 2018 to $174 million in 2024.

Why North America?

What makes this story interesting is not the fact that the Pakistani diaspora has a hankering for food from home. It is the

fact that the diaspora in the United States and Canada is so much more willing to spend money on National Foods products than the much larger diaspora in the Middle East or even the United Kingdom. And the difference has to do with which Pakistanis end up in North America versus which ones end up in the Middle East and Europe.The vast majority of Pakistanis who move to North America are college educated professionals. Convenience food is a much more important need for them than it is for Pakistanis in the Middle East who may be less well educated and skew heavily male, which means they likely do not even cook their own food and thus have no need for spices and other cooking supplies. Pakistanis in North America are much more likely to be dual income, which means that women are much more likely to be working outside the home, and thus these households have much more of a need to economise on the amount of time they can spend on cooking at home.

The new investor

Millville is not a stranger to the region—it has experience investing in South Asia, from funding tech startups like GrocerApp in Paki-

stan to Chaldal and iFarmer in Bangladesh. But this venture into spices and condiments marks a shift into the consumer goods sector, signalling perhaps a long-term bet on the rise of middle-class consumption in emerging markets.

The fund’s stake in National Foods crept up last year, when it bought 4.5 million shares, pushing its ownership past the 10% mark to become a substantial shareholder. And it is not just about biryani mixes and pickles; National’s growth story is what seems to have caught the eye.

Millville’s bet likely hinges on National’s ability to expand further into international markets, particularly in North America, where it’s already making inroads via Amazon, Walmart, and brick-and-mortar stores. With global demand for ethnic foods growing and National’s proven track record of scaling its business, it seems the hedge fund sees room for National to spice up its revenue streams even more.

The fund is run by Alejandro Montealegre, a 38-year-old investment manager who graduated from Princeton University in 2008, worked at Goldman Sachs, followed by a stint at a small investment fund in New York before starting Millville in 2011. n

Ishaq Dar wants to hand 35% of any future natural gas discoveries over to the private sector. What is stopping him?

A task force led by the Deputy Prime Minister has had to stall its decision again because of the continued absence of Petroleum Minister Musadiq Malik

By Ahmad Ahmadani

A20-member Task Force on Gas-related Issues, led by Deputy Prime Minister Ishaq Dar, has been unable to finalise the Council of Common Interests’ decision to allocate 35% of future gas discoveries to the private sector, due to Petroleum Minister Musadik Malik’s repeated absences.

According to sources privy to the development, the delay in enforcing the CCI decision is apparently because of the repeated absence of Petroleum Minister Musadik Malik from key meetings, slowing progress on a policy that Ishaq Dar has been pushing for.

Ever since his appointment as Deputy PM, Ishaq Dar has been trying to craft a role for himself in shaping the economy. Part of this has been his leadership of different committee’s that would traditionally be led by the finance minister. However, Mr Dar has taken up command of committee’s like the one on privatisation and the CCI.

The CCI actually deliberates on matters related to interprovincial coordination. While it did not make sense for Mr Dar to be on the council as foreign minister, he has more overarching authority as Deputy PM. The council had earlier decided that 35% of any future natural gas discoveries in Pakistan would be given to the private sector. This was part of the incumbent government’s focus on selling natural resources, mining, and agriculture to foreign investors to try and improve Pakistan’s economy. The government claimed, as it does regularly, that this plan could unlock $5 billion. However, no evidence of this has been provided.

Despite four task force meetings convened to enforce the decision, the absence of Petroleum Minister Musadik Malik from

two critical sessions has hindered a final decision, sources added. There seems to be a clear disconnect between the two cabinet members.

The sources revealed that the meetings held under DPM Dar’s leadership had full attendance, except for the petroleum minister, who initially consented to attend but failed to appear in the last two meetings. The absence has reportedly stalled deliberations on enforcing the CCI’s January 2024 directive, which mandates that 35 percent of gas from future discoveries be auctioned to the private sector through competitive bidding.

The Council of Common Interests (CCI), on January 26, 2024, approved the amended Exploration & Production (E&P) policy, stipulating the allocation of 35 percent of gas from future discoveries to the private sector. The CCI’s decision required the Petroleum Division to submit an implementation framework to the Executive Committee of the National Economic Council (ECNEC) for approval. However, despite the passage of eight months, the Petroleum Division has yet to present the framework to ECNEC, further delaying the policy’s implementation.

As per sources, the task force, led by Deputy Prime Minister Ishaq Dar, has held four meetings since the CCI decision, with Petroleum Minister Musadik Malik attending only the first two. Malik’s absence has reportedly caused frustration among task force members, as the decision’s enforcement is seen as crucial to attracting significant investment in the energy sector. Sources suggested that Malik’s reluctance stems from his opposition to allocating 35% of future gas finds to the private sector, as he believes the matter warrants reconsideration by the CCI.

While sources close to the task force have indicated that Malik is employing

delaying tactics to prevent a final decision, the petroleum minister has denied these allegations. When approached for comment, Musadik Malik clarified that his absence from recent meetings was due to prior engagements, including his participation in the Russian Energy Week in Moscow. He emphasised that he is not opposed to the policy and that his ministry is actively working on a framework to implement the CCI’s decision.

In the absence of the petroleum minister, the task force continues to address other critical issues related to the energy sector. In a meeting held on Monday, the committee discussed topics including high-speed diesel imports, the utilisation of additional LNG, and the allocation of gas to the Fauji Fertilizer plant. However, despite the ongoing discussions, the key issue of the 35 percent gas allocation remains unresolved.

Deputy Prime Minister Ishaq Dar, frustrated by the repeated delays, has called for swift action to enforce the CCI’s decision. He urged the committee to reach a unanimous conclusion on the allocation of gas from future discoveries to the private sector. Sources close to the task force have revealed that Dar plans to convene another meeting next week, hoping to break the deadlock and move forward with the policy’s implementation.

It is also learnt from sources that the Finance Minister, Minister for Maritime Affairs, Secretary Petroleum, Managing Director PSO, MD SNGPL, CEO UGDC etc. have attended this important meeting.

It is pertinent to mention that with mounting pressure to resolve the matter, it remains to be seen whether the task force can overcome the internal disagreements and finally implement a decision that could prove crucial for Pakistan’s energy sector and economy.

Cocomo has a big chunk in Pakistan’s biscuit market despite not quite being a biscuit.

In a classic case of consumer driven innovation, Bisconni has responded to demands and launched its new Cocomo cereal. What could this mean for Ismail Industries?

By Nisma Riaz

In the cutthroat world of Pakistani snacks, few brands inspire the kind of devotion reserved for Cocomo.

Its catchy jingle - “Cocomo, mujhe bhi do” - is seared into the collective consciousness of a generation raised on those bite-sized chocolate-filled biscuits. But even cultural touchstones must evolve or risk fading into nostalgic obscurity.

For Bisconni, the makers of Cocomo, that evolution came from an unexpected source: their own consumers.

Consumer-driven innovation is how Pakistan’s favourite biscuit found itself making the improbable leap from a quick snack to a breakfast cereal. But in a market dominated by multinational heavyweights and the local giant Fauji Foods, can Cocomo swim in the milk bowl without sinking?

How does Ismail Industries measure up?

Sometimes the big guy is exactly that — the big guy. And on most occasions when the Goliath comes out on top, they don’t leave more than a few crumbs for the many proverbial Davids to fight over.

But on other, rarer, occasions the small players are not quite as small as you’d think. The picture is similar in Pakistan’s snacks and confectionery market. As one would expect, the largest players in the market are English Biscuit Manufacturers (EBM) and Mondelez Pakistan. EBM is a homegrown company that has been around for the past five decades and has produced household brand names such as Peek Freans and Modelez is the international company that owns and operates Cadbury among many other brands.

Together, EBM and Mondelez rule over the market for chocolates, confectionery, biscuits, and sugary sweets in Pakistan, which is worth just over Rs 250 billion. Since the share of the biscuits market is the largest out of all the categories EBM is also the biggest company in this business, controlling over Rs 80 billion in total retail sales. Mondelez is fast on its heels with total retail sales worth just over Rs 70 billion. Together the two control nearly two-thirds of the total pie with net retail sales of Rs 150 billion.

And while Mondelez and EBM have created brands that have brought them this success over the course of decades, there is one other competitor that is not far behind. Founded in 1988, Ismail Industries is another local player in the sugar snacks, chocolates, biscuits and confectioneries market that has made a

name for itself. Under this Candyland brand name, Ismail Industries have produced some or the most popular snacks in Pakistan including Cocomo and Chilli Milli - both of which are market leaders in their respective categories.

Within this, Cocomo has played no small role in the success of Ismail Industries. According to the Euromonitor report we have used for this story, Peek Freans is the most sold biscuit brand in Pakistan. And while Continental Biscuits comes in second in terms of gross sales of biscuits, the second most bought brand of biscuits in Pakistan is actually Bisconni. This is owned and operated by Ismail Industries which also runs the famous Candyland brand. Now, Bisconni and Ismail Industries do not have many famous biscuits. Bisconni Chocolato is a chocolate flavoured biscuit that has done well and Bisconi’s Chocolate Chip Cookies have a similar story. But according to Ismail Industries’ own estimations, the biggest seller under the Bisconni brand name is Cocomo.

Cocomo really is a bit of a cultural icon. The small, chocolate filled, round treat is a favourite in school canteens and corner stores around the country. There are passionate debaters on social media that engage in Cocomo discourse and for the few months that Miftah Ismail was finance minister he was asked about Cocomo by almost every single person that interviewed him. In fact, Miftah was regularly hounded about the fact that a Rs 5 pack of Cocomo now contains only three cocomos in it — a matter many interviewers asked the former finance minister about to display the concept of shrinkflation.

{Note: During the course of his ministry, Profit interviewed Miftah Ismail on multiple occasions. Although questions regarding Cocomo were never officially asked, the matter was discussed off the record more than a few times. Mr Ismail was always kind enough to bear with the badgering.}

What is impressive about Ismail Industries being in third place in the biscuits segment is that they did so with a product that barely fits in the biscuit category. This points towards the wild popularity of Cocomo and Ismail Industries’ ability to understand what the consumers want. After all, the company has had a rich history of success in the sweet snacks industry particularly when it comes to candy.

Founded in 1988, the company’s flagship brand has been Candyland. Underneath this the Ismails have remained market leaders in the sugar confectionery segment. In fact, according to a recent report, the most consumed sugary snack in Pakistan is Candyland’s Chilli Milli. They control more than half of the Rs 56.7 billion market that exists in Pakistan. The competition in this segment is not particularly tough. Hilal is number two with less than half of the gross sales total as Ismail and Mitchells

has continued to see its fortunes dip. But within the sugar confectionery sector there is one other player that is small in terms of market share but big in stature.

How did Cocomo evolve from a biscuit to a cereal?

We all know what Cocomo is, with its popular tagline ‘Cocomo, mujhe bhi do,’ the biscuit does not need an introduction. It is one of Pakistan’s biggest brands, so much so that Cocomo is more well known than its manufacturer Bisconni or the parent company Ismail Industries.

Launched in 2002, the brand quickly rose to fame for its affordable chocolate filled bite sized biscuits. Originally, Cocomo was only available in Rs 5 and Rs 10 packets. Promoting the concept of sharing from the very beginning, eventually, the company introduced a bigger Rs 50 pouch, with a zip lock seal to double down on Cocomo’s tagline and introduce a better offering.

But how did it go from being a snack to a breakfast cereal?

It is no secret that Pakistanis take their tea very seriously, and their evening tea is often accompanied by biscuits. With a general culture of dipping one’s biscuit in tea is a very South Asian concept. But Cocomo was never paired with chai, perhaps because despite its wide consumption by all age groups, it was always marketed to children.

Bisconni did not feel the need to complement its Cocomo with a beverage like tea, unlike Peek Freans’ Sooper or Continental Biscuits’ Zeera Plus. Even international brands like Kraft’s Oreo, which later became localised and started being manufactured by LefèvreUtile (commonly known as LU), have marketed their biscuits with milk. However, Cocomo was enough by itself, or so Bisconni thought.

Until they saw that consumers were having Cocomo with milk.

Profit sat down with Bisconni’s Senior Brand Manager Nigah Hasnain Zaidi, to understand how the Cocomo cereal came to life. Admitting that this innovation is entirely consumer-driven, Zaidi told Profit, “It all started when our interns, who were Gen Z, were seen enjoying Cocomo with hot chocolate at the office, and quite seriously debating the best way to consume the biscuit. One intern insisted that they always eat it with milk and that it’s the best way to consume it.”

Bisconni already had some consumer insights after being tagged in social media posts where people claimed Cocomo and milk were the perfect combo. “We had already been working on this idea for two years, thanks to

similar consumer insights from social media. Naturally, the product needed adjustments to complement milk better, and after two years of refining, we finally enhanced its composition to make it the ideal milk companion, and introduced a new segment of Cocomo as a breakfast cereal.”

Timing is everything (especially when wooing Gen Z)

It was clear what the consumer wanted, but what nudged Bisconni to finally speed up this project they had been working on since 2022?

Zaidi said that Gen Z, in particular, caught their attention. “They are a tricky and very demanding group. Gen Z are not only hard to please, but also constantly looking for the next new thing.”

That being said, it is also a generation that possesses the unique ability to make things trend very quickly and that is what Bisconni decided to bet on.

For Cocomo, which already has strong brand equity and nostalgic appeal across generations, losing out on this new market could spell trouble. “Gen Z’s loyalty is fleeting, so we knew we had to act fast to keep them engaged,” Zaidi shared.

She highlighted that Cocomo’s appeal spans from kids to elders, but Gen Z’s constant need for novelty posed a risk. “So, we decided to expand Cocomo beyond just a snack and offer it in the breakfast segment as well. We’re not restricting Cocomo to one shelf anymore— we want it on every rack, in every segment. This boosts brand recall and ensures Cocomo remains a household name,” said Zaidi.

Bsiconni’s research also revealed that Cocomo had a lot of “lapsers”—former fans who had moved on. “Despite being the number one biscuit brand in Pakistan, we found that many of these lapsers were Gen Z. They crave variety and fun, so launching a Cocomo cereal felt like the perfect way to win them back and keep the brand fresh and exciting or risk losing out on a huge new market,” Zaidi explained.

In a consumer run market, identifying a trend is not enough. Crafting a positioning statement for a brand can be a real puzzle for marketers.

According to Zaidi, you start with the assumption that, “Oh, my 15-year-old would love this,” only for your market research to reveal that even 5-year-olds and 30-year-olds are enjoying it. She gave the example of Digestive biscuits to illustrate her point, “For instance, digestive biscuits are surprisingly favoured by young children, even though they’re primarily marketed to adults. This revelation can be quite eye-opening for brand managers, who

realise they may have been targeting the wrong audience or overlooking another segment that actually loves their product.”

She shared that they had been working on this insight for two years, but the growing feedback made them feel it was the right time to act. “We got a firsthand glimpse of this demand when we noticed our interns enjoying Cocomo, and their excitement inspired us to take the plunge and accelerate our plans,” Zaidi divulged.

She also admitted that while Pakistan may not have a strong cereal culture, the company noticed that among young children and those living alone, cereals are increasingly popular. They offer a quick, convenient, and tasty option in an era where meal prepping reigns supreme.

Can Bisconni’s Cocomo cereal be as big as the biscuit?

Breakfast cereals are a tough category in Pakistan. According to a 2023 Euromonitor report, although breakfast cereal is projected to achieve double-digit value growth, constant value growth is anticipated to be minimal, with volume sales expected to decline.

Persistent high inflation is hindering volume growth, despite an increasing population, as consumers are turning to more affordable breakfast options like roti and other local staples. Family breakfast cereals, particularly flakes, still represent the majority of volume sales, but hot cereals are expected to perform the best in 2023, experiencing the least volume decline. However, it’s important to note that value sales for hot cereals remain low.

This shows that it is already a difficult time for the particular category. Combined with tough competition, it becomes an extremely risky endeavour for Bisconni.

Let’s first see what the breakfast cereal segment in Pakistan currently looks like, before debating whether Cocomo cereal has what it takes to become as big of a success as its original counterpart.

According to Euromonitor’s analysis, Fauji Foods continues to dominate the market, appealing to price-sensitive consumers who value its affordability. The main competitors of Fauji are international brands like Kellogg, Cereal Partners Worldwide (Nestle), and PepsiCo, which are ranked in descending order of their market presence. While these global brands are perceived as high-quality options, their higher prices, especially following the significant currency devaluation in 2023, have widened the gap between them and the more affordable Fauji Cereals, which currently take 59.6% of the market share.

Despite this, it is not an entirely hopeless category.

Euromonitor estimates that although breakfast cereal is set for a volume decline in 2023, the outlook remains positive, with potential for growth as inflation stabilises. Busy lifestyles will drive demand for convenient options, supported by the expansion of modern grocery retail channels. Muesli and granola products are expected to thrive, particularly among health-conscious consumers, prompting local manufacturers to introduce new offerings with unique flavours and eco-friendly packaging. Additionally, urbanisation will increase the need for on-the-go breakfast solutions, with single-serve and portable cereals, along with cereal bars, likely to see significant growth due to their quick and easy preparation.

Consumer insights reveal that cereal options are evaluated based on quality, pricing, taste, and nutritional value. Established brands such as Nestlé, Quaker, and Kellogg’s are typically associated with consistent quality standards. In terms of pricing, Fauji Foods holds a competitive edge due to its strong market presence. Taste preferences vary widely; some consumers gravitate towards the familiar flavours of international brands, while others seek out unique and innovative options.

“When it comes to nutritional value, brands like Kellogg’s and Quaker are often viewed as healthier choices, emphasising fibre content, whole grains, and lower sugar levels. Among these brands, Nestlé generally receives the highest quality ratings, whereas Kellogg’s and Quaker are recognized for their nutritional benefits. Pricing can fluctuate based on promotions and competitive dynamics,” said Adeel Raza, General Manager at OMG Pakistan.

For Cocomo Cereal, understanding these consumer perceptions and preferences is crucial for effectively positioning itself in the market and differentiating its offerings based on these essential factors.

The question remains– will Cocomo cereal be able to crack this market?

Raza told Profit, “Entering the cereal market with big players like Fauji Foods and Nestle can be tough due to scale advantages, brand loyalty, distribution networks, hefty marketing costs, regulations, and the need for product uniqueness. However, with smart tactics and knowing what customers want, new brands can find success in the market over time.”

Zaidi responded to this confidently, saying, “When we looked at the entire cereal market—a $7 billion industry where Fauji cereals dominate, having a 60% share—we knew breaking in would be a challenge. But challenges also present opportunities, and for a company like Bisconni, known for innovation,

we were ready to take that leap.”

She added that Ismail Industries, with its diverse portfolio, has the risk-taking appetite to explore new frontiers. “What sparked our decision was the growing consumer demand for more options. There’s a social element to it too—people like comparing what they eat with their peers, saying, “Oh, you eat this? Well, I prefer that.”

The target market is notoriously fickle, with brand loyalty lasting just a heartbeat. To keep pace, you must continually adapt. While Cocomo’s primary audience includes adventurous Gen Z consumers—known for their quirky food combos like ice cream with fries—Cocomo’s appeal extends far beyond, Zaidi insisted. “Anyone with teeth can enjoy this guilty pleasure, making it a treat for many adults,” Zaidi claimed, doubling down on Cocomo’s popularity.

So, Bisconni is quite literally piggybacking on its robust brand equity and consumer enthusiasm to make Cocomo cereal thrive in a competitive market. What else?

Well, the thing about Cocomo is that it has always been quite affordable. But cereals are notoriously expensive, and a product that only a small segment of society buys and can afford. In such a competitive market, will Bisconni be able to leverage its ability to offer affordable products to capture a sizable share of the market?

Well, the Cocomo cereal box is priced at Rs 699 and contains 200 pieces.

We asked Zaidi why someone would pay Rs 699 for a 200-piece Cocomo cereal pack, when they can buy four Rs 50 packs and get as many pieces as the Rs 699 cereal box?

She insisted, “Our cereal box priced at Rs 699; which is quite affordable, considering that it competes in a costly arena. What sets it apart? It’s filled with chocolate. Offering 200 pieces for Rs 700 makes it an enticing value proposition, delivering more bang for your buck.”

She also shared that even the Rs 50 Cocomo packs have shrunk in quantity due to inflation, but consumers often don’t do the maths. They’re more inclined to think about convenience. A single 200-piece box saves them the hassle of multiple purchases.

What do branding experts say about the potential of Cocomo

cereal?

Cocomo may have taken a leap of faith with its new cereal but what can it do to stand out in the competitive landscape of breakfast cereals?

Raza believes that entering the market

might be tough for Cocomo cereal, but it can still make waves by tapping into what’s hot with consumers, such as health and nutrition trends. “By focusing on organic, low sugar, gluten-free options, and sustainable packaging, Cocomo can offer a healthier choice, stand out from the competition, and attract health-conscious buyers. By aligning with these trends, emphasising quality, transparency, and innovation, Cocomo Cereal has a shot at competing and gaining market share in the cereal business,” he said.

He continued, “Bisconni can shake things up with unique cereal flavours, health-focused options, and customisable blends. Creating a strong brand identity emphasising health, sustainability, and quality, along with strategic distribution through online platforms, health food stores, and partnerships, can help Cocomo cereal stand out in the market.”

We asked Zaidi whether Bisconni is positioning the new product as a healthy and nutritious breakfast option? She answered, “No, we are not claiming a higher nutritional value but offering the consumer what they are demanding, as well as, value additions like a formula that complements milk better.”

When inquired about introducing more flavours in their cereal, such as strawberry, orange and milk, which are available in Cocomo biscuit, Zaidi said, “It’s still early days for new flavours, as we’re in the testing phase, evaluating market reception. This product is designed to become a household staple, unlike Cocomo (biscuit), which serves a different purpose. We expect a surge in sales between the 25th and 10th of each month when grocery

shopping peaks. We’re actively monitoring how the product performs and remain excited about future experimentation.”

Additionally, Raza also believes that in order to make this new offering successful, Bisconni must promote both products together to create synergy, maintain consistent branding for a smooth transition, engage biscuit fans through targeted marketing, and highlight shared values to foster trust.

In the end, Cocomo’s cereal gambit represents more than just a new product launch. It’s a case study in consumer-driven innovation, a test of brand elasticity, and a highstakes bet on the evolving tastes of Pakistani consumers.

Will Cocomo successfully make the transition from beloved biscuit to breakfast staple? Can it carve out a meaningful share in a market dominated by established giants? Only time, and countless bowls of milk-soaked chocolate cereal, will tell.

One thing is certain though; in the ever-changing landscape of Pakistani snacks and breakfast foods, standing still is not an option. Bisconni’s willingness to follow its consumers into uncharted territory may well prove to be the secret ingredient that keeps Cocomo on Pakistani tongues, and bowls, for generations to come.

So the next time you’re strolling down the cereal aisle, keep an eye out for that familiar green palm tree logo. Your childhood favourite might just be vying for a spot in your breakfast routine. After all, in the world of Cocomo, it seems “mujhe bhi do” now applies to more than just biscuits. n