CONTENTS
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7 The man behind commerce, one-on-one with Profit 10 Have Pakistan’s most successful startup founders become Naspers courtiers?
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16 The culture of safety Asif Saad 18 Malls and retailers were dying to open again. Now they’re regretting it
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22 At Amreli steel, things look solid 23 Turbulence in the oil and gas sector
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26 Circular debt - the nearly 2 trillion problem
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28 Survive or Thrive - how CPG companies adapted to C19 lockdown
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25 Bank Alfalah looking attractive to investors
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36 Is the auto sector going to get worse? You bet
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37 Despite Covid-19, fertiliser prices will drop
Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Syeda Masooma l Taimoor Hassan l Abdullah Niazi l Meiryum Ali l Hassan Naqvi l Shahab Omer Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk
IN BRIEF The State Bank of Pakistan has announced mandatory targets for banks to increase their lending for housing and construction to at least
5%
of their total private sector credit by December 2021. None other than the US President Donald Trump has shown interest in buying the PIAowned Roosevelt Hotel, located in New York.
International airlines such as Qatar Airways, Etihad Airways, and Emirates have made negative
Covid-19 tests mandatory for all passengers travelling from Pakistan.
A new notification by the Oil and Gas Regulatory Authority cut gas rates for consumers of Sui Northern Gas Pipeline by
6%,
and Sui Southern Gas Company by 2%.
Fitch Solutions has predicted that the value of the Pakistani rupee will remain at an average of Rs163 against the US dollar in 2020
Pakistan’s Information Technology and IT enabled Services (export remittances grew by
20.8%
PTCL Group’s revenue for the half year ending June 30 was Rs62.9 billion, a 5% drop when compared to the same period last year.
Rahat Kaunain Hassan has assumed her office as the new chairperson of the Competition Commission of Pakistan, for a three-year term.
in the first eleven months of fiscal year 2020, totalling $1.11 billion, compared to $918 million during the same period last year.
Car sales have plummeted 53%, with
110,583
units being sold in 2020, compared to
235,229
units the previous year, according to the Pakistan Automobile Assemblers Association.
The Khyber Pakhtunkhwa government aims to complete work on two hydropower projects by December
2020,
adding more than 60 MW of electricity to the grid. 6
The Advisor to the Prime Minister on Commerce, Abdul Razzak Dawood, talks about what his ministry is doing to exports during the coronavirus pandemic, and what we can expect from the future INTERVIEW
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By Ghulam Abbas and Shahzad Paracha
scion of one of Pakistan’s pioneering industrial families, the Dawood Group, and the founder of one of Pakistan’s largest engineering companies, Descon, Abdul Razak Dawood is currently serving in his second stint in the federal cabinet. Both times the titan of industry turned politician has held the same portfolio, Federal Minister for Commerce. While his first term, under former military ruler President General (r) Pervez Musharraf, was served from a plush seat in parliament, his second one has come as an
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Advisor to the Prime Minister with the status of Federal Minister. On both occasions, Dawood has been no stranger to controversy or murmurings of conflicts of interest. Just a month ago when the annual federal budget had been announced, Dawood had been under fire for a tax exemption granted to the Lahore University of Management Sciences (LUMS), of which he is Pro-Chancellor. Before this, back in January 2019, his company Descon won the Rs 309 billion bid for the construction of the Mohmand Dam. While these incidents have reached far from conclusive ends, currently, the advisor to the PM does not seem to have them on his mind. As it should be, his mind is focused on dealing with the ongoing coronavirus pandemic that has rocked Pakistan and the world. Like some already implemented mitigation measures, the Ministry of Commerce has also come forward to initiate some steps for countering the impact of the pandemic on the country’s external trade. Chief among the government and the ministry’s priorities has been the “Make in Pakistan,” policy, which is a bid to set up exports to the international market, particularly in the current challenging times. The concept behind the policy is that after the pandemic ends, there will be economic opportunities ready for the taking, and Pakistan must be prepared. For this, the government is shoring up products and increasing production, in order to promote locally made products in global markets. To talk about what the commerce ministry is doing, and what we can expect for the future, Abdul Razzak Dawwod sat down with Profit for an exclusive one-on-one interview. Profit: The natural first step in the process of ‘Make in Pakistan’ was to allow imports of raw material with relaxed regulatory duties. What have you done in this regard? Abdul Razzak Dawood: The government is working to reduce the regulatory duties (RDs), Customs Duties, (CD) and, additional Custom Duties (ACDs) on raw material in coming years. We have a plan to make RD, CDs zero from the existing 20 percent duties. Our aim is to prepare cheap products in Pakistan and export to the EU and other countries. Additionally, under this program, the government has reduced the RD, and CD on more than 1000 tariff lines pertaining to raw material in the budget 2020-21. This will have immense benefits for our local industry. Profit: There has been a tussle between the Ministry of Commerce and Federal Board of Revenue (FBR) over duties and tariff as the former thinks the duties and tariff imposed by the latter as major impediments in hurting
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exports. What do you say to this? ARD: Unfortunately, successive governments kept focus on revenue and did not pay heed to export. The FBR collects 47 pc of revenue from customs. Compare this with our neighbouring country India, where only 28 pc of the revenue is collected from customs. Bangladesh is a similar story with 26 pc. Meanwhile more developed regions such as the EU get only 10% revenue share from customs. Unlike Pakistan, these countries collected more from sales and income tax. I had raised this issue with the Prime Minister last year. It was exactly as a result of this conversation that the determining tariff is now under the domain of the commerce ministry instead of the FBR. Profit: Since the ministry has been empowered to decide the tariff, how has it used this new power to bring down the cost of production? Has it been through reduction of the tariff? ARD: Our team has been working on tariff rationalization policy since November 2019. Admittedly, the original aim had been to complete this process since before presenting the 2020-21 budget. However, we postponed it in the middle to complete more consultations required with stakeholders. Profit: How has the pandemic affected the country’s exports and the resultant export policy? Has there been a major shift in the focus on exports? ARD: We had estimated $42 billion in exports till 2024-25 before the pandemic. I was personally optimistic that the government will be able to reach our $25 billion target, as there was at least 14% growth in exports comparable to the first eight months of last fiscal year. . However, after the pandemic hit, we believe that the export levels will have fallen to somewhere around $22 billion this year. Now that the budget has been presented, I will give a three year roadmap with regard to import and export. Profit: Still, what has the government done up until now to boost exports? ARD: We have taken various measures to boost exports such as the release of Rs97 billion to textile exporters in comparison to the Rs 68 billion previous governments released from 2009-10 to 2017-18 in support schemes for the textile sector. The incumbent government can further release funds in the last month of the current fiscal year (June). We have already released Rs51bn to the export sector in this fiscal year. Furthermore the prices of gas as well as RLNG have been rationalized at Rs786/mmbtu and $6.5/mmbtu for export oriented sectors. Besides, electricity has also been provided at
reduced rates of 7.5 cent/Kws to export oriented sectors including textiles. Other important measures taken for supporting the export sector included import of cotton through the Torkham Border, withdrawal of RD, customs duty and ACD on imported cotton with effect from January 15, 2020. The markup of long term financing facility has been continued at 5% to encourage installation of plants and machinery, similarly, the mark up on export finance scheme continued 3% to provide short term loans to the exporters. The duty free import of textile machinery has also been continued. To give a more long term plan, the third textile policy for the period of 2020-25 has been prepared. The draft has already been circulated to all ministries concerned and this policy would provide a foreseeable future to the manufacturers and exporters. Profit: One of the traditional complaints has been that even if Pakistan manages to ramp up its exports, we are simply exporting the wrong things. Shouldn’t we be focusing on diversifying? ARD: Pakistan has been very dependent on a few sectors, and our scope is confined to textile, leather, rice, carpets and other such products. What we have to do is focus on and give importance to other sectors such as pharmaceutical, engineering, and meat as well as poultry, food, chemicals, and IT. Part of the reason for our current situation is that our geographical spread is also very limited. We have been concentrating primarily on the western world, such as the USA and Europe, then on China, Japan and Korea. It is only after these that we think about Far East Asian markets such as Malaysia and Thailand. We never visited Latin America, Central America and Australia and now the big one, Africa, which is bigger than India in terms of population (over a billion people), and almost the size of China. This is geographically bigger than China. We need to focus the neglected regions as potential markets of our products. Profit On that note, your ministry, under the umbrella of the ‘Look Africa Policy’, had arranged a three-day conference in Kenya in January this year to explore the African market. What was the outcome? ARD: Our exports to Africa have increased by 10 percent during the past few years. The unfortunate part was that the mega event organised by Pakistan in Africa was held just before the Covid-19 pandemic really shook the world. When we returned back from Kenya, we witnessed cases of Covid in Wuhan, and all attention went in that direction. Soon the first cases of the virus were reported in Pakistan. Anyhow, soon this pandemic will end, and then
we will again be able to focus on the potential market of Africa. Profit: As announced last year, your government had managed to get the additional export facility of $1 billion in China, mainly targeting export of three items from Pakistan: sugar, cotton yarn and rice. However, the facility, which was aimed at reducing the trade imbalances, could not be availed fully. What was the reason? More importantly, are there chances for this special facility to continue? ARD: Pakistan has exported 200,000 metric tonnes of rice, worth $86 million to Chia. Similarly, we have also exported 300,000 tonnes of sugar worth $117 million. The amount of cotton yarn was 500 tonnes, and without any tax. making up an overall export amount in excess of $700 million of these items exported to China during the current financial year. As far as this facility between Pakistan and China continuing is concerned, you will have to wait and see. This could be possible after high level talks. The Prime Minister may need to go there and discuss the matter with their leadership. Apparently, this may not happen now. Profit Talk to us about the export of Personal Protective Equipment (PPE) that the government has allowed. We have heard that your ministry is getting a good response from the EU, especially Italy and the Netherlands. ARD: This is correct. Exporters are getting millions of dollars worth of import orders from different countries, and Pakistan will be able to export $500 million worth of masks, sanitizers, gloves, and gowns, in the coming months. Profit: As mentioned, the export of PPE has recently been announced. However, there are reports that there could be a shortage of molasses, alcohol and related items in the coming months in Pakistan itself. Presently, the rate of 80-90% ethanol varies from Rs 1000 to Rs 4000. The availability of and supply of alcohol to hospital pharmacies at cheap rates has become a challenge. Does the export of such items at this juncture make sense? Would the export not cause a jump in prices of the items in the local market where the masks, sanitizers are being sold out at exorbitant rates? ARD: We are not immune to the economic shocks caused by the Covid-19 crisis, and our exports are down. A lot of our garments’ and chemical manufacturing capacity is lying idle and people are losing jobs, which will ultimately increase social pressures. We must remember that there is a lot of idle capacity available to take care of any shortage, which in my opinion is unlikely to arise. This is because, as we export, our capability to manufacture PPEs will increase, which will take care of any local shortage. As for alcohol, our current production is far more than what we
require. Exporting PPE will not only bring in foreign exchange, reduce import dependency, open up a new market for exports, but it will also create employment. If we don’t move in time, we will be left behind. We are already late in this area and we have lost a lot of orders to India and Bangladesh. India has become the world’s second largest manufacturer of PPE (after China) within a short span, despite the fact that they also have a huge number of Covid-19 cases. Out of abundant caution, the government has put in place a monitoring mechanism by forming a committee comprising myself, the Minister for Industries & Production, SAPM on Health and the Minister for Science & Technology. It will monitor the stock surplus of the PPEs on a fortnightly basis and, if required, it will recommend an immediate ban on export of specific PPE items. This will take care of not only the availability but also the untoward price escalations that you mentioned. Profit: Karachi is the trade hub of Pakistan. Reportedly, the provincial government is not taking the required steps to support and facilitate the business community there. Chambers and trade bodies are complaining about the lack of facilities in Sindh. Is the federal government going to take any steps in this regard? ARD: The Sindh government is in a tough situation as Karachi is a huge city. There have been restrictions with regard to opening of business. On the other hand, Punjab is a big province and people prefer to start work there. However, I have also been receiving complaints that the Punjab government is creating hurdles for investors. I will talk to the business community and government officials in Punjab about this, but effectively balancing these two things is not an easy task for any government/. Profit: Your American counterpart, Wilbut Ross, visited Pakistan in February this year. Did that visit ever result in anything? Perhaps in some sort of old deal that was in the pipeline but never ended up happening? ARD: Back in the Musharaff era, the Bush administration had given an idea to Pakistan and Afghanistan. This involved the two countries preparing different products and exporting them to America without any duty, however, this never came to fruition. This is similar to the arrangement made between Israel and Jordan. In the arrangement Jordan produces certain products with 25percent Israel content and exports to the US without any duty. As the war like situation is still there in Afghanistan, no one can take the risk of investment in such an arrangement. In addition to this, a lot of discussion is also required with Americans and other stakeholders to set up
industry in the merged areas of Khyber Pakhtunkhwa (KP). I cannot say that this is on the card or that this will be done in coming months. Profit: As a prominent industrialist, how do you feel about the country’s economic outlook, and do you think your background gives you an edge over traditional politicians who usually run this ministry? ARD: First and foremost, being a businessman gives me the distinct advantage of knowing the problems of the business community first-hand, as I myself have faced these problems at one point or the other. In business, the technocrats can persuade the markets by reputation, competence, and experience. It is the right of the Prime Minister to decide what expertise he wants for a position in the cabinet, since he is the one that has to deliver the expectations of the people. He has to make it work in any way he deems fit. He is the captain of the ship, and therefore has the right to select the winning combination. Also, being a businessman, I would like to think that it helps the government to bring in a mix of technocrats and parliamentarians in the cabinet. It creates a very diverse portfolio of expertise and experience. Profit: When will Pakistan open its borders with neighboring countries for trade? The Pakistan China border at Khunjerab could not open after closure in December. China is reportedly not in favor of opening the border. ARD: As you know, the Covid-19 situation in all the neighbouring countries of Pakistan is escalating, due to first or second waves of the pandemic. Hence, my ministry along with the ministries of interior and health are monitoring the situation and taking necessary measures. For example, we have allowed transit trade and exports to Afghanistan at Torkham and Chaman, subject to observance of SOPs to avoid Covid-19 spread. Iran has not been importing much from Pakistan for many years, however, as a gesture of goodwill, Pakistan has allowed imports from Iran especially for sustenance of border areas. Profit: It seems that the process of reforms in the government institution has also been slowed down after the pandemic spread. As the World Bank may complete its survey for compiling Ease of Doing Business Index by October, where do you see Pakistan’s position in the next ranking? ARD: We had done a lot of work before the Covid-19 crisis struck. However, I agree that since the crisis started, our efforts have received a slight setback. In my opinion, it is not fair to second-guess the World Bank at this stage. But I do hope that the World Bank takes into account difficulties brought in by the crisis, as ease of doing business is also affected by such externalities and force majeure events. n
INTERVIEW
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By Taimoor Hassan
T
he lives and successes of brothers Zeeshan, Imran and Haider Ali Khan have been extensively chronicled and billed as a success story. Founded in 2006, their high-flying property portal start-up, Zameen.com, has quickly become one of the largest property portals in the world. Now, Zameen.com’s parent company - the Emerging Markets Property Group (EMPG) - has vaulted into the unicorn club after its merger with classifieds giant, the OLX Group. The EMPG-OLX merger was announced on April 29, 2020 in Pakistan, the UAE, Egypt and Lebanon. The transaction includes a funding round of $150 million out of which $75 million will be invested by existing EMPG shareholders, with the remaining $75 million being invested by the OLX Group. The transaction values EMPG at $1 billion, making the merged entity the third unicorn created by Pakistani founders following Afiniti and KeepTruckin, with the OLX Group becoming the single largest owner of EMPG at 39% per cent shareholding . Out of the four geographies where the merger transaction took place, OLX already had a presence through its local brand of the same name {OLX} in Egypt and Lebanon. These platforms have now been merged into EMPG which plans to roll out new services for the real estate community, besides promising to offer consumers a better experience across all categories. In Pakistan and the UAE, both groups had platforms under their own local brand names. In the UAE, EMPG has Bayut whereas in Pakistan, it is Zameen. OLX’s local brand for UAE is Dubizzle whereas in Pakistan, it operates as OLX Pakistan. In both these countries, EMPG will operate these brands which will continue operations under their respective local brand names. “OLX is a global horizontal brand with a strong presence in many of EMPG’s markets,” says Imran Ali Khan, the CEO of EMPG and co-founder of Zameen.com. “EMPG, on the other hand, has built a strong localised infrastructure in each of these geographies. It made sense to combine these strengths into a single entity.” While the merger may be relatively clean and simple, where the point of interest lies in who EMPG has decided to do business with. OLX is the classifieds business of the South Africa based media and technology giant, Naspers, and partnering
with them is surely an exciting opportunity for EMPG. In fact, Naspers was an early investor in Tencent and holds 30% stake in the company, its most successful investment so far. It runs the OLX Group through a Netherlands-based spinoff company called Prosus. This puts Naspers in the same league as Softbank, and is counted among the big six technology investors in the world. Any merger involving them is going to be a big deal for a company like EMPG. But things are not completely peachy. For starters, while the Khan brothers may have managed to create a unicorn, rumours are that if they have not exited already, they are on the verge of it. There is no definitive answer on this, but the key is Naspers, which has a history of high-stake mergers that eventually end in the founders of the companies they merge with crashing and exiting. The co-founders did not disclose specific details about the exit strategy of any of the shareholders or the lead up to the merger. They were also secretive about the holding structure of EMPG, and did not even confirm whether or not they were majority shareholders in the company after the transaction, in response to queries made by Profit. To get to the bottom of this, it is necessary to look to the past. Back in 2012, Zameen.com raised its first angel investment from French investor Gilles Blanchard in 2012, who serves as the chairman of the board at Zameen.com. This was followed by a Series A round in 2014 in which Zameen. com raised an undisclosed amount from Singapore based-Catcha Group and Malaysia based-Frontier Digital Ventures (FDV) in which both the funds received significant but non-controlling shares in Zameen. From FDV’s financials available publicly, it owns 30% shares in Zameen.com. A source has disclosed to Profit that there are only two shareholders in Zameen. com; FDV and EMPG. So the remaining 70% is held by the EMPG. Since OLX is now the single largest shareholder in EMPG at 39%, by extension OLX has 27.3% shareholding in Zameen.com. That leaves 33.7% shareholding that the rest of the shareholders at EMPG can possibly hold in Zameen. com. That effectively puts the brothers in a minority in at least Zameen.com. Furthermore, from what Profit got to know from another source, there is another shareholder in EMPG: Kingsway Capital. That further reduces the shareholding of the original co-founders and brothers in Zameen.com. It might also be possible that an investor might have exited in the merger and funding
transaction, but there is no news of that sort and neither Zeeshan nor Imran gave us any clue. From what our source told us, neither the brothers nor Kingsway Capital, have exited during the transaction. Extrapolating from this, there is a strong case to be made for the possibility that the co-founders might have decided to exit from Zameen.com and EMPG after this transaction. It might as well be a prudent business decision, and a lucrative deal might have been worked out. We can only wait and see how it unfolds. It is not only because of the assumptions based on shareholding percentages that we know. It has more to do with the classifieds business and the competition that might have brought about an exit for the brothers.
A merger of equals?
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aspers is big, and as their Chief Executive Officer (CEO) likes to explain, their business strategy is not to invest with the intention of making some money and exiting. Which is why, the merger between OLX and EMPG may not be one between equals, and the history and nature of Naspers may have forewarned the Khan brothers that they may have to exit eventually. For Naspers, it is about fostering growth. “We like an investment with which we can stick for 20 years. Naspers is not a fund, so there is no exit horizon,” says Bob Van Dijk, the Naspers CEO. “That is important for us. We do need to have the confidence that the business model works. We don't mind if it consumes cash for a while.” This is Naspers' typical strategy, which is to keep investing in the business for as long as it is required to make it profitable. However, there is a flip side to this positive approach, which is that since Naspers continues to invest heavily, it usually ends up completely acquiring that business it involves itself in. And nowhere has Naspers applied this method more than in their classifieds business. For instance in March 2013, Naspers merged its Slando. ru and OLX.ru assets with a $50 million investment in Russia in exchange for an 18.6% interest in another Russian classifieds platform called Avito. Avito was a competitor, and acquiring it meant Naspers could create a leading general classifieds business in one of the largest countries in the world. Another example of this ‘invest and acquire’ strategy was on display when Naspers invested in the UAE’s leading property portal, Dubizzle, for a 51% stake in 2013. By
MERGERS & ACQUISITIONS
“We like an investment with which we can stick for 20 years. Naspers is not a fund, so there is no exit horizon. That is important for us. We do need to have the confidence that the business model works. We don’t mind if it consumes cash for a while” Bob Van Dijk, Naspers CEO
2018, they had acquired it completely. Dubizzle has now been merged with the EMPG’s Bayut platform in the emirates. However, during all this time while Naspers was investing further and further in their classifieds business, which included Dubizzle, they were also taking hits in the millions of dollars. Despite this, they did not change course and maintained their investment strategy. but Naspers kept on investing. They finally made profits from its classifieds business in 2019 - a validation of its strategy. In 2019, the company reported a profit of $2 million from its classifieds business. For the year 2020, classifieds profits of Naspers have jumped to $44 million. This is a story the company uses to extol their own virtues. “Our classifieds business, we started investing in it eight or nine years ago,” says CEO Dijk at a recent conference. “It made an operating loss for seven years but it turned profitable last year (2019). Everybody said it’s a great business and well, we told you it’s great!” Naspers push into classifieds had become more aggressive in 2018. In an interview with CNBC Africa, the Naspers CEO underscored classifieds as “one of the segments that we are focusing on, and where we will spend our money and also where we will deploy most of the capital going forward.” Naspers boldy says that its investments into classifieds business are part of its strategy to consolidate its global presence as the leader in classifieds. It is because of this strategy that the co-founders of EMPG might have thought about exiting before they eventually found themselves with no other choice. This is classic Naspers, and the Khan brothers will be more than aware of this.
The world of classifieds
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he classified ads industry has evolved from those drab, blocky, black-and-white text only print ads in newspapers, into digital and online ads with all sorts of visuals and hooks. And as with all things going digital, the cost of putting online ads has come down as well,
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compared to the pricey print advertisement. But for a platform putting those ads online, money would not be earned easily unless the platform is the leader in the space. In the world of classifieds, Zameen.com started out by carving a niche for itself in the real-estate segment and has since conquered it. But it did not really do so through classifieds alone. It evolved from a classifieds focused tech company into a full-fledged sales and marketing and real-estate development company. It is the evolution of its business model that defines the evolution of Zameen, and that is what has helped it grow exponentially and stay ahead of the competition. Zameen.com was created in 2006 by brother duo Zeeshan and Imran to list properties of real-estate agents on its portal in what was the newly crafted classifieds model. Sellers would post free ads on the portal to get buyer leads for a property. More and more real estate agencies would post properties on Zameen.com which would generate leads for these sellers and higher conversion rates. As the portal would become famous, more and more sellers and buyers would visit it. More traffic on the portal would mean the portal was valuable for buyers and sellers, and Zameen would eventually move on to paid listings in 2010. Zameen’s sales teams would take onboard real-estate agencies to advertise properties on its platform under different packages, ranging from a few lacs to over a million rupees. It would also evolve to start exclusive marketing of real-estate projects. The way this worked was that Zameen.com would market the property of a real-estate developer, and then would collect hefty commissions when the sale was finally made. This was essentially an offshoot into traditional real estate business with many non-tech players like Star Marketing already providing a similar service to developers. For the years to come, it also invested in its own real-estate development projects such as apartment complexes and malls. Its development projects include Zameen Opal in Lahore, Zameen Ace Mall Islamabad, Zameen Ace Homes Islamabad and Mall 35 Rawalpindi.
This varying business model is what has fuelled Zameen’s growth. So much so that from $1 million in revenues in 2015, Zameen’s revenues in 2019 had gone up to a staggering $42 million.
Playing the stages
T
he classifieds business is by nature one that can only make money when there is just a single player. Back in 2010, after establishing themselves as an important player in Pakistan’s real estate sector, Zameen moved to paid listings. This was the first crack, and in 2012, OLX started its classifieds business in Pakistan with ‘free’ ad space on its platform, giving Zameen.com its natural nemesis. However, even the ad space on OLX remained free only until 2018. Until this point, real-estate agencies would be able to post free ads on OLX instead of paid ads at Zameen.com, and that would affect Zameen’s revenue. By 2018, when both companies had finally moved to paid listings, the real competition was on. It was a matter of time before something gave, and with Naspers out-spend strategy and much vaster resources, a merger was possibly the best outcome for EMPG and Zameen.com. Naspers has operated OLX itself in Pakistan since 2012, growing it to over 7 million users per month. From what some sources tell Profit, Naspers was spending roughly $5 million a year on its OLX business in Pakistan. For the eight years OLX has been operational in Pakistan, roughly $40 million have been invested in it. Accounting the income that it made during these years, sources say that OLX was burning roughly $3 million per year on classifieds in Pakistan. However, there is no such thing as a free ad, at least not forever. In the long run, nobody makes money by continuing to provide free of cost space. The only reason
“Moving into the wider classifieds space was already on the cards. With OLX coming into EMPG, there are several markets where we will be actively pursuing a horizontal classifieds play. The existing real estate verticals across the group, however, will remain as they are aside from developing synergies with their horizontal sister companies” Zeeshan Ali Khan, CEO Zameen.com to continue to give your space out for free is if you are ready to burn some cash to dry out your competitor of funds, reach a scale large enough that you can keep your competitor from growing, and eventually acquire it. Something that Naspers has done in other markets. Classifieds alone would not make money for OLX and neither for Zameen - at least not enough to sustain the business on its own in the presence of a competition. While OLX had Naspers at its back, Zameen raised new rounds. Zameen's sales and marketing model flourished, as is evident from its revenues. Because of this evolution, Zameen.com might not necessarily be a technology company anymore. If the major chunk of their revenue came from sales and marketing and development segments, that is what predominantly non-tech, conventional real-estate agencies like Bahria Town or Star Marketing do as well. This blurs the distinction between Zameen being a technology company against what all these non-tech agencies are. The management refused to disclose how much of the revenue came from the ‘tech’ component of the business for us to conclude that Zameen is purely a technology company. Imran, however, replied with a cliché that all the companies in the world, big or small, leverage technology in their operations one way or the other and therefore Zameen. com is a technology company. Zameen.com aside, the group as a whole, with its OLX portfolio companies after the merger, is overall technology-oriented. And while Zameen transformed its business model, the OLX Group decided to evolve into the same model of providing sales and marketing services for real-estate development projects. The model was put into effect in 2018. But the model was not like Zameen. Where Zameen would do end-to-end sales and marketing, OLX would generate leads of prospective buyers online for a particular project and hand those leads over to the project owners who would then
close those deals through their own sales teams. OLX would earn hefty commissions on these leads as well. More than anything, sources in the industry believe that if anyone could challenge Zameen in real-estate, it was OLX. And rather than giving up, OLX was encroaching on Zameen’s share as a real-estate leader. Instead of backing out, in January 2020, OLX held its first property expo in Islamabad that the company claimed attracted a footfall of 25,000 visitors in two days. While OLX evolved its model in 2018, another company entered the real-estate market with the sales and marketing and real estate development models and an online property portal. This was the Graana group of companies run by Shafiq Akbar, presumably a close friend of Special Assistant to the Prime Minister, Zulfi Bukhari. The company claims that it has a stellar reputation in the real estate industry in the United Kingdom and is now expanding its operations into Pakistan. Graana’s online portal, however, is relatively small, averaging 60,000 users a month on its website. But another player means smaller market share, perhaps in the long run, for the other two. What Zameen pursued in Pakistan, it replicated, minus the real-estate development model, in the UAE with Bayut.com. While Pakistan was a playground for Zameen, in the UAE, things were pretty different. The classifieds war in the UAE was with OLX Group that entered the Emirates market after their 2013 acquisition of the earlier mentioned Dubizzle and Property Finder - another leading real-estate portal that raised serious sums in its financing rounds. Sources say that in the UAE, Property Finder is the leading property portal. However, all three of them claim that they are the number one property platform in the UAE. Profit’s analysis of the website analytics of the Bayut and Property Finder reveals that both of them roughly averaged 2 million users per month for the first six months of 2020. Dubizzle, on the other hand, aver-
aged 5.67 users per month for the same six months. Dubizzle, the UAE platform of OLX, is a general classifieds platform that has other classifieds categories like autos and careers as well, besides real estate. Therefore gauging the number of users searching only for properties on Dubizzle is difficult. Nonetheless, as sources tell us, Dubizzle is no less formidable than the other two, and all three of them retain their reputation and status as the three companies on top of the property portal game in the UAE. In turn, the competition has been fast paced and stiff. In April 2018, Naspers injected $190 million into Dubizzle and acquired it completely. In November 2018, Property Finder raised $120 million from private equity firm General Atlantic to scale its operations. Bayut followed with an announcement of raising $100 million Series D investment in February 2019. The clear conclusion? For now none of them is ready to back out. So what do you do with a three-way mexican standoff and no one flinching? While the details about the lead up to the merger are still being kept under wraps, it was apparent way beforehand that at least two would have to merge to keep the third from growing. Naspers would be ready to burn for as long as it would be required, so it was probably EMPG that blinked first, and the Khan brothers were perhaps already aware at this point that they may have to exit. In conversation with Profit, Imran, obviously, said that neither OLX nor EMPG was needy enough to initiate the merger deal and that it was a mutual decision. Sources that had been watching the EMPG, OLX deal closely said that merger in Pakistan was not that significant. It was what had played out in the UAE that was more important, with Dubizzle joining Bayut being the ‘sweetest’ part of the deal. “Everything else is pretty small. The jackpot in this deal is Dubizzle. I am actually
MERGERS & ACQUISITIONS
“OLX is a global horizontal brand with a strong presence in many of EMPG’s markets. EMPG, on the other hand, has built a strong localised infrastructure in each of these geographies. It made sense to combine these strengths into a single entity” Imran Ali Khan, CEO Emerging Markets Property Group surprised that OLX took only 39% in the deal,” the source said. Interestingly, other than in Pakistan, Property Finder is a competition to both OLX and EMPG in UAE, Egypt and Lebanon - places where both decided to merge their operations. EMPG has been a heavyweight in classifieds. It has acquired smaller players before. For instance, in Pakistan and the Middle East, EMPG acquired Rocket Internet-backed Lamudi’s business in 2019. This was followed by another acquisition of Lamudi’s portals in Philippines, Indonesia and Mexico in May 2020, shortly after the merger was announced. But there has never been any news about Zameen even trying to buy OLX. A partnership, therefore, made sense. “Even though the merger was announced a couple of months ago, our relationship with the OLX Group goes back around five years. Joining forces in MENA, South Asia and Southeast Asia had been in discussion for well over a year and the benefits of such a deal were obvious to both parties,” says Zeeshan Ali Khan. Another technique typical of Naspers is that it empowers local entrepreneurs to run businesses. It did the same in India with Flipkart, PayU and Swiggy. And it has entrusted the brothers from Pakistan to run EMPG and OLX’s platforms in locations where the mergers took place. For now, the brothers deny any clauses in the merger deal for any call or put options, meaning that they
“When you talk about careers, it is a very involved business. For jobs you need to get much deeper. Job matching is not like advertising like in other segments.” Monis Rahman, CEO Rozee.pk
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are probably going to stay - for now. Sources close to Naspers say that the company maintains very high and strict standards. For now, the brothers might have been given a chance by Naspers to grow the merged entities, but if they are unsuccessful, Naspers would not hesitate to ask for an exit.Much like the first transaction with Avito and its eventual acquisition, is Naspers going to acquire EMPG? It is definitely going to be worth the wait. What that means is that EMPG might have become a Naspers company in which Khan brothers have some shareholding. If it has not already become one, it would eventually, and we would like to say inevitably, become a Naspers company that would be run by Khan brothers in the top management, with Naspers calling the shots behind the scenes.
A clash of the titans in Pakistan?
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or now, the classifieds’ kings in Pakistan, Zeeshan Ali Khan and Imran Ali Khan, plan to lead the classifieds war for OLX and EMPG in Pakistan against Graana in real estate, PakWheels in autos and Rozee.pk in careers. The game almost seems rigged, given the resources and stature of Naspers and what that could do for the Pakistani market. Zameen was already the biggest in real-estate in the country, and it just got bigger after
merging with OLX. When asked, the Competition Commission of Pakistan (CCP) told Profit it was still too early to say whether or not this was a monopoly. The CCP is still in the early stage process of evaluating the merger application and said that it was too early for them to declare it a monopoly. But whether these two are forming a monopoly or not is besides the point, because a major competitor is entering the classifieds field, and they may disrupt the plans that the merger had for Pakistan. Daraz, the AliBaba owned entity, are also looking to enter the classifieds game. This changes the dynamics altogether. It is unclear whether Alibaba is backing this move by Daraz or not. In conversation with Profit, a source reliably said that the decision by Daraz to move into classifieds is taken by Daraz management in Pakistan and the Alibaba Group has nothing to do with it. But if Daraz manages to make this a fruitful move, and get the attention of its parent company over in China, it changes things. If Alibaba starts looking into this strategy more aggressively and pushes for Daraz to compete head on with the now merged OLX and EMPF, Naspers would be competing head on with Alibaba. The rationale for Daraz moving into classifieds is that it is already a marketplace that has developed over time and has created its own ecosystem. It has user traffic on its website, it has payment processing and delivery solutions. It is already connecting businesses with customers through a marketplace so it plans to open that marketplace up for customers looking to sell items to customers. Simply put, they are connecting individual sellers with individual buyers, which is exactly what OLX is doing right now. But unlike OLX, Daraz plans to solve the problems that arise during the transaction between an individual buyer and a
TEXTILES
seller. For instance, if you do not want to go through the hassle of meeting a stranger (meeting a stranger is a normal course of things during a traditional classifieds transaction), you post a product on Daraz and negotiate with potential buyers but when the right buyer is found, Daraz is going to make the trade happen. Customers would be able to prepay or do cash on delivery (COD) but Daraz riders would pick up the product from the seller, package it and deliver it to the customer. For the buyer, it would be like an escrow payment where the payment will be held by Daraz for a couple of days and if the buyer is happy with the product, Daraz will release the payment to the seller. Our source on this liked to call it ‘assisted classifieds’, but did not mince words in saying that Daraz would be directly breaching OLX’s space. The revenue model is going to look different as well as compared to OLX. A more lucrative one actually, a source in the industry said. Where OLX charges a posting fee for ads, Daraz is going to take a percentage as commission for the transaction. At the same time, Daraz’s focus remains on consumer goods for C2C, and rightfully so, it is what they have been doing successfully for some time now. But would it be moving on to other segments like autos, real-estate and careers? The jury is still out on that, but they may very well. “Daraz plans to get into OLX’s space. Besides consumer goods, other verticals might be on the cards. Daraz can potentially move into autos and real-estate because the opportunity in that is still huge,” said a source. “It is still about a year away [since Daraz has not launched yet], but they [Daraz] will do it.”. While Daraz is planning to impinge into OLX’s space, it would be logical for OLX to start a B2C marketplace like Daraz. Regardless of OLX moving towards a B2C (Business-to-consumer) marketplace model, the Zameen management is poised to move to horizontal classifieds more aggressively. By horizontal we mean general classifieds, like OLX, with pretty much every category possible for instance autos and careers. While at EMPG and Zameen the brothers were focused entirely on and dedicated their energy towards real-estate vertical, the classifieds kings in Pakistan would be leading the merged entity towards autos and careers as well. It remains unclear how successful the brothers will be in leading the EMPG
“Only the paranoid survive. We will continue to be paranoid. We will continue to improve and innovate and find ways to serve our customers better” Raza Saeed, CEO PakWheels
in other categories such as autos and careers. They might never have intended to enter other segments. Even the name [Emerging Markets Property Group] suggests a focus on real-estate. But Zeeshan had a varying answer. “The group had already acquired a horizontal portal, Kaidee, in Thailand before the OLX merger took place, so moving into the wider classifieds space was already on the cards. With OLX coming into EMPG, there are several markets where we will be actively pursuing a horizontal classifieds play. The existing real estate verticals across the group, however, will remain as they are aside from developing synergies with their horizontal sister companies,” Zeeshan told Profit. While it is beyond question that the brothers know how classifieds work, in categories besides real estate, they would be new entrants with established competitors. In careers for instance, Rozee.pk is a household name. It has been able to keep a major market share because it is focused only on the careers segment. And careers is a different play altogether, claimed Rozee.pk CEO Monis Rahman in an earlier interview with Profit, providing some general insights into how Rozee has competed with its competitors in careers over the years. (Editor’s note: Monis Rahman was interviewed before OLX had disclosed its plan to enter the career classified space). “When you talk about careers, it is a very involved business. For jobs you need to get much deeper. Job matching is not like advertising like in other segments,” said Monis. “You need to get an applicant’s career profile and their CVs and then match them with the company that is looking for applicants that require those skills and portfolio.” “That involves a lot of AI (artificial
intelligence) and matching which gets good with data and Rozee.pk has a lot of data. We have 9.8 million CVs on Rozee,” claimed Monis. It is not just on the basis of data that Monis claims Rozee has been able to keep ahead of the competition, it is also the superior user experience on Rozee’s portal. And Rozee is already working to further consolidate its position as the leader in careers classifieds by launching a portal for blue collar jobs called Rozgar. pk that will help users find blue collar workers, for instance household servants, plumbers etcetera. Now what about the autos? There are different versions in the market about who the market leader in autos classifieds is. Some say that PakWheels leads the autos space while others bet on OLX. If it is PakWheels, it is because PakWheels management is focused only on autos, providing adjunct services besides classifieds to keep itself ahead of the competition. For what’s ahead and how PakWheels plans to compete with an even bigger competitor after the merger, Raza Saeed, the CEO of PakWheels, had a radical answer. “Only the paranoid survive. We will continue to be paranoid. We will continue to improve and innovate and find ways to serve our customers better,” says Raza. While both Monis and Raza appear confident, competition with Naspers means that these two might also meet the same fate as that of the brothers, Zeeshan, Imran and Haider Ali Khan. And with EMPG’s replenished war chest, both Monis and Raza would have to be on their toes. The only breathing space they would have would be if Daraz is able to successfully keep EMPG on its toes as well. n
MERGERS & ACQUISITIONS
OPINION
Asif Saad
The culture of safety
a strong emphasis on the culture of safety, but accident data and consequent investigations over the years globally have shown that most accidents happen due to a series of errors instead of just one mistake. In the aviation industry, safety is a given, right? Unfortunately, many businesses across the globe and most in Pakistan pay only lip service to safety and do not invest the Wrong, especially in Pakistan required financial and human resources nor allocate the time hen you travel on an airplane, you judge the airline required to do justice to this sensitive subject. on the basis of many factors, but safety is not one One of the worst industrial disasters in the chemical indusof them. This is due to the simple reason that you try occurred in Bhopal in India where, in 1984, a gas leak killed will never board a plane unless you are one hundred over 3000 people within a week. The chemical industry was awopercent sure that you will arrive safely at your destiken from its slumber due to this incident and safety became one nation. This is taken for granted and is a fundamental fact about the airline of the key business goals for the global chemical industry thereon. business without which there would be no business. In the chemical industry, one of the key drivers of CEO and top Unfortunately, recent events in Pakistan point to the sad truth that this management performance is safety. How safe is their operation fundamental fact of the business should not be taken for granted, and there measured by the number of hours operated without a lost time are many question marks on the safety performance of our national carrier, case and many other similar and strict key performance indicators aviation authorities, and both government and private organizations associat(KPIs). The improvement in performance of the chemical industry ed with this industry. from this perspective is largely attributed to top management Pakistan has a chequered aviation safety record, including a number of being made accountable. airliner crashes. In 2010, an aircraft operated by private airline Airblue crashed The case of the chemical industry is no different from other near Islamabad, killing all 152 people on board - the deadliest air disaster in industries. When top managers take ownership of the health and Pakistani history. In 2012, a Boeing 737-200 operated by Pakistan’s Bhoja Air safety of their employees, businesses witness a significant imcrashed in bad weather on its approach to land in Rawalpindi, killing all 121 provement in performance. In fact, good companies go out of their passengers and six crew.And in 2016, a PIA plane burst into flames while travway to ensure that their customers, vendors and all other stakeelling from northern Pakistan to Islamabad, killing 47 people.The preliminary holders are protected from any risks arising from their operations. report of the PK 8303 crash disclosed in the parliament a few weeks back has They will invest in acquiring appropriate safety processes, in safer laid the blame on pilots, air control personnel, civil aviation authority, crew technologies and in training their workforce consistently. This inand many other departments. But one thing that the report is silent on is the vestment is considered essential and well managed businesses will responsibility of top management of the airline and the aviation authorities and give themselves a license to operate via their internal processes, ministers. I find this strange in all the reports which come out in our country! even where there are no mandatory regulatory licenses required. Top managers are never held accountable. Having managed some large and In addition, this investment can have a good payback as seen by sensitive organizations in my own career, I believe the foremost responsibility the ESG (Environment, social and governance) criteria that many for safety rests with the top management of the organization.The reason I investors now use to determine the quality of management in a say this is because good safety performance is a function of the culture which business. When companies exhibit safety as a core value, they are pervades in the organization. Organization cultures exhibit priorities of the also building better brands and engaging with the community, organization and these priorities are decided by the top management and the thereby adding value via a more sustainable business model. boards of the company. It is true that accidents can occur despite there being Unfortunately, in general, Pakistani companies are known to only pay lip service to safety and top managers are usually not seen to be giving it their attention. Safety is seen as an unnecessary cost which is one of the first to be slashed in down cycles. When organizations run training programs, it is common practice for junior staff to attend such programs Asif Saad without the presence of top management. As a consequence, these trainings end up becoming usual tick in the box seminars where training hours are accounted for and feel good certificates handed out at the end. Some multinationals is a strategy consultoperating in Pakistan have tried to bring about a change in these practices but only a few of them remain committed ant who has previover longer periods. Coming back to airlines operating in Pakistan, one hopes important lessons have been learnt ously worked at varithis time. It is not enough to blame a few pilots for the overall decay of the safety systems. If the top managers had ous C-level positions been committed to safety they would have institutionalized proper screening of pilots and the crew, they would have for national and never flown defective planes (even with minor faults), they would ensure they coordinate with control towers more multinational effectively and engage in many similar activities to ensure passengers who board their planes are never put at risk. corporations Ultimately, the buck stops at the CEO and boards of these organizations.
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COMMENT
16
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By Hassan Naqvi
s the coronavirus pandemic spread in Pakistan, and the government oscillated between different levels of lockdown, different industries came to the government for help. This was fair enough: when disastrous, unforeseen circumstances arise, it is the job of the government to look after the people it governs. The ongoing pandemic is one of those situations, and the government has to both look after the average citizen industries. Pakistan has tried to do both, disbursing cash through the Ehsaas programme and giving stimulus packages, tax breaks, and incentives to different industries. However, one of the industries that has gone largely starved of government attention has been retail, also one of the industries hit hardest by the pandemic. Instead of getting breaks like rent cancellation, both retailers and the government landed on the idea that reopening stores would be the best way to go. The results, disastrous as they have been to public health given the post-Eid spike in coronavirus cases, have also not been much better for the retail sector. Promises of following social distancing protocols have just not been enough to convince a large enough amount of customers to return to their stores. And with the higher expenses of staying open with social distancing measures, retailers are finding themselves in the last throes of a sinking ship. According to a recent joint report by Dun & Bradstreet (D&B) Pakistan and Gallup Pakistan, more than half of the working-class has either taken a pay cut or lost a job because of the Covid-19 outbreak, while others’ confidence remains downbeat on fears of
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unemployment prospects in the near future. Because of this, during the month of June, consumer spending on entertainment and education declined severely, with spending on medicines and household cleaning items increased. Even high-income consumers recorded a sharp decline in expenditure on luxury items. The report noted that there was a 53% decline in travelling, 51% on apparel and footwear and 49% on outdoor entertainment. Malls have been opened, and retail stores have been allowed to operate, but shaky job security, and economic uncertainty have the retail sector reeling. As the pandemic continues to lag on, the crisis is proving to be more devastating for retail than previously estimated, and in the coming months the sector foresees a further deterioration in the financial position of the industry. One thing is clear, by the time this blows over, the world will be a different place. Retail is no different, it will change, the only question that remains unanswered is just how bad this change will be.
What exactly has happened to retail
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etail stores and businesses are measured through a few key parameters. The most important ones include customer traffic and what percentage of this traffic end of buying products. The other metrics are then things like how much money a single customer is spending on average at the retail store and what number of transactions each customer is making. A single chink in any of these factors often spells disaster for retailers. However, at the core of the entire business model is customer traffic, if no customers come in, none of these measurements can be
While retail stores and malls are open for business again, footfall has fallen drastically, and retailers are bleeding money. What will they ask of the government now?
RETAIL
made or fixed. The pandemic has thus knocked out the core of the retail industry, with footfall decreasing and retailers quickly losing space to e-commerce. “As an apparel retailer, we have lost our main sales season due to the Covid-19 virus lockdown, and the next six months are going to be extremely difficult,” says Nabeel Abdullah, CEO of Sapphire Retail, who says that the retail industry is going through a major crisis at the moment. “We need complete support from the government if we are to survive,” he says. “We need the government to back us in terms of taxation relief and subsidising or decreasing the rent of our stores. If a win-win situation is not created between all stakeholders – the government, landlords and retailers – many retailers will go out of business forever. Families will be ruined.” In Punjab, it took the foolhardiness of the Buzdar government in Punjab and the typical shenanigans of Pakistan’s highest court to re-open malls and retail stores in the midst of the pandemic. The jury is still out on how smart that decision was from a public health point of view, and while it was a big win for retailers and mall owners, the results have been less than encouraging. After the reopening of malls, a 70-80% reduction in footfall has been recorded in malls across the country, while footfall has fallen by more than 60% in stand alone retailers, according to a report of the Chainstore Association of Pakistan (CAP). This drastic fall has happened despite the Eid shopping season falling right in the middle of this period. And with the implementation of smart lockdowns in different parts of different cities all over the country, the footfall is expected to fall further. Even worse-hit was the restaurant sector, particularly with the prohibition on dine-in facilities. “Dine-in concepts have been damaged to such an extent that we now fear that half the food and beverage sector might not even open back up once the ‘smart lockdown’ is over,” said Asim A Majeed, managing director and master franchisee of Second Cup, a Canada-based coffee chain, in Pakistan.
We need the government to back us in terms of taxation relief and subsidising or decreasing the rent of our store’s. If a win-win situation is not created between all stakeholders the government, landlords and retailers - many retailers will go out of business forever. Families will be ruined.” Nabeel Abdullah, CEO of Sapphire Retail social distancing SOPs direct that stores not allow people in after they have reached 30% capacity. The possibility of having to wait outside stores has also kept customers away. In addition to this, the current timings for malls is 9am to 7pm, with the weekend off. These timings are the same for non-mall retailers as well. This has effectively reduced shopping hours by 45%. It is worse when one considers that footfall between 9am to 12pm is nearly zero, with most stores not even opening until 12pm under normal circumstances. The fact that weekends have been taken away from retailers is also hurting them, since up to 60% retail sales were generated over the weekend in regular times. These factors have led to a precipitous fall in retail sales of up to 90% for some, with most averaging a 70% fall in sales for all brands.
Challenges of retail with social distancing Why malls have been he condition that the government, hit the worst and even the courts, set for the
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reopening of retail stores was the following of government issued standard operating procedures (SOPs) for social distancing. The retailers agreed, and businesses were opened. However, running a retail store with social distancing protocols is not easy. For starters, traffic in and out of the stores was already low, and on top of that
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M
alls across the country had been reopened after a bit of a scuffle and some back and forth in the courts. But once they did, mall owners and mall retail store owners will have been hoping people desperate for entertainment would flood their stores. What happened was the opposite, and has made keeping these
malls operational with such low traffic difficult. The phenomena that gives mall outlets a crucial edge in sales compared to non-mall locations, was the combination of family activities, cinemas, food-courts and promotional activities by brands. With no families allowed in malls, food courts and cinemas closed, the mall as an outing for the family has died for now. Leisure shopping has been replaced by a targeted method of buying, for which malls are not ideal. This goes back to the earlier mentioned figure that malls had seen a 70-80% fall in foot traffic while stand-alone retailers have seen a still catastrophic but less terrible 60% fall. Also, most mall customers, particularly the big ones like Emporium or Packages in Lahore for example, cater to the upper middle class, a relatively better educated segment of society that has a greater level of awareness and are thus more cautious about the Covid-19 pandemic. They also have the resources to look elsewhere for retail shopping, such as online or in smaller stores, and have chosen to do that. With all this, there is little sense in keeping malls operational from a business perspective. One only has to look at the condition of fashion retail, which was quick to jump on the e-commerce side of things, but whose retail side can see no light at the end of the tunnel. Consumer spending is down due to the eco-
“Compliance needs to be encouraged with a stick-and-carrot approach. GST rate needs to be reduced to single digits to encourage retailers to integrate, to stimulate demand and to loosen the belt on existing tax complaint retailers,” Asad Shafi, CEO of Cross Stitch
nomic meltdown coupled with reduced social activities. Meanwhile, fixed costs such as rental and salaries continue to need to be paid, and, according to most retailers, are vastly outpacing revenues. Under such circumstances, inventories are piling up as the reduced hours for both days and hours of operation make it even more difficult for consumers to access stores. According to the earlier mentioned report by CAP, mall footfall has been down by 75-80% across Pakistan, while standalone footfall is down by 60%. These figures were collected from Dolmen Mall Clifton, Dolmen Mall of Tariq Road, Dolmen Mall in Hyderi all in Karachi and Giga Mall Rawalpindi. Because of this, the confidence of the retailers has been deeply shaken. A CAP survey shows that “89.3% of retailers expect their overall sales revenue to drop by 30% or more over the next 3-6 months, out of which 54.8% expect a drop of 40% or more.” The survey states cash or liquidity is the biggest issue of concern for retailers, rentals is the second biggest issue, and payroll cost is the third biggest and profitability is very low priority. According to the survey, only 13.7% of retailers foresee that they will be able to keep their complete workforce for the next 3 months and only 5.3% of retailers foresee that they will be able to keep their complete workforce for the next six months.
What do the retailers propose now?
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he problem is with the situation is that this is exactly what the retailers wanted: for their stores to be open again. One can see why they would want this, but with people just not showing up, the cost of keeping their stores open, and that too with social distancing SOPs, is just bleeding these retailers dry, and perhaps starting to dig into the savings of the owners. With all this, a number of retailers have hope in an unlikely hero: The Federal Board of Revenue (FBR). “There is a need for stability in FBR rules and regulations,” says Asad Shafi, CEO of Cross Stitch. “The government
needs to focus on economic expansion and to increase the tax net. Taxation is a by-product of economic growth and activity, not a penalty for being compliant. Compliance needs to be encouraged with a stick-and-carrot approach. The GST [general sales tax] rate needs to be reduced to single digits to encourage retailers to integrate, to stimulate demand and to loosen the belt on existing tax complaint retailers,” he says. Other than FBR rules, the retailers want a change in the allowed timings, and claim that this factor alone can cause a turnaround in the sales figures. This makes a little sense, and would perhaps even be better from a public health perspective, since longer shopping hours mean a more thinly spread out amount of customers in stores at one time. “If there is only one thing that the government can do to save jobs in the retail sector, it is to immediately allow all shops to open on weekends and till 10pm daily,” says Asfandyar Farrukh, CEO of Hub Leather. “Throughout the globe, the retail sector has been re-opened with health and safety SOPs in place but without any such ad-hoc restrictions on timings or days,” he says. “The short operational hours and closure on Saturday & Sunday have resulted in empty shops while the burden of rents, payroll costs, etc. is being piled on. The reality is that most customers do not visit during the weekdays due to work commitments or the harsh weather.” Altaf Hashwani, Director of Sana Safinaz, says the retail networks of brick and mortar shops is a major challenge with the lockdowns. “For the vast majority of brands, these shops provide up to 95% of total sales of the business. Limited operating hours and restrictions on children and over 55 years adults along with strict SOPs are only being enforced in Tier-1 tax-paying outlets,” he said. Of course, that is exactly what the retailers had been saying about the lockdowns. Just let us open, they said, and you will not need to bail us out. We will be able to fend for ourselves. What the retail sector has yet to grasp is that, even though the Prime Minister seems unconvinced that the pandemic is a public health risk that needs to be taken seriously, the public continues to do so, and are staying at home,
by and large. That this pandemic has hit four years after most of Pakistan acquired access to a broadband internet connection through their mobile phones, and the challenge to physical retail from e-commerce has been greater than ever before. In the prevailing situation of fear, uncertainty and lack of disposable income, the retail sector in Pakistan will see a very slow second half of the year with focus on online business. However, this increase will not be able to compensate for the loss from bricks and mortar outlets.
Rent relief at last?
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ome landlords have already started to heed the call for rent relief: Dolmen City, Pakistan’s only publicly listed real estate investment trust (REIT), which owns Dolmen City Clifton in Karachi, one of the country’s largest malls, has announced that it is already providing rent relief to as many as 45% of its tenants for the month of July. Combined with the Harbour Front office building, housed in the same complex and whose tenants will also see some reduction in rents, Dolmen City in Clifton collected Rs3,429 million in rent in 2019, or Rs286 million per month. That such rent relief is necessary in a mall complex that used to see over 1 million visitors every month before the pandemic is extraordinary. It is unclear exactly how long Dolmen can continue its rent relief, and whether or not other landlords have the willingness or even the capacity to offer similar relief. Even if they do, most will demand some form of government assistance for doing so, which is likely to be difficult to proffer given the famously undocumented nature of the vast majority of the retail sector, including the larger parts of the commercial real estate sector in the country. As in most parts of the world, Covid-19 has exposed underbellies most societies and economies were happy to have left hidden. n
RETAIL
At Amreli steel, things look solid The steel rebar manufacturer’s steady increase in production will pay off when the construction sector’s big-ticket projects come up
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mreli Steels has been having a bit of a moment for the past few months. The 48-year-old steel rebar manufacturer is riding the wave of a brand new, slick television commercial that has won internet fans that do not really associate tearjerkers with, well, sarya manufacturers. The brand’s tagline is now “Aap ki tarah solid”. But is the company actually as ‘solid’ as it makes out to be? Turns out, yes. As Syed Masroor Hussain Zaidi, analyst at BMA Capital illustrates in a note issued to clients on July 7, Amreli steel is well positioned to benefit from a bunch of ‘solid’ factors. These include lower international scrap prices, and an uptick in product demand and shrinking financial charges. First (and possibly the biggest plus any steel company has) is that Amreli Steels is a company operating in Pakistan. Why is this important? Because Pakistan has one of the lowest consumptions of steel products on a per-capita basis, at 37kg, compared to Myan-
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mar, 42kg, Sri Lanka, 50 kg, India, 77kg, or even Vietnam at 262kg. So, given demographics and general construction, the country’s steel consumption has only one way to go from here: up. Second, Amreli Steels focuses on steel rebar production. Rebar is short for reinforcing bar, and is basically reinforced steel used to help prop up and support concrete structures. Amreli has been steadily increasing its rebar capacity over the decades, from 60,000 tons annually in 1993, to 180,000 tons annually in 2007, to 605,000 tons annually in 2018, according to the company website. Meanwhile, sales for Amreli steels was just above 200,000 tons in 2017 and 2018, climbing to 300,000 tons in 2018, and is projected to hit 335,000 tons in 2022. As one can imagine, rebar demand is tied to demand for construction. This is great, because as Zaidi points out, “We expect rebar manufacturers to be key beneficiaries of improved construction sector outlook.” According to his analysis, the manufacturers of
graded rebars will emerge as the key beneficiaries of ongoing and announced ‘big-ticket’ projects. Amreli is also helped by being a large, legacy institution. This is important because the Federal Board of Revenue has launched an aggressive documentation drive, which will likely shift the share of rebar production from smaller players, to larger players, like Amreli. Now, it is true that the outbreak of Covid-19 has dented this construction activity somewhat. However, Zaidi sees the recent positive data on cement sales as a proxy for construction, and thinks a revival is bound to happen. “We remain upbeat on long-steel product outlook and expect yearly improvements to continue, foreseeing industry offtake to grow by a 5yr CAGR of 7.6%,” Zaidi says. According to Zaidi, the industry will grow in the medium tomorrow to 4.9 million tons in 2021, and 5.3 million tons by 2022. This would lead to sales of 310,000 tons for Amreli in 2021, and 335,000 tons in 2022.
along with these reduced interest costs, mean that net margins are expected to stand at 4% in 2021. Is there anything that could upset this promising story? Zaidi has a few concerns that are out of the company’s control. For instance, the sector has not emerged from an ongoing expansionary cycle, which means prices could remain ‘under pressure’. If that happens, then any costs like tariffs or
scrap prices will not be able to be passed on to the consumer, affecting Amreli’s costs. This is somewhat concerning, only because Amreli heavily depends on the electricity grid. A hike there would throw Amreli’s cost structure askew. Still, Zaidi predicts that healthy demand and favourable factors like interest rate cuts and lower scrap prices, will pull Amreli through safely. A ‘solid’ bet, indeed. n
Turbulence in the oil and gas sector
Mari Petroleum is most likely to succeed and Pakistan Oilfields is expected to have the highest decline in what is a serious disruption in oil and gas production.
Finally, international scrap prices have dropped 10% this year to date, and are expected to hover between $312 and $318 a ton between 2021 and 2023. This means that the cost of production is expected to decrease. The result: gross margins, or the percentage of revenue that exceeds a company’s cost of goods sold, are expected to bounce from 8% in 2020 to 13% in 2021. Amreli Steels is also set to benefit from Pakistan’s lower interest rates. The central bank cut interest rates from 13.5% in March to 7% in June, which among other things, is hoped to improve credit availability for housing finance, one of the government’s stated goals. “So far, benefits of lower interest rates have not been visible in higher credit off-take due to COVID-19. However, going forward we expect the offtake to resume its pre-COVID trajectory.” says Zaidi. Amreli steels has a very highly leveraged balance sheet, with a debt to equity ratio of 1.51, and a debt to assets percentage of 52%. With a total debt of Rs16.18 billion, this means that lower interest rates are a huge relief for the company, and are even estimated to add Rs2.42 per share to earnings in 2021. The improved gross margins mentioned earlier,
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e are now in the fourth quarter of the fiscal year 2020, and what does Pakistan’s petroleum sector have to show for it? Well, not much according to Shankar Talreja, an analyst at Topline Securities. In a note sent to clients on July 9, Topline Securities reported that the lockdowns imposed during the Covid-19 pandemic led to, among other things, a disruption in production for both oil and gas. Pakistan’s oil production during the fourth quarter of 2020 fell by 25% year-onyear, from 7.8 million barrels in the fourth quarter of 2019, to 5.9 million barrels this year. This brings the total production in 2020 to 28 million barrels, which is a 13% fall year-on-year from the 32.8 million barrels produced in 2019. This quarter experienced the sharpest drop compared to previous quarters because a lot of refineries were affected by the lockdown. The top eight gas fields in the country - Nashpa, Adhi, Makori East, Maramzai, Chanda, Mardankhel, Pasakhi, and Makori Deep - make up 60% of the country’s oil production. Collectively, the production from these eight fields fell by 29% yearon-year to 3.3 million barrels in the last quarter.
Of these, oil flows from Mardankhel, Maramzai and Makori East, which are all located in the Tal Block in Khyber Pakhtunkhwa managed by Pakistan Petroleum, dropped by between 38% and 63% year-onyear during the fourth quarter. However, production in Makori Deep and Chanda actually improved by 79% and 35% year-on-year respectively due to the discoveries in wells Makori Deep 02 and Chanda 5. Meanwhile, Pakistan’s gas production during the fourth quarter of 2020 fell by 17% year-on-year, from 355,825 mmcf in the last quarter of 2019, to 296,0979 mmcf in the last quarter of 2020. This brings the total production in 2020 to 1.2 million mmcf, which is a 10% fall year-on-year from the 1.4 million mmcf produced in 2019. Of the top eight gas fields, Kunnar Pasakhi Deep and Kandhkot experienced the greatest decline, at 46% and 43% respectively. According to Talreja, the power sector, specifically power generation companies, had demanded a lower offtake. On the other hand, Mari reported offtakes of 737mmcfd and 741mmcfd in the last two weeks of June 2020, which were all time highs. This helped contain its quarterly decline to just 5%. According to data from Pakistan Petroleum information, companies reported nine discoveries and ten dry wells in 2020.
STEEL
This is a success ratio of 47%, which is higher than the historical average of 36%. Specifically during the fourth quarter of 2020, the sector had one discovery and two dry wells. Talreja also noted that in Jun-2020, “there is also one possible discovery by MARI from Hilal-1 field as status is showing ‘discovery notice under approval.” During the year, meterage drilling fell by 33% year-on-year to 187,000 metres. Resources spent on exploratory wells fell to 44% of the total in 2020, compared to 50% in 2019. This year, the less expensive 2D seismic survey increased by 105% to 4,312 L.Kms, mostly in part to efforts by the Oil and Gas Development Company and Mari Petroleum. The more expensive 3D acquisition fell by 10% to 1,436 square kilometres. But what does this all mean for players in the sector? The company most likely to succeed is Mari Petroleum. Out of Topline’s surveyed
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production companies, its earnings in the fourth quarter of 2020 will remain unchanged when compared to the fourth quarter of 2019. It is also the only company to see its earnings in 2020 rise, by 26% year-on-year to Rs230.6 per share. “We estimate exploration cost at Rs680mn, down 70% QoQ due to lower seismic acquisition,” reported Talreja. On the flip side, Pakistan Oilfields is expected to have the highest decline due to its greater reliance on oil production. Talreja estimates a 59% decline in earnings in the fourth quarter of 2020, compared to the fourth quarter, mostly due to a fall in oil prices by 50%. Oil production is likely to decline by 23%, while gas production is likely to decline by 29% during this quarter mostly due to disrupted field operations. The total earnings in 2020 are to decline 4% year-on-year to Rs56.9 per share. The Oil and Gas Development Compa-
ny earnings are likely to decrease by 48% in the south quarter of 2020 compared to the third quarter, mostly because of a decline in hydrocarbon production by up to 16%, along with an expected increase in exploration costs by 29% over the quarter (it expensed two dry wells this quarter, compared to just one last quarter). The company’s ‘other’ income is also likely to fall by 55% on a quarterly basis due to an absence of heavy exchange gains. Its earnings in 2020 are predicted to fall 16% yearon-year to Rs23.2 per share. Finally, the earnings for Pakistan Petroleum are likely to decline by 24% on a quarterly basis due to fall in hydrocarbon production by up to 28%. Interestingly, though, the company decided to expense fields like Talagang (announced as a discovery in September 2018) and Zarbab in Hala Block this quarter. The earnings of the fiscal year 2020 are predicted to decline by 15% year-on-year to Rs18.5 per share.
POWER
Bank Alfalah looking attractive to investors Despite a fall in profits, the bank’s dividend yield on offer will have shrewd investors interested
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ack in March of this year, Bank Alfalah announced that its profit after tax had fallen by 8.6% year on year, from Rs3.16 billion in the quarter ending March 2019, to Rs2.89 billion in the quarter
BANKING
ending March 2020. And its earnings outlook has not exactly improved, in fact, the outlook has looked so grim to investors that the stock price of the bank has reduced by nearly 30% in the last six months (to be fair, the trend is similar throughout the banking sector).
And yet the curious thing is, as the stock price drops, the dividend yield on offer has actually looked a little more attractive to some shrewd investors scoping about. In a note issued to clients on July 9, analyst Hamza Kamal of AKD Securities reviewed the bank’s
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expected earnings, and some potential risks to keep in mind. To start with the facts, Bank Alfalah’s stock price declined by 28.7% in the past six months. This matched a downward revision in the bank’s one-year forward target price, which was set at Rs38 per share (previously, it had stood at Rs48.9 per share). What led to the decline? Primarily there are two reasons. The first is that compared to other commercial banks, Bank Alfalah is a lot more sensitive to changes in the interest rate. By Kamal’s own calculations, Bank Alfalah is about 1.21 times ‘sensitive’ compared to the average bank’s sensitivity of 1.02 times. Second, the bank unexpectedly began a somewhat late push for growth, such adding 50 branches within the last year. This push is also reflected in the fact that its IT costs shot up 22.6% year-on-year. As administrative costs rise in the medium term, this will naturally upset earnings expectations. While earnings growth in calendar year 2019 stood at 18.6%, it is expected to stand at -7.8% in 2020, and -17.4% in 2021. One can also see a change in the bank’s expected return on equity, which measures the profitability of a bank in relation to the shareholder’s equity, or net income divided by shareholder’s equity. The higher the ROE, the more efficient a bank is. Bank Alfalah’s ROE, which stood at 15.7% in 2019, is expected to fall to 12.4% in 2020, 9.3% in 2021, and 9.7% in 2022 (however, to be fair, these numbers are in line with the bank’s historical average). But interestingly, dividend yield is actually preserved. It stood at 11.6% in 2019, 8.7% (expected in 2020 - and then 8.7% for both 2021 and 2022. This could be the figure that attracts investors. However, Kamal remains a little cautious on dividend contunituty. Firstly, the heyday of the early 2010s are long over (in 2010, the dividend payout was a whopping 46.7%). Plus, the bank itself could change its actions: for instance, it could preserve its capital base in order to create the 75 new branches it said it would in 2020, or to absorb credit risks. The bank has a somewhat riskier lending portfolio than other banks, which gives it the advantage of actually gaining higher yields on its lending book. It also has strategically acquired longer tenor bonds, worth around Rs69 billion, at fixed rates. These make up a substantial 9.1% of deposits. So, even though it is more sensitive to interest changes, these actions could help limit the impact on expected hit to the bank’s net interest income due to the fall in interest rates. “However, the downside of riskier lending books is the concern on potential credit costs,” notes Kamal. That’s why he incorporates a 0.8% provision cost for 2020, the same
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for 2021, and 0.2% provisioning cost for 2022. Even so, the bank could persevere and control costs. For one it is actively managing risks, as it is subjectively providing provisions for ‘problem loans’. Secondly, the bank is helped by a number of central bank and government measures that have been bailing out and sharing the risks on loans to ‘problem’ sectors, like agriculture and small and medium enterprise. Well, that’s the predictions for much later: how is the bank faring now? According to Kamal, earnings in the second quarter of 2020 are expected to clock in at Rs1.81 per share, which is a 11.9% rise from the previous quarter, and 1.1% rise year-on-year. The bank is helped out by some gains due to repricing on advances, and previously unrealized surpluses from bonds (in March alone, the unrealized gain from Pakistan Investment Bonds stood at
Rs6.3 billion). The first half of 2020 will see a net profit after tax of Rs6.1 billion, with an earnings per share of Rs3.45. (For comparison, the net profit after tax in the same period last year was Rs6.5 billion, while earnings per share were Rs3.6). And yes, provisioning costs have gone up even from quarter to quarter (0.3% in the second quarter, compared to 0.2% in the first quarter), though Kamal notes: “potential impairment reversals could keep a lid on overall provisioning expense.” Foreign exchange income is expected to drive non-interest income, though fee income is expected to remain flat due to the lockdown earlier in the quarter. The bank’s costs as a percentage of income are expected to stay at around 55%, which is stable when compared to the last quarter. n
Circular debt the nearly 2 trillion problem
Governments have unsuccessfully promised to eliminate circular debt before. This time doesn’t seem much different
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n November 2019, Dr Hafeez Shaikh, the Adviser to the Prime Minister on Finance and Revenue, made the bold proclamation that there would be no more circular debt in the country by December 2020. It is not just a bold promise, but an old one that has been made before. But it is necessary for Shiakh to say it regardless: circular debt has now reached Rs1.9 trillion, and is a colossal burden on Pakistan’s economy. But first, exactly what is circular debt? If one thinks of regular debt transactions, A owes money to B, which A eventually has to pay back. As it happens B, also owes some money to A, and the debts can cancel one another out. However, in circular debt, as the
name suggests, the debt never gets a chance to cancel out because it is operating in a circle. This happens when A owes money to B, who owes money to C, who owes money to A. That is how the debt gets passed around without ever actually being paid, or the cycle completing. In Pakistan’s electricity sector, who are players standing in a circle? These are: the consumers, the power distributors, the power producers, the fuel suppliers, and the goverments Consumers, which do not pay their bills, owe money to the power distributor (the Discos), which are then unable to pay the power producers (IPPS, Gencos, or Wapda) which then owe money to fuel suppliers (PSO and gas companies), which forces some plants to remain idle. That means power producers are
unable to produce electricity, which means distributors do not deliver enough electricity, which means the consumer refuses to pay their bill, because they are not receiving power. On top of this, the government owes unpaid subsidies to power distributing companies, and one also has to contend with theft and operational inefficiencies within the system. Amazingly, Pakistan’s capacity to produce electricity actually exceeds its demand; by one estimate, the available power generation capacity in 2018 stood at 31,986MW, but peak demand stood at 21,425MW that year. It is just that electricity never reaches the final consumer because the entire system needs to be upgraded particularly in distribution, which it can’t because of all of the non-payments and lack of money. This circular debt began to emerge in the late 2000s and successive governments relied on heavy budgetary support and quasi-fiscal financing to eliminate it. This did not work. When the PTI government took office in 2018, the circular debt was at Rs 1.1 trillion - it has nearly doubled since then. Obviously, this situation had now become untenable. It is in this scenario that the Energy
Sukuk II was introduced. The idea was that the government would issue Energy Sukuk II of Rs200 billion, with the primary aim of reducing the stock of circular in the economy. Secondly, it would help resolve any issue of working capital for power plants during the peak season of summer. When it was introduced in May, the sukuk was oversubscribed to Rs339 billion, around 70% above the target offer. Instead, it amounted to Rs199.96 billion. The 10-year government-guaranteed sukuk features semi-annual profit payments for investors. According to reports, the Power Division has planned to spend the sukuk amount by making payments to a planned 79 IPPs and GENCOs. Initially, distribution of Energy Sukuk II payments were widely reported, which was the first installment on June 3. But according to a report by Topline Securities, issued to clients on July 9, there have actually been three further distributions to IPPs: on June 22, 29 and 30. These cumulative payments and totals were shared in the report. By far, the largest payments went to Kot Addu Power Company (KAPCO), which received Rs15.82 billion and Engro Thar, which
received Rs11.3 billion. Lalpir Power and Pakgen Power received total payments of Rs924 million and Rs1.18 billion , respectively. This has enabled them to announce cash payouts of Rs1.25 per share. Nishat Power and Nishat Chunian Power also received total payments of Rs2.24 billion and Rs2.49 billion respectively. These companies have projected loans payables of Rs1.5 billion and Rs1.3 billion , respectively. According to Topline’s report, both IPPs can potentially declare cash payouts of Rs1.5 to Rs2 per share. Engro Power Qadirpur has an outstanding project loan of Rs924million, while it received Rs3.2 billion in payment. Adjusting this amount against cash received, the company can also declare a potential dividend. Kohinoor Energy received Rs1.4 billion in payments, while Hub Power Company received Rs10.2 billion, which Topline believes will be used to pay fuel to PSO and to retire long- term debt. “Nonetheless, the decision to announce payouts are subject to future cash needs of the company. Our payout expectations can deviate from actual announcements,” the author of the report noted. n
CIRCULAR DEBT
By Babar Khan Javed
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ith lasting expected effects on consumption, business models and marketing expenditure, Covid-19 and the lockdowns that followed have impacted supply, demand, and media consumption. Vincent LĂŠtang, EVP of global market intelligence at Magna, said that the current situation is totally unprecedented, with the closest historical equivalent being a combination of the great recession and 9/11. Profit spoke to seven marketing leaders in the fast moving consumer packaged goods (CPG) space to understand how businesses adapted to the interruption to value chains and ecosystems.
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This article concerns seven companies that fall under the CPG category due to the majority of their product portfolio. Four of the companies Profit spoke are foriegn owned, while three are local. While all seven companies do not in every instance compete with each other, they do share consistencies in appealing to home and personal care, consumer healthcare, hygiene, and the skin care share of our wallets. Our reporting here includes surveys and interviews we have conducted with key people at these companies, or people who are familiar with the operations of these
companies. What we have found are three key trends across the sector as a whole that help illuminate the brave new world companies in this sector find themselves operating in.
Key Findings 1. The fastest path to eCommerce is (apparently) with an online marketplace
The lion’s share of respondents to this study rely on marketplaces and e-tailers to sell products online for them, forgoing the benefits of owning a platform and acquiring first party data. Brand marketers that spoke to Profit insisted that an owned, branded site was in the works, with delays being attributed to sorting out delivery, storage, and fulfillment partnerships. In relying on third parties even just for now, the CPG firms faced the wrath of customers when deliveries were delayed, when prices were inaccurate, and when the quality product cataloguing did not reflect the true appearance of a product. Respondents that were more digital savvy divulged that a business case has been made to partner with Brandverse, an eCommerce solution that uses uses robotic cameras to catalogue products from a variety of angles and uploads the digital images (and brand approved content) on the Flare app, which is a means of selling and distributing the products as well. The attached bar charts illustrate how nearly every CPG company has double sales through the eCommerce revenue stream. As stated in the Profit apparel study, an increased percentage of spending online does not mean that like for like (LFL) nominal revenue has also increased. This means that same-store sales revenue has gone down overall, even in absolute numbers, according to most respondents.
2. Buying behavior - quantity and frequency - shifted out of uncertainty Respondents shared how purchasing behaviour shifted across categories, with many buyers stacking their shopping carts higher than usual with Covid-19 essentials, menstrual pads, skin care, hair care, contraceptives, and soup mixes. The experts that spoke to Profit said that qualitative surveys at the point of purchase revealed that buyers were afraid that there would be longer and more restrictive future lockdowns given the news of exponential rise in Cocid-19 cases. They were
thus planning for the worst case scenario. Speaking to Profit, business intelligence and market leaders insisted that the spike in purchases had more to do with being a prudent measure instead of being indicative of the frequency of product usage. The only exception to this was for C19 essentials, such as germ protection soap, which went from being used thrice a day before Covid-19 to several times a day. Echoing the apparel study by Profit, sources shared that the double digit sales through eCommerce had more to do with shoppers being either unwilling to risk exposure at brick-and-mortar stores, or that many had no choice in the matter. Profit’s survey data shows that shoppers substituted in-store purchases with online purchases.
3. “I’m the captain now” meets “All your bases belong to us”.
Respondents that rely on third party marketplaces, e-tailers, and courier services complained that the companies were taking advantage of the situation with higher margins and win-lose terms of service. Many complained about not being able to work with marketplaces on a trading model, whereby an upfront amount is shared, which goes against the marketplace model which shares revenue as a product is sold. Either through a fundamental misunderstanding of the marketplace business model or due to a top-down instruction to get the best possible deal for the least possible effort, respondents were upset that marketplaces and e-tailers refused to hand over first party data or offer free visibility on the product home page (mobile app or web app), of which the former is mentioned as the intangible property of the vendor while the latter is part of the advertising business model.
Case Studies
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ccording to Profit’s analysis of Household Integrated Economic Survey (HIES) and Pakistan Social and Living Standards Measurement (PSLM) data from the Pakistan Bureau of Statistics (PBS), consumer spending on groceries was approximately Rs6,540 billion ($48 billion) in Pakistan, which makes up approximately 38.5pc of total consumer spending. An analysis of Pakistan’s supply chain capabilities by Profit found the country has approximately 650,000 to 700,000 kiryana stores and that no CPG company is able to distribute products to all of them. To understand the impact of the pandemic on the CPG industry, Profit spoke with business intelligence leaders at seven companies, four of which are foriegn owned multina-
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“Another challenge was rules regarding eCommerce deliveries and what products were essential to deliver. It took about two to three weeks for some amount of normalcy to come back after which orders for D2C were resumed albeit shorter delivery time within a day” Dione Rodrigues-Almeida, Marketing Manager Santex
tionals and three of which are locally owned manufacturers and distributors. All of them rely on international modern trade (IMT) and local modern trade (LMT) for over 90pc of total revenues, with experiments in eCommerce either with third party online marketplaces or with owned sites, with respondents predominantly falling into the former category.
Santex
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s a manufacturer of feminine hygiene products, Santex first began selling its products on Daraz two years ago. Towards the end of 2019, the company created its own eCommerce website to acquire first party data, own retargeting, and the insights gathered. The company was driven by a desire to own the direct link to product buyers and product users, given the sensitivity of the product inquiry level. “Periods do not stop for a woman irrespective of whether there is a pandemic or not,” said Dione Rodrigues-Almeida, the Marketing Manager on Brand, Innovation, eCommerce & Outreach Programs at Santex. “So it was critical we get our sanitary range to consumers via both B2C and D2C channels.” Speaking to Profit, Rodrigues-Almeida said that, like most CPG companies, Santex had a tough time at the start of lockdown due to the improper labeling between essentials and nonessentials by the government, which was resolved after weeks of lobbying. “During the initial Karachi lockdown
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in April, the biggest challenge was moving stock to consumers from our factory due to movement restrictions,” she said. “Another challenge was rules regarding eCommerce deliveries and what products were essential to deliver. It took about two to three weeks for some amount of normalcy to come back after which orders for D2C were resumed albeit shorter delivery time within a day.” She said that an owned website proved to be the best alternative sales channel during the initial lockdown crisis. This in turn resulted in the consumer base expanding and the company was now able to increase new users, who previously would never purchase online. During April 2020, when the pandemic was beginning to peak, due to the nature of the product, women started bulk buying most SKUs. Rodrigues-Almeida shared that the company saw an organic increase in orders like never before, and had to increase forecasts for online orders. Butterfly, the flagship feminine hygiene product by Santex, introduced bulk slab discounts in May 2020 for SKUs in order to pro-
vide a discount option for consumers as well. Rodrigues-Almeida told Profit that since May, Santex has been very active in D2C marketing to consistently inform consumers, as an essential brand, that the products are available for safe, direct, deliveries to their homes. “This has worked for the overall online sales and has shown a positive upward trend,” she said. “Covid-19 has also given rise to existing e-retailers expanding their portfolios, or new ones trying out this direction. Since midApril, we have either onboarded or are in talks with many such e-retailers to expand our reach online, so that the consumer may find us across the board in all major options available to her. So overall, for D2C, for a brand like Butterfly, we have increased consumer reach and orders via our existing channels. Tried to make our online propositions more relevant to what the consumer wants during this period of time.” She added that despite the success of the owned eCommerce site, the company continues to partner with e-tailers in order to leave no stone unturned. On that note, the
“We increased performance marketing spends as well. Challenges in terms of supply constraints were faced, where demand grew faster than supply in the case of liquid handwash, sanitizers, antiseptic disinfectant liquid, [and in some cases] Durex & Veet as well.” Kashan Hasan, CEO of Reckitt Benckiser Pakistan Limited
company developed an outreach program for underprivileged societies and schools in order to educate them on menstrual hygiene management. “During the pandemic, we were unable to go the route of education but adapted our vision to the relevant need of the time,” she said. “Santex collaborated with quite a few NGOs, schools, and hospitals and supplied free sanitary napkins to help these organizations ration drives for the needy. We were able to help serve 6000 + periods in Karachi alone in April.”
English Biscuits Manufacturers
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reviously known as Peek Freans Pakistan, English Biscuit Manufacturers (EBM) considers itself to be a market leader in the biscuits category with a sales distribution network that covers over two hundred thousand direct distributors. “For our products to reach both across Pakistan and internationally, we are targeting 100pc of the IMT and LMT trade channels,” said Rais ur Rehman, senior manager of trade marketing at EBM. “[Our] brand portfolio is mostly driven by consumers who have been buying our products for decades now. It is our uniqueness as a brand and the credibility of our products that generates revenues for us. In 2019, more than 99pc contribution of sales was driven by the offline channel, whereas less than 1pc contribution
was marked by eCommerce.” Rehman insists that EBM has been actively establishing an eCommerce channel since before Covid-19, and that the company had realized the potential of the customer acquisition medium after learning from global market practices. He said that the biscuits manufacturer generated under 1pc of total revenues using eCommerce, and expects that in 2020 the method will yield a slightly higher return. “The discount and pricing regimes have to be carefully monitored now, as no one can afford to distort existing market channels and framework in lieu of a newly emerging channel - such as eCommerce,” he said. “From what can be observed, eCommerce appears to be a lot more active concerning certain industries, such as textiles and electronics. Though there has been a definite increase in the activity generated by this channel, and it has also exponentially increased potential, which still needs to be captured.” Rehman said that the CPG industry as a whole relies heavily on brick-and-mortar
stores, whether in the form of giant IMT, LMT, or the neighborhood kiryana stores. In light of this, he does not believe that eCommerce will scale to the potential observed intentionally, adding that there is an exponential growth in the local context, as a lot of brick and mortar stores are also engaging in opening their eCommerce platforms in accordance with their physical presence.
HibaLife
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ith a network in excess of 100 local modern trade (LMT) relationships and nearly two thousand general trade shops nationwide, HibaLife reigned in 90pc of its 2019 revenue from offline paths of purchase, with the remainder 10pc of 2019 revenue coming from eCommerce paths of purchase. Within days of the C19 lockdown, the herbal medicines business switched its attention to generating sales through eCommerce, while increasing its presence on the Google Display Network. Faizan Syed, CEO
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of HibaLife, told Profit that this decision yielded the best results in April 2020. “The TV ad budget was shifted entirely to digital,” he said. “Digital allows for accurate tracking of every dollar spent, whereas on conventional ad spend, 70pc of advertising is wasted and cannot be tracked back to the consumer level,” he said. “Our main focus was previously brand promoters at the point of sale where the consumer had the first interaction with the brand. However, given the movement restrictions during Covid-19, this wasn’t possible, so the spend was closed and shifted to digital.” Syed told Profit that sales from eCommerce were growing at a steady pace, with the current trajectory suggesting that between 25pc to 30pc of total revenue will be derived from online customer acquisition efforts. Mirroring responses across this CPG study and a recent B2C apparel study, HibaLife faced challenges on the supply chain front, with enterprise resource planning ensuring timely dispatches and in managing out of stock situations. He added that quality assurance with courier services was a challenge, with brand integrity impacted when products reach buyers in terrible condition.
Unilever
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ithin a month of reporting a 11.7pc growth in sales to $78.8 million during the year ended 2019, Unilever Pakistan was shaken by the strict lockdown measures imposed by the Government of Pakistan in response to the rapid spread of COVID-19. The severe disruption to the global socio-economic environment meant that effects on supply, demand, and media consumption have been more complex than in any normal economic recession in the past, and some of them will outlast the current crisis, according to Létang. “Towards the end of the last quarter, the Government of Pakistan ordered a strict lock down which adversely impacted the industrial & commercial activities with ensuing hardship on the general public,” said Aman Ghanchi, Executive Director Legal & Company Secretary at Unilever Pakistan, in a letter to the General Manager of the Pakistan Stock Exchange Limited. “Despite the abnormal conditions, your company performance in the last quarter was very encouraging.” In his letter, Ghanci revealed that sales at Unilever Foods Pakistan Limited grew by 17.2pc on the back of strong brand equity, successful innovations and sustained investment in advertising and promotion, while gross margins declined by 2.64pc to 40.8pc due to the difficult operating environment. He added that the earnings per share
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“The TV ad budget was shifted entirely to digital. This allows for accurate tracking of every dollar spent, whereas on conventional ad spend, 70pc of advertising is wasted and cannot be tracked back to the consumer level” Faizan Syed, CEO of HibaLife
(EPS) increased by 48.4pc versus the same period last year. Since then, Unilever has to restructure its resource pool within the context of omnichannel, pure players, and Dark Stores as alternative paths to reaching customers, according to sources familiar with the matter. “On the omnichannel front, Unilever Pakistan is working on a 3P fulfillment model, such as that of Naheed Supermarket and Metro Cash & Carry,” the sources said. “We also work with pure players such as GrocerApp, Bagallery, and HumMart, with the e-tailers having their own warehouses in which they self-stock inventory.” Leopard Courier, the courier partner for Unilever Pakistan, manages deliveries while the front end is managed by Careem and Cheetay. Before the lockdown, Foodpanda had already initiated its own Dark Store initiative and secured a deal with Brandverse, a rapid eCommerce go-to-market solution, to launch Pandamart. In doing so, Foodpanda is able access the largest catalogue of products in the country, with hi-res images and con-
tent, along with a whitelabel eCommerce site that is ready to be discovered and ordered from. The sources told Profit that the drop shipping model with Pandamart and Careem has led to booming sales. Sources shared with Profit that while Hindustan Unilever and the NAME (North Africa, Middle East) regional teams have their own direct to consumer (D2C) channels, Unilever Pakistan as a whole does not. The business does have D2C platforms in Pakistan for specific products such as over 5,000 bicyclists for Wall’s, the Magnum Store as standalone outlets or within major malls, and more recently Munchies, a snack ordering app that was in the planning phase since mid 2018 and was sped out by VentureDive before the lockdown. They further revealed that the decision to ramp up Munchies may have had something to do with how badly the business to business (B2B) Food Solutions division and portfolios for out of home and frozen desserts portfolio have been hit due to Covid-19. The homecare category - comprising Surf,
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Domex, Vim - and the personal care category - comprising Lifebuoy and Lux - have seen Covid-19 as a blessing in disguise, as sales exceed the best case scenario laid out by demand planning teams. The eCommerce department at Unilever is led by Imad Paracha, and was the only department to not only increase its headcount after the lockdown, but also saw an increase in its secondary targets. Naturally, they were also the only department to receive further investment instead of budget cuts. Research from Afterpay suggests that the boom in eCommerce sales around food & groceries has more to do with avoiding people in crowded stores than it does with convenience, pricing, and store operating hours. According to people familiar with the matter, Unilever receives engagement requests from new pure players everyday, with little understanding of the financial muscle for a long term relationship. Another challenge faced by the department is the reluctance of existing and new players in working with cash, while Unilever itself has become extremely stringent about working with credit. Perhaps the biggest challenge shared by not just these sources but other CPG employees Profit spoke to, is the reluctance of e-tailers - such as HumMart - to share the purchaser profile. Liaisons of eCommerce teams at Nestle, P&G, and Colgate Palmolive claimed that pure players are hesitant to share data on who is the buyer, what did they come looking for, which traffic source did they come from, and what time of the day is conversion traffic the highest. “They literally hold back that information even though they know that information will help us build better, more relevant content,” a relevant source tells Profit. “[They tell us that] ‘our bosses don’t allow us to give that information out’, so we then resort to A/B testing different content on different platforms at different times, to see where we’re getting more conversions from.” The sources at Unilever credited Mindshare Pakistan as the backbone of eCommerce media campaign execution, while its parent company has announced a wave of new digital oriented openings in the Karachi office. While the media agency has been a
Leopard Courier, the courier partner for Unilever Pakistan, manages deliveries while the front end is managed by Careem and Cheetay. Before the lockdown, Foodpanda had already initiated its own Dark Store initiative and secured a deal with Brandverse, a rapid eCommerce go-to-market solution, to launch Pandamart Unilever partner for decades, the relationship was strengthened through the introduction of Ultra in 2016, a Unilever trading desk for programmatic advertising. According to Keith Weed, former Chief Marketing and Communications Officer at Unilever, Ultra delivers hyper targeting at scale and is the first trading desk transacting on 100pc viewability. As part of its data-driven, long-term digital eCommerce roadmap for Unilever Pakistan, Mindshare Pakistan is working with online retailers - such as open markets, social commerce, general malls - to seek new media opportunities. To date, the eCommerce function at Unilever Pakistan has grown four times over the last year to date, averaging double growth from omnichannel partners and seven times growth with pure players. The team went from operating in two cities before the Covid-19 lockdown to having a presence in nearly 15 cities by May 2020. Like most businesses operating in the eCommerce space, Unilever Pakistan is faced with outstanding payments issues and stuck end stocks. This happened due to numerous online retailers speculating that Unilever Pakistan would not be able to keep up with production and supplies for items such as hand sanitizers, soaps, tea, hand washes, surface cleaners. However, Unilever responded by stocking up in bulk. This perceived inability to match demand with supply was not the case, the sources added, with Unilever resolving its numerous challenges with flash sale budgets or stock swaps. “Unilever refused to give these e-tailers any unnecessary TTS on these Covid-19 relevant items throughout the lockdown period, because of which they couldn’t liquidate the amount of stock they had piled up,” the
sources shared. The British-Dutch multinational consumer goods company utilizes People Data Centres (PDC) across five key markets, which provide real time insights to people related questions through the combination of live data sources. It also taps into data provided by six digital companies it has invested in, namely Brandtone, Big Sync Music, Clavis, Olapic, Percolate, and Discuss.io. With these investments, Unilever global is able to empower its eCommerce teams worldwide with the ability to execute mobile database marketing in emerging markets, gain music licensings for ads, gain eCommerce retail measurement, access to UGC, cross-platform CMS, and access quick & low cost research. At industry events, Weed has claimed that these investments have given the company data driven customisation, which uses consumer search queries to predict trends and match content with a real time purchase opportunity.
Nestle
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eeling from the impact of Afghanistan border closure on exports, Nestle Pakistan managed to achieve a 2.6pc like for like (LFL) rise in revenue for the first quarter of 2020. Within a week of the Covid-19 lockdown, the Swiss multinational food and drink processing conglomerate corporation committed PKR 100 million as pledge for underprivileged societies and frontline workers, in the form of products and cash donations. On the latter, the company shared that hand hygiene stations would be installed at public places, quarantine zones, and health facilities across Balochistan and Khyber Pakhtunkhwa. On the business front, Nestle Pakistan had invested the better part of 2019 working with Daraz for its eCommerce operations, pushing its products using Facebook Collaborative Ads. The results can be seen in a report from Daraz, ranking Nestle Everyday and Nestle Nido in the top ten CPG products sold on the Alibaba Group owned online marketplace and logistics company. After the lockdown went into effect, key decision makers in the Nestle Pakistan eCommerce team
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opted to remove all their eggs from the Daraz basket and onboard additional marketplace vendors such as MyVitaminStore.pk, Dawaai. pk, GrocerApp, HumMart, and Metro Online. “Prior to COVID 19, Daraz and other e-retailers were not willing to handle perishable liquid items like juices and milk but now they are selling juice, ready to drink (RTD) coffee and RTD chocolate and malt powder products,” sources shared. “In terms of media spend, major contribution to eCommerce, [our spending] came from the reallocation of some of online upper funnel spend/activities.” Sourced shared that in 2019, only 1pc of the total sales at Nestle Pakistan came from eCommerce channels, which amounts to PKR 1.16 billion ($7.5 million in December 2019) according to the 2019 earnings report. Sources shared that based on the current trajectory, eCommerce will bring in between 2pc and 3pc of total revenue in 2020. Since the Covid-19 lockdown, the company has doubled its spending on eCommerce and lower funnel campaigns during the second quarter of 2020, resulting in eCommerce sales rising by 50pc and offering 50 times the average return on ad spend
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(ROAS). In terms of customer acquisition, sources shared that the ROAS of 50:1 is being achieved by using a combination of Facebook Conversion Ads, Paid Search, YouTube Trueview Ads, organic search, and display ads. “The overall structure of any CPG [industry] in Pakistan [has a] heavy reliance on offline sales & revenue and that’s the main bottleneck,” sources said. “Categories such as coffee, waters, beverages, and juices have declined, while infant nutrition and powdered dairy categories have grown.”
Reckitt Benckiser
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ith over 150 thousand point of sale touch points - directly and indirectly - across Pakistan, Reckitt Benckiser splits its business between its traditional consumer goods and its consumer healthcare portfolio. For the former, LMT and IMT are engaged, along with the neighborhood kiryana stores. For the latter, the British multinational consumer goods company is covered by over 30 thousand pharmacies operating under its consumer healthcare distribution
network. Kashan Hasan, CEO of Reckitt Benckiser Pakistan Limited (RBPL), spoke to Profit about how the leading a producer of health, hygiene and home products reacted to the C19. “The response has been super fast, anticipating the exponential growth in the e-commerce channel and prioritizing stocks for online channels and adding more resources to expedite execution,” he said. “We increased performance marketing spends as well. Challenges in terms of supply constraints were faced, where demand grew faster than supply in the case of liquid handwash, sanitizers, antiseptic disinfectant liquid, [and in some cases] Durex & Veet as well.” Across all product categories, Hasan said that the eCommerce team was given first priority for stock allocation, with area sales managers and territory managers acting as enablers to help with fast execution in the field and with onboarding local partners across Pakistan. The movement restrictions imposed during the first phase of the lockdown proved to be a challenge for Reckitt Benckiser and all the CPG businesses surveyed by Profit, which impeded time taken to make deliveries. “We are experiencing a month over month growth in in-market sale, selling out from the platforms, new partner onboarding, [and have seen] a wave of new ecom platforms,” he said. “The introduction of Now Commerce [gives us] 30 mins to two hour delivery [times]. [We rely on] Jaldisaman, Cheetey, and [Pandamart]. The surge in eCommerce will not be temporary. There will be a huge section of the buyers who will continue purchasing through eCommerce because of a positive consumer experience they
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have received. This includes, convenience, better assortment and better prices.” In terms of organic customer acquisition with eCommerce and sales conversions, Hasan told Profit that in-platform search, Facebook, and the branded websites for both Dettol and Veet - both of which redirect interested to buyers to Daraz - helped the business in discoverability, consideration, and conversion across the buyer decision journey. As expected, Hasan said the business noticed a huge surge in searches for Dettol after C19 - a claim confirmed by Google Trends - with Dettol Antiseptic Liquid ranking in the top five branded search terms after C19 according to the latest eCommerce index from Daraz. “We have our own dedicated e-com FB page “Rbazaar” through which we acquire new customers, also we have a Facebook shop and shop now button on each brand page,” he said. ‘We have two brand websites [for] Dettol & Veet each having an eCommerce leg integration with specific shops now linking, which redirects the customer to our eCommerce store - with Dettol being the hour of the need the website has helped us in an upsurge in organic traffic and acquisition.” In terms of paid customer acquisition with eCommerce and sales conversions, Hasan told https://www.youtube.com/ watch?v=8lZrJHfvTjw that Facebook Collaborative Ads, Google Shopping Ads, and Instagram helped the business acquire new customers and in growing page views. He said that there is no slowdown in demand for products across the Reckitt Benckiser portfolio in Pakistan as far as eCommerce is concerned, adding that the closure of salons has meant that beauty products such as Veet grew in demand as well.
L’Oreal
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ithin days of the lockdown, L’Oreal tripled down on its eCommerce business unit with deals with marketplaces and e-tailors such as Naheed, Vegas, Saloni, Daraz, and many more similar businesses. “LOreal has always been pro digital and ecommerce,” said sources within the company. “Brands like NYX are only sold on digital. [After the C19 lockdown], deliveries were a huge challenge due to reliance on marketplaces and e-tailers which are not known for their prompt deliveries. We shifted major spending towards Facebook and influencer marketing, driving conversions through both. The makeup and skincare categories are performing really well, with nearly PKR 50 million worth of the former selling out in Ramadan alone through eCommerce [purchase paths].” Sources at both L’Oreal Pakistan and Cosmo Group - an international cosmetics
Echoing the apparel study by Profit, sources shared that the double digit sales through eCommerce had more to do with shoppers being either unwilling to risk exposure at brick-and-mortar stores, or that many had no choice in the matter. Profit’s survey data shows that shoppers substituted in-store purchases with online purchases brand importer & distributor that competes with L’Oreal Pakistan - shared that the proliferation of counterfeit or fake products listed on Daraz is an epidemic that has not been resolved, adding that now communications on the platform need to add the “please only shop products that have Daraz Mall tag” on them. Respondents from both cosmetics companies shared the slow response from the Alibaba-owned marketplace in improving the vetting of its self-registered sellers is cause for investing in an owned eCommerce platform. They wished Daraz with mirror eBay and Amazon with checks for counterfeit products.
Top three complaints CPG companies have about online marketplaces and e-tailers
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ources at Unilever and Nestle lamented that Daraz, HumMart, and its competitors in the online marketplace and logistics ecosystem were taking advantage of the C19 situation on a couple of fronts. Of the three common complaints, two have merit due to multiple customer complaints across social media that point to symptoms of imperfect end to end customer experience and scenario planning capabilities. Spokespersons of both Daraz and HumMart, who spoke to Profit, refuted and minimized the allegations. There is one complaint, however, that Profit considers to be invalid because it demonstrates a lack of understanding of the online marketplace business model. The first of the valid complaints are that online marketplace companies do not share data on the customer profile. This includes: who is the buyer, what did they come looking for, which traffic source did they come from, and what time of the day is conversion traffic the highest. The second complaint is that both companies have poor hygiene standards for both their websites and their warehouses, with sources keening about everything from missing images on listings, wrong product descriptions,
and delivering expired stock to consumers. The absence of corrective actions by online marketplaces and e-tailers has driven many CPG marketers that spoke to Profit, towards Brandverse, an eCommerce infrastructure provider for product cataloguing and for deploying an online store with application programming interfaces (APIs) for delivery services such as Bykea, Airlift, and Careem. The third complaint is one which Profit does not agree with because it shows that the eCommerce teams at Nestle and Unilever do not understand the various facets of the revenue models at online marketplaces. In a forecast from 2017, this reporter said that Amazon’s advertising business is worrying the duopoly - Google and Facebook - for eating performance marketing budgets. Within a year later, the prediction came true, with Amazon’s share of performance marketing spending rivaling that of the duopoly. Similarly, Alibaba Group has an advertising business that charges brands that are listed - and even those that are not listed on its platform - for placing ads (even those that redirect to owned dot coms) on its paid, earned, shared, and owned (PESO) digital real estate. This includes and is not limited to the main site, the app, the daily newsletter, and the social media accounts which have grown due to a paid investment over decades. It is this fundamental misunderstanding of the various business model avenues of the online marketplace model that has created the third complaint - that the leading players in online marketplace charge brands for any visibility on the homepage, on the newsletter, or on social media. Sources at Nestle and Unilever shared that their eCommerce teams were being told they would either be expected to chip in half the cost of running ads on paid, owned, or earned platforms by the marketplaces or expected to return to the negotiation table and offer deeper discounts. The eCommerce teams at Nestle and Unilever expect to have a brand presence across various prime digital real estate, regardless of its placement across the PESO model, while anticipating marketplaces will oblige without asking for anything in return. n
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Despite Covid-19, fertiliser prices will drop
The drop in prices represents fertilizer companies unable to set prices because of the unique circumstances presented by the pandemic
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he price of fertilizer is extremely significant to a country’s food prices. Having lower fertilizer reduces the input costs, which helps drive prices lower and reduces cost-push inflation. Secondly, lower fertilizer prices means more farmers can afford the product, which in turn leads to higher yields of crops, and therefore lower food prices. All in all, it is always a good thing. Of course, this is in normal times. The Covid-19 pandemic, and the locusts invasion
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raging has somewhat altered this dynamic. Analyst Muhammad Awais at Foundation Securities paints a somewhat confusing state of affairs in his note to clients on July 8. The note holds that fertilizer prices will be down because of government-provided subsidized gas. However, the agriculture sector is suffering from low demand, Covid-19 disruptions, and somewhat subdued yields. The situation is leading to a fall in prices in crops - which is not really related to the fall in fertilizer prices. Instead, what all of this really means is that fertilizer companies do not really have wiggle
room to set prices, or have limited pricing power, in this very odd situation. Let us walk through step by step what is happening. First, fertiliser manufacturers are one of the main users of natural gas, accounting for its largest input cost. That cost was brought down earlier this July, when the Economic Coordination Committee in Pakistan decided to supply Regasified Liquefied Natural Gas, or RNLG, at a subsidized rate to two plants: Agritech Limited and Fatima Fertiliser (formerly, Dawood Hercules plant). According to
decision for subsidized rates, will keep urea prices in check. “Therefore, we have revised our Urea price forecast by ~4%/5% for CY20/ CY21,” says Awais. Now, not only is the fertilizer industry facing a subdued performance of cash crops, but is also experiencing an inventory buildup. However, urea offtake will actually be at a healthy 6 million tons in 2020. This is because despite all of the farmer's problems, it is still Rabi season: someone is going to have to sow those crops. Demand will be stronger during Rabi season, due to a likelihood of a subsidy disbursement in Punjab. In addition, better wheat prices are also to help demand. And given the improved and consistent gas supply, particularly to Engro Fertilizers, urea production is expected to remain close to that of 2019. In fact, Engro Fertilizers’ production is expected to increase by 12% yearon-year in 2020, while production for Fauji Fertilizers Bin Qasim is expected to increase by 8% year-on-year in 2020. When it comes to Diammonium Phosphate (DAP), Pakistan is expected to see an increase in demand for DAP, coming to around 2.2 million tons in 2020. Most of this is being led by a 26% year-on-year decline in international prices for DAP, and also a subsidy of Rs925 per bag, most likely in Punjab. This pattern, interestingly, is reflected internationally as well: India’s DAP imports are also expected to increase in the second half of this year due to lower domestic production amid lockdown. China imposed a lockdown in Hubei province,
the Ministry of Industries and Production, this was to be offered from July to September at the subsidized rate of Rs756 per million British thermal units (mmbtu). According to Awais, both of these plants should be able to produce around 210,000 tons of urea. Why was this done? The government wanted to make sure that there was a smooth supply of urea during the Rabi season (which is when crops are planted in the winter and harvested in the spring). Never mind that demand for fertilizers is somewhat depressed, because of a concern about the impact of locusts. There have been reports that farmers are delaying the application of fertilizers to divert the attention of locusts in cultivated regions. There is also an expected subdued performance of cash crops. This along, with the
halting production as 27% of DAP is produced in that province. This, Awais notes has provided support to falling DAP prices. Now, we mentioned earlier some of the problems of the agriculture sector. These are quite serious: there are locusts in about 46 districts out of Pakistan’s total 131 districts. Then, the monsoon season came in earlier than expected this year. There have also been massive logistical and supply side problems due to the lockdowns imposed across the country due to the Covid-19 pandemic. These lockdowns have also meant much lower local demand than usual from Pakistan’s food and textile industry. These factors have essentially led to much lower prices, such as in cotton and rice. Maize prices this season have dropped by around 35%. These cash crops have also faced lower yields, which have affected farmers profitability. But amazingly, Awais still has a positive outlook for the agriculture sector. How is this possible? Well, the two cash crops that are not affected are wheat, as mentioned before, and sugarcane. This will help out farmers significantly. Second, the government has announced a Rs50 billion package for the sector. And third, Awais takes an overly optimistic take on the continuous monitoring of the locust outbreak. The National Disaster Management Authority has conducted aerial and ground sprays, and earmarked Rs26 billion to combat the outbreak. Perhaps the worst will not hit after all. n
Is the auto sector going to get worse? You bet A slump of this level has not been seen since 2009
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an it get any worse for the automobiles sector of Pakistan? Yes, yes it can. And you better believe it will. If there was any more proof that Pakistan is reliving a slump the likes of which was last seen in 2009 , it is that the total car sales in fiscal year 2020 are the lowest they have been since 2009, according to Hammad
Akram, analyst at Topline Securities, in a note issued to clients on July 13. The total car sales in 2020 were recorded at 110,583 units, which is the worst recorded since fiscal year 2009. The greatest contributors to this decline were Honda Atlas, which saw sales decline by 63% from 44,234 units in 2019, to 16,390 units in 2020. Indus Motors sales declined by 53% from 60,993 units in units to 28,378
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units in 2020. Finally, Pak Suzuki Motors saw sales decline by 49% from 130,002 units in 2019, to 65,815 units in 2020. Specifically, the month of June 2020 witnessed a 52% decline year-on-year from 17,468 units in June 2019 to 8,446 units last month. This marks the remarkable 20th consecutive month of a year-on-year decline in car sales. Around 1,000 units are also expected to have been sold by non-registered car assemblers, such as KIA during the month of June. However, it is an indication of how appalling the month of May was for car sales that sales actually increased 77% on a monthly basis. Car dealerships became operational after the lifting of Covid-19 related lockdowns and restrictions. That is why one sees unusual jumps in the monthly sales growth figures: Honda Atlas recorded sales growth of 514%, while Indus Motors recorded 199% sales growth. Meanwhile, in the world of motorbikes, Atlas Honda recorded sales of 90,039 units in June 2020, up by 5% year-on-year and 644% month-on-month. However, when it came to sales in 2020, the company recorded a decline of 22% year-on-year to 873,902 units, or the lowest level since 2016. Tractor sales for 2020 are down by 35% year-on-year to 32,727 units. However, tractor sales in June 2020 were up by 46% year-onyear and 187% month-on-month to 5,312 units. Within that world, Al Ghazi Tractors sales increased 121% year-on-year, while and Millat
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Tractors’ sales increased 23% year-on-year respectively. “We believe the uncertainty regarding tractor subsidy of Rs2.5bn has ended, when it was not made the part of budget FY21.” says Akram. That explains the June 2020: farmers had been holding their decision to buy tractors to take advantage of the subsidy, and made the purchases in the outgoing month So, what happened in 2020? According to Akram, the year remained turbulent for car assemblers, as slow economic activity and high interest rates affected demand at the start of the year. The depreciation of the rupee, which lost value by 3.9% from July 2019 to March 2020, also led to unusually high car prices. For instance, just a few months ago, Honda Atlas had to increase its prices on average by Rs90,000, while Indus Motors had to increase its prices on average by an astonishing Rs200,000. The final nail in the coffin for anxious consumers was the Covid-19 pandemic which severely affected sales in the second half of the year. Turns out, the middle of a pandemic, and fear of job security, is when people are least likely to buy a new car, instead focusing on essentials that matter and making sure a home is still running. It was not always meant to be this way: as Ali Asghar Poonawala analyst at AKD Securities pointed out in a note sent to clients on July 13, the year 2020 was slated to be ‘the year’ for new entrants to launch complete
knocked down cars (or cars that are imported in parts and assembled in the importing country). But only one, Kia Lucky, launched two variants: the compact SUV Sportage in August 2019, and the hatchback Picanto in October 2019. Meanwhile, the much awaited Toyota Yaris’s launch was delayed well into 2020. Indus Motors – the Toyota subsidiary in Pakistan – launched its new sedan in March 2020. There were high hopes for the Yaris: its average price is Rs2.7 million, which is significantly cheaper than the Corolla (at Rs3.7 million), and only Rs0.1 million more expensive than its competitor, the Honda City. Perhaps in another climate it would have boosted sales; as is, this is an environment of overall weakness, and the launch was hampered by the Covid-19 crisis. There is one bright spot moving forward: as Poonawala noted in another report sent to clients on July 13, interest rates have been pulled down from 13.25% in March to 7% in June. And even better, banks like Habib Bank and Bank Alfalah have started to offer discounted limited time promotions on auto loans. Now granted, the loan space is still in its nascent stages: HBL’s scheme has attracted less than 1000 applicants. The interest rate cycle tends to have a three month lag on consumer loan growth profile, so it will be interesting to see how the car space evolves, if at all, in the next few months. n
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