He is a 'Certified Director' from the Pakistan Institute of Corporate Governance. He has served as Chairman of the Aga Khan Foundation (Pakistan) and also as a Director of Pakistan Centre of Philanthropy, Pakistan Security Printing Corporation and Atlas Insurance. Currently he is the Chairman of Jubilee Life Insurance Co, Director of the Atlas Battery Ltd, NBP Fullerton Asset Management Ltd, International Steels Ltd, International Industries Ltd, ICI Pakistan Ltd and a member of the Board of Governors of Army Burn Hall Institutions.
BR Research recently met Chinoy to talk about the dynamics of Pakistan's cable industry and the issues it faces. Market structure and the regulatory hurdles were the key talking points. Below in an edited excerpt of the conversation.
BR Research: Tell us about the structure of the wires and cables industry in terms of market size, dynamics, categories etc.
Kamal Chinoy: The wire and cable market is well diversified in terms of variety in different types of wire cables. It goes from overhead lines, underground, cables, wiring for household items to much higher technology applications such as undersea cabling, aircraft cabling, etc. In Pakistan, the bigger element is essentially for power and electricity. Pakistan Cables would be, around 25-30 percent of that particular market.
Pakistan Cables covers three main markets. One is the building wire for your house or any kind of building, basically lights, fans, AC, etc. Other is for projects, which includes new factories, expansions, buildings, housing etc. And then they are utility companies. The building wire is sold in our case through trade. We sell to dealers, wholesalers, retailers and distributors all over Pakistan. The wires used for projects are sold directly to the customers, based on their customized needs. The utility companies work on tender basis. Big volumes are seen in the utility segment, primarily WAPDA, NTDC and KE.
There are two kinds of conductors: aluminum and copper. Copper is more efficient, but is more expensive. Aluminum is less efficient but is lighter and cheaper.
BRR: What are your market shares in all the major categories?
KC: In the project segment, our market share ranges between 35 to 40 percent, because there is value for quality. Most people tend to give us a premium on quality and we have positioned ourselves that way. In the building wire segment, we have a mixed situation.
We are the single largest brand nationally, present in over 150 cities with the dealer network of about 800 all over Pakistan. But we have a lot of under the radar operators and the market is full of low-quality manufacturers. The grey market is widespread in this sector, plus there are a lot of local domestic brands. With that type of market structure, I guess that 50 percent of the market is unreported. Of the reported segment, we have a 35 percent share of the formal sector. The unreported sector poses a safety threat to consumers because it is completely unregulated and generally very low quality.
In the utility segment, we have a small share of less than 5 percent. This is more of a strategic call as there are a lot of payment, tendering, and ethical issues.
BRR: Considering the informal sector is huge and growing, is there some kind of estimate, by an economist, of the informal sector exist in the industry?
KC: We had an active Cable and Conductor Manufacturers Association, which had become less active because of increasing competition within the industry. With the rising Chinese threat now, we are reviving the association. Amongst other issues, a major study on the size of informal market is something we can consider going forward.
BRR: Could you shed some more light on the dynamics of what you call the "Chinese threat'? Is it an even bigger threat than the whole informal market?
KC: Chinese are supplying into the organized sector, particularly in the low voltage and medium voltage cable for projects. For instance, K-Electric, has been importing almost all its medium voltage cable from Chinese for the last 10-12 years.
Pakistan Cables and our close competitors set up plants years ago for this particular single item. K-Electric initially used to buy from us but then they moved to Chinese product and this coincided with Abraaj coming in. In the last three years, an estimated Rs 4 billion of cable has been imported by K-Electric alone from China. It is cheaper because of extra incentives and lower priced raw materials that China offers its companies. In Pakistan, we import almost all our raw materials and these attract import duty, whereas the Chinese have the benefit of locally available raw materials. This coupled with an export subsidy that is estimated to be between 13 percent - 15 percent, makes it very difficult to compete with certain Chinese products.
Power outages happen on a daily basis in Pakistan and that is a big hindrance. There's no such issue in China, which makes them more efficient.
Similarly, with the recent phenomena of large Chinese contractors entering Pakistan and working on several mega projects including power plants, ports and shipping and several other mega projects, we are starting to see a major influx of all types of Chinese cables in the Pakistan market.
The concessions given by Pakistan's government to Chinese, due to CPEC, are completely against Pakistani industry. There is 17 percent sales tax on the products that we supply, whereas if CPEC projects purchase imported cable and wire they are exempted from paying sales tax and customs duties. Import is not just focused only on China, imports can be done from other countries as well and the CPEC project importing would never chose to go for local products, because of the huge advantage they would get from importing. So, the whole world has the advantage to supply to any special project in Pakistan as compared to the Pakistan industry. We demand that the local industry be given the facility to sell to CPEC projects on a zero rated basis. This is something that the National Assembly Finance Standing Committee has also recognized and has supported the local industry and we hope the same will be reflected by the government in the upcoming budget.
BRR: There haven't been any major imports from China in any of the major HS codes. There have been imports amounting to $60 million from China copper waste and scrap, and that too this year only. So is the Chinese import really that big an issue? And what share of the project market does the Chinese have?
KC: Copper waste and scrap goes to Gujranwala and there is a lot of scrap coming in mainly from China that is being processed in Gujranwala and then being used by many of our competitors in the local cable industry. Pakistan Cables, on the other hand, only utilizes LME A Grade 99.99 percent pure copper and this is how we distinguish ourselves from our competition.
The threat of imported cables is a major one. The import of wires and cables in the major HS codes has gone up from $43 million in FY14 to $67 million in 9MFY17, and is estimated to touch $89 million for FY17.
In terms of how much of a threat Chinese imports are as a percentage, Chinese imports were approximately 80% of total cable imports in 9MFY17.
That said if government policy are supportive of local industry, tremendous opportunities exist in Pakistan for the cable industry. It is simply a matter of creating synergy between policy and industrial development opportunities.
BRR: The revenue isn't growing too fast. Margin growth seems fine due to the decline in the international prices of copper. That's one thing we want you to shed light on. Your director reports have stated that inventory losses are a risk because of the nature of the business, and the inventory turnover in 2016 has gone down. So, what are you doing about it? Thirdly, some CAPEX is visible on the balance sheet and some of it was debt-based, so please tell us something along these lines.
KC: Sales are dependent on the international prices of copper and aluminum and the growth in our volumes has been erratic. There was creeping growth in previous years but due to various strategic initiatives we have seen strong volume growth in the past two years. However, often volume growth can be offset or augmented by changes in metal prices.
Our strength has been a very solid balance sheet, thereby allowing us to build debt on our books when the need has arisen. Currently our balance sheet is hardly leveraged and we have the flexibility to utilize it for Capex for various BMR projects.
Net margins, are generally 2-5 percent in this business. This is in-line with international levels. Higher technology or very complex cables will have higher margins but for building wire and Low and medium voltage cables, which is primarily our product mix, the margins will tend to be in the lower range.
Margins have been very healthy this year, mostly due to improving GP margins. Our net margins for 9MFY17 are 5 percent compared to 3 percent in the same period last year.
Raw material amount to 70-75 percent of our net sales value and the majority of it is metal. In the cable industry across the world, metal fluctuations and inventories can be managed through hedging mechanisms. We don't have this facility in Pakistan, as the rules do not allow us to hedge. Therefore, we pay very close attention to managing our metal inventories against orders by ensuring a very closely coordinated supply chain mechanism.
BRR: You mentioned that the SBP's regulations do not allow for hedging, so could there be a way out? You could buy from your Dubai office which can hedge the risk.
KC: Yes, you can do that. But our whole approach of doing business is based on high level of ethics, so we wouldn't hedge unless formally allowed. We want to be true to all the stakeholders: customers, government, suppliers, and shareholders.
BRR: How do you see the industry growing in the next five years, on an annualized CAGR basis?
KC: It should grow higher than the GDP growth. Even if you take out the growth spurt that is expected in overhead conductors, the volumetric growth should be 15 percent. At any point in time, the total housing shortage is 10 million. Electrical infrastructure is deficient and will be built out. Fundamentally, the Pakistan cable market is positioned well for growth and is relying on government support to realize this.
BRR: But according to studies, up to 62 percent of the funds coming in remittances are spent in consumptions: household consumption, edible and non-edibles and durables. So, how do view this?
KC: Twenty years ago, people weren't living like this. The population has also grown and so has the demand. With the residential segment growing, demand for wires and cables will continue to grow. As people become wealthier, they are building their own homes.
At the same time, there has been growth in infrastructure development and various industry segments have been undergoing expansion, which has driven Project cable sales.
BRR: What are your capex plans going forward?
KC: We have had a few lean years, with respect to Capex, but recently have been aggressively refining our efficiencies - be it on the floor or with respect to our machines in terms of engineering, replacement, and upgrading.
We have also recently undergone some capital expenditures to enter the overhead transmission line market. We have introduced a new technology to Pakistan, which is patented by an American company. It is highly efficient overhead conductor that reduces line losses and can be used on current towers being light in weight thereby also covering very long distances such as river crossings, mountains, from valley to valley, etc.
BRR: Is it this new transmission line product less likely to be counterfeited?
KC: It's a unique solution under typical conditions. It's a highly technical solution. We don't expect it to be counterfeited.
BRR: Do you see any new players coming in the market anytime soon?
KC: I would say that they come and go, although they can be sizable because they mostly operate in the utility sectors. In recent times the market has become more competitive because of new entrants, several with lower thresholds for ethics and quality. I think the growth rate will entice some investors to look at Pakistan.
Copyright Business Recorder, 2017