BR Research recently sat down with Mr. Tayyab Aijaz Qureshi, CEO of Roshan Packages Ltd. A business graduate who started his professional career with Roshan Group. Tayyab is also a founding director of PAMCO, a Punjab agri-marketing company for three years. He has participated and represented Pakistan's horticulture sector packaging industry on many international Platforms. Tayyab is also the Chief Executive Officer and Director of Roshan Sun Tao Paper Mills, a joint venture between Roshan Packages Limited and Shandong Yongtai Paper Mills, a Chinese corrugated paper producer. We discussed with him the impressive growth of Roshan Packages and the firm's upcoming initial public offering (IPO).
Below are edited excerpts from the interview.
<B>BR Research: Let's start off with a brief introduction of the Roshan Group and how Roshan Packages Ltd. came into the picture.</B>
<B>Tayyab Aijaz Qureshi:</B> The Roshan Group that was started by my father in 1959 with the publication, Urdu Digest, eventually became a publication house. In 1989 Roshan Enterprises was established for the purpose of exporting fruits and vegetables. In a short span, it was able to become one of the largest fruit exporters of Pakistan which included setting up a citrus processing plant in Sargodha and a mango processing plant in Karachi. As our export volumes picked up we faced problems in procurement of corrugated boxes for packaging our products. This led to Roshan Packages being set up in 2002 with the plant starting operations in 2003 to ensure an uninterrupted supply of packaging for our exports.
<B>BRR: Please tell us more about Roshan Packages for which you are also conducting an initial public offering (IPO) in the coming weeks.</B>
<B>TAQ:</B> Roshan Packages has two principle product categories. One of them is the corrugated segment that produces box cartons for packing consumer goods, fruits, textiles etc. The other is flexible packaging which caters to the packaging requirements for confectionery, food, cosmetics and FMCG firms. The company has two primary manufacturing plants that cover more than 16 acres of land, 680 employees and utilises state of the art machinery imported from Germany.
By 2012 our association with FMCGs had increased to such an extent that we set up a flexible packaging unit to cater to the growing demand of the sector. Apart from Packages Ltd. there was no other supplier that provided diverse packaging solutions under one umbrella. As our product line expanded, we started facing capacity constraints because of our phenomenal sales growth. In 2015, we decided to expand our production facilities and by last year the majority of expansion already been achieved. The previous corrugated box capacity of 30,000 metric tons is being doubled to 60,000 tons per annum.
Similarly, flexible packaging capacity of 3,600 tons per annum has been tripled to 10,800 tons by the fourth quarter of 2016. It is being further expanded to 12,240 tons by the end of this year. In our flexible division, we have set up an extrusion line, which has allowed us to backward-integrate the flexible plant and internally produce polyethylene film, which is used for products such as oil, ghee and pasteurised milk.
In the global packaging industry, it is extremely important to continuously innovate because your clients are competing against international players. Therefore, at Roshan Packages innovation is a priority and we have ensured that during our expansion phase as well.
The proceeds from the IPO will mostly be utilised in expansion, while the remaining amount will be used for debt servicing and working capital requirements. We also feel that getting publicly listed will allow us to continue our impressive growth trajectory and achieve our desired scalability. The book building will be held from January 17-18, 2017 and a total of 32.5 million ordinary shares will be offered at a floor price of Rs35 per share. The book building portion will be 24.375 million ordinary shares ie 75 percent of total, while 8.125 million ordinary shares will be offered to the general public.
<B>BRR: How do you see the future growth trajectory of Roshan Packages? Which factors do you see as having the most impact?</B>
<B>TAQ:</B> Almost 64 percent of our sales mix comprises of the FMCG sector, which is experiencing rapid growth. Many corporations are setting up plants to increase capacity to cater to the growing demand because of rising incomes.
Moreover, the unorganised package sector has faced setbacks in terms of quality assurance and reputation concerns. This has led to FMCGs looking for a vendor that provides all their packaging solutions according to international standards. We believe Roshan Packaging is in a perfect position to take that market share because of our expansion and backward integration.
<B>BRR: Roshan Packages registered a large increase in asset revaluation surplus in FY16. Could you please provide the basis for this revaluation?</B>
<B>TAQ:</B> The amount recognised against revaluation of assets is Rs 1.143 billion. According to International Accounting Standards, assets are required to be recognised on cost basis or revaluation basis. We have adopted revaluation basis thus as per IAS requirement, assets are required to be revalued on their market values after every three years. The previous revaluation was carried out in 2013, latest was carried out in 2016 and in the future, it will be carried out in 2019.
<B>BRR: It is good to see the spill-over effects of CPEC materialising. It would be nice if you could share the story of how the joint venture of Roshan Sun Tao Paper Mills materialised.</B>
<B>TAQ:</B> Every business should be aware of the international trends taking place in their respective industry. We realised a paper mill would eventually be required but the question was whether to set it up ourselves or create a joint venture. Every business also has a scale, which needs to be taken into account. Some businesses are not feasible in the long run on a smaller scale.
When we took into account the scale as well as technology and capability, required it was sensible to create a joint venture. The next question was selecting a partner for the venture who could provide the maximum benefit in terms of technology and skill transfer as well cost competitiveness. We narrowed it down to China as they have a very established and modern paper industry. In addition, their pricing and costing model is also very attractive.
In our corrugated segment the major source of raw material is paper. In Pakistan quality, brown paper is very scarce. So, either the paper is being imported or small scale mills are providing it, which are unable to meet the large demand. Hence, in view of our increasing requirements as well as the inception of the China Pak Economic Corridor (CPEC), we initiated a joint venture with a Chinese company to set up.
The Pakistan embassy in Beijing held a seminar where our commercial counsellor Dr Arfa arranged meetings with potential companies that were interested in forming a partnership with Roshan Packages. It took a period of three years to narrow down our eventual partner and understand each other's requirements and model. The Punjab Board of Investment (PBIT) also played a very co-operative role in helping us set this project up, and we are thankful to them. They helped us in logistical issues such as visas, security as well as creating a positive impression on the Chinese investors with regard to investing in Pakistan.
Roshan Sun Tao Paper Ltd. will be a subsidiary of Roshan Packages Ltd. The important part is we have 60 percent share and our equity is 55 percent. We have sold our shares of Roshan Sun Tao Ltd. at a premium, which reflects the trust and confidence place in the Roshan Group by investors. It will start production in 2019.
The Chinese will train our workers in production, which will allow skill-transfer to take place. In addition, the project will generate employment of at least 2000-3000 people. I feel it is also important because of import substitution of paper that will eventually result in savings of millions in foreign exchange.
<B>BRR: Do you see any export potential by Roshan Packages in the years to come and how soon can that happen?</B>
<B>TAQ:</B> We are already exporting our packaging products to Afghanistan, and it is our desire to increase that reach to Africa and other regions. Our goal is to improve our exports in the years to come and open up new markets for exports of packaging products. Our increased capacity, enhanced technology will definitely allow us to be internationally cost competitive. As for the time frame let us get over with the IPO and then focus on building up our export base.