One of the companies we met that day was a previous “darling” of foreign investors about two years ago. The company produces air conditioners, refrigerators and freezers, as well as power equipment such as transformers and meters which we thought at that time should benefit from better power supply and investments in the power sector and generally low penetration of refrigerators (only 47% of households have a refrigerator and 52% a washing machine). However, the company has been especially hard hit in the last few months since the Pakistani Rupee was devalued from around 105 to the USD to the current 128 and generally companies in Pakistan cannot hedge their foreign currency exposure. For this company, an increase of 1 PKR against the USD is equal to 150 million Rupees in additional costs which the company has been able to only partially pass onto customers. Additionally, a relatively new Chinese entrant in the aircon market was able to gain significant market share in only 5 years and is now the major player. Other companies we met in Lahore were in the insurance and cement sectors, the latter being one of the dominant industries in Pakistan. The cement sector in Pakistan especially benefitted from the heavy Chinese infrastructure investment into the China Pakistan Economic Corridor (CPEC). The Chinese government and Chinese companies have committed so far to invest over USD 60 billion into infrastructure projects in Pakistan, including roads, ports, bridges, railways, dams and especially power generation (mainly coal fired). The cement industry grew in 2017 on average by 15% compared with 5% on average over the past 25 years. Thanks to the boom in the cement sector many companies announced and started expansion projects, especially in the south which allows them to export some of their cement or clinker to neighbouring countries, East Africa or even to South Africa. Despite the increased supply, the price of a bag of cement has increased this year from 515 Rupees to currently 570 Rupees in the north of the country. However, profit margins are under pressure due to the weaker currency and a higher coal price (most coal for cement production in Pakistan is imported from South Africa) or higher gas prices which the new government announced a few days earlier (see further below). On the positive side, continued investments in CPEC related projects and especially a “5 million housing project” which should be announced by Imran Khan’s government in October, will be very beneficial for cement companies in the medium term.
Later in the afternoon we took a flight from Lahore to the country’s largest city and commercial centre, Karachi, on Pakistan International Airlines (PIA), which is still 85% owned by the Government (Ministry of Defense) and last year lost USD 30 million each month. The company just changed its CEO and he wrote in the in-flight magazine that he will turn PIA around and the airline will have the “best entertainment system in the world” – let’s see! The aircraft was an old Boeing 777-200 and several signs such as the exit, restrooms and no smoking are still written in Vietnamese, maybe because the previous owner of the aircraft was Vietnam Airlines. We also noticed a Vietjet (a Vietnamese budget airline) aircraft on the tarmac right next to us which was obviously “wet leased” to PIA. We arrived safely in Karachi after a 1 hour and 20 minutes flight, and the hotel bus drove us through heavy traffic on the three-lane highway with many newly built bridges and flyovers to our hotel in Clifton.
Over the following two days we met with several companies from various sectors: banking, car manufacturing, cement (of course), chemicals, food, insurance, pharmaceuticals, steel, technology and textiles. Many of these companies are suffering from the Rupee deprecation and higher raw material costs and thus their net profit margins are depressed and generally the expectation is that the currency will weaken further, putting more pressure on those companies in the short term.
One sign of optimism came from a CEO of one of the leading textile companies in Pakistan. They received in the past several weeks more orders from U.S. textile buyers, especially for low end products as imports of low-cost textiles from Pakistan, Bangladesh or Vietnam will face a 0% duty, while imports from Chinese factories will be taxed at 10%. This particular CEO was also of the opinion that textile companies in Bangladesh and Vietnam are working at almost full capacity which is not the case in Pakistan since Pakistani textile companies cannot compete with Bangladesh due to, in his view, the overvalued Pakistani Rupee.
Most of the meetings were held at the Movenpick Hotel in Karachi and I was looking forward to our final two meetings which were with a food/snack company not far from the hotel and a pharmaceutical company, based in one of the industrial areas situated near the Karachi Port. The drive to the pharmaceutical company was unique as in the middle of the congested roads it is still possible to come across carts pulled by horses, donkeys and even camels. Also, very unique to Pakistan are the colourful painted buses and trucks which dominate the roads in busy Karachi.