MULTINATIONALS IN PAKISTAN

Flow of foreign investment into Pakistan is eye catching for many countries in the region.

AMANULLAH BASHAR
Sep 04 - Sep 10, 2006

The World Bank, International Monetary Fund and the Asian Development Bank are of the unanimous view that the existing trend of economic growth could be sustained for another 8-10 years provided the process of reforms remains uninterrupted in Pakistan.

Actually, it was the economic agenda and reforms, which accelerated the pace of growth placing Pakistan in the club of the fastest growing economies in the world. It is estimated that Pakistan's average GDP growth of 7 percent was attributed to the multi-national companies to a large extent as they were contributing the major chunk in the overall growth.

In fact, Pakistan wasn't a popular foreign investment choice especially for the investors from Middle East countries until a few years back. A number of multinational companies in the banking, airline companies and pharmaceutical sectors even had to quit the country on the back of disturbed law and order and uncertain political conditions.

In 1998 the country defaulted on an international loan, and was generally regarded as a risky country to do business.

Today, the Middle East companies are leading the rally of foreign private investment in Pakistan, which tallied insignificantly at $17.3 million in 2001-02.

TURNAROUND

The situation is altogether different now; flow of foreign investment into Pakistan is eye catching for many countries in the region.

Recently, Emaar and Limitless - the world's renowned construction giants - have announced real estate projects valued at $40 billion (Dh147 billion) in early June, followed by Etisalat deal in 2005.

In June 2005, a consortium of Etisalat and Dubai Islamic Bank announced it would invest $2.6 billion for a 26 per cent ownership and management rights in Pakistan telecom PTCL. In May, Emaar said it would invest $20.4 billion in four real estate developments in Karachi and Islamabad. Limitless, Dubai World's international real-estate arm, followed with news of a $20 billion (Dh73.4 billion) plan to invest in a mixed-use Karachi real-estate project.

Another major development in the area of foreign investment was announcement from Dubai Islamic Bank to open 50 to 70 branches in Pakistan. Last year foreign investors injected three billion dollars in the country, as compared to the more than $40 billion that the Dubai projects will pump into the economy over the next few years equivalent to more than 10 per cent of Pakistan's GDP.

According to Sultan Al Habtoor, Chairman Al Habtoor Group, "Pakistan offers one of the best investment opportunities in the region under the dynamic leadership of General Pervez Musharraf and Prime Minister Shaukat Aziz". He made these observations while talking informally to leaders of the corporate world and financial sectors at a dinner hosted by Saad Zaman, CEO Dubai Islamic Bank in Karachi.

Al Habtoor Group of UAE has grown tremendously in the past 30 years. Known for construction, it is now internationally recognized in the areas of hotels, real estate, education, insurance, automobile dealership and publishing. It is one of the UAE's most respected and successful business corporations that also operate in the Middle East and the UK.

Commenting on the investment scenario in Pakistan, Sultan Al Habtoor said: "Investment from abroad and even within the country can only progress and prosper if continuity of policies is guaranteed both at the micro and macro levels. Short-term benefits offered by any economy today are the biggest impediments in the way of investments that are long term oriented. It is only because of a visionary leadership and close cut policies that investment comes into a particular country."

Saad Zaman while speaking about investment climate in Pakistan said: "Dubai Islamic Bank is proud to play the role of a catalyst with regard to business opportunities in Pakistan. In an exponentially growing and investment-friendly business environment, the future of Pakistan appears to be very bright."

Actually, the foreign investment has played a remarkable role by lending a strong hand for achieving the seven per cent growth rate. In 2003-04 the GDP of Pakistan had been calculated at $94.80 billion and is now well settled to reach a level of $132.95 billion by the financial year 2008-09. It may be recalled that invigorated by the foreign investment, it was for the first time that the GDP of Pakistan crossed $101 billion in 2004-05 mark from $94.80 billion in 2003-04.

According to the World Bank and other international financial agencies, the economy of Pakistan could sustain the current trend of robust growth and leading to expansion in the GDP, employment opportunities, poverty alleviation and increase in per capita income.

GROWTH IN AUTO INDUSTRY

The automotive sector in Pakistan is primarily dominated by multi-national companies and has the potential of becoming a principal driver of economic growth.

Being one of the core sectors that play an imperative role in our economic development and a potent profit-generation, the industry is contributing enormously to our economy in terms of significant revenue generation, job creation and transfer of technology to the state. The auto sector is one of the largest segments in the world trade. In Pakistan car and two wheelers have seen remarkable growth over the last five years. The growth in domestic market has risen from 40,601 in 2001-02 to 126,817 in 2004-05, which is to cross 150,000 units during 2005- 06. The automobile industry is growing up rapidly by over 40% per annum and if an average annual growth of 30% per annum is maintained Pakistan's market will cross the mile stone of 500,000 units by the year 2010.

The Industry is also contributing immense magnitude of revenue and GDP to the government. In the preceding year the industry has contributed revenue of Rs 7 billion and if the vendors are also included the amount will be over Rs 10 billion. The total contribution of auto industry to the GDP is Rs 38 billion and savings in foreign exchange by import substitution would amount to $ 500 million.

The OEMs (original equipment manufacturers) were investing Rs11 billion, with Honda alone investing Rs3.5 billion this year, in capacity expansion, and vendors another Rs5 billion in view of future market growth. The car market has increased to over 155,000 units from 40,000 in 2002 with the expansion of the national economy. Indus Motors plans to roll out 190 cars per day by June 2006 from the current 180 cars while it was assembling 130 in 2004, rising to 144 in the middle of year 2005. The company looks forward to achieve production of over 50,000 units in 2006 from 35,874 units in 2005.

The auto sector has been booming for the last three years and was among the top performing sectors of the economy.

The total investment by Toyota, Suzuki, Honda, Nissan and Hyundai is over eight billion and with the introduction of Fiat it would amount to Rs 10 billion approximately. Dewan Farooque and other big names will also expand the investment size in future. Indus Motor Company has the investment of Rs 2000 million, Pak Suzuki has its share with Rs 2700 million and Honda group has invested Rs 1000 million in the sector. The investment level is expected to increase in future.

The local auto industry is employing over 400,000 persons and had recorded an average growth of 35% per annum during the last few years. The production had gone up from 45,000 to 200,000 units. The government was projecting the scale of 500,000 units by 2012 as a part of its Automobile Vision while industry was looking for 350,000 units by 2010.

INDUS MOTORS

Indus Motor Company was incorporated in Pakistan as a public limited company in December 1989 and started commercial production in May 1993. The Company's principal activities are to manufacture, market and distribute Toyota and Daihatsu vehicles in Pakistan. The Company is a joint venture between the House of Habib, Toyota Motor Corporation Japan (TMC) and Toyota Tsusho Corporation Japan (TTC) for assembling, progressive manufacturing and marketing of Toyota vehicles in Pakistan. IMC's production facilities are located at Port Bin Qasim Industrial Zone near Karachi in an area measuring over 105 acres.

The Company is engaged in sole distributorship of Toyota and Daihatsu Motor Company Ltd vehicles in Pakistan through its dealership network. Indus Motor Company's plant is the only manufacturing site in the world where both Toyota and Daihatsu brands are being manufactured. Toyota has been ranked as the world's most admired automobile company by "Fortune Magazine."

Heavy investment was made to build its production facilities based on state of art technologies. To ensure highest level of productivity world-renowned Toyota Production Systems are implemented.

Being an icon in automobile industry Indus produces leading brands of Toyota Corolla, Toyota Hilux Single Cabin 4x2 and 4 versions of Daihatsu Cuore. Daihatsu and Indus Motor signed an agreement to launch the Cuore in market. The project worth Rs 750 million was developed at Port Qasim between Daihatsu and Indus Motor to produce Cuore. With the launch Daihatsu heated up the competition in small car segments. The quality of locally assembled Toyota is according to the international Toyota standard as they say "We don't say a car is made in Japan or Pakistan, we say it is made in Toyota."

PAKISTAN'S COMPETITIVE INVESTMENT PACKAGE

POLICY PARAMETERS

MANUFACTURING SECTOR

NON -MANUFACTURING SECTORS

Agriculture

Infrastructure & Social

Services including IT & Telecom Services

Govt. Permission

Not required except 4 specified industries *

Not required except specific licenses from concerned agencies.

Remittance of capital, profits, dividends, etc.

Allowed

Allowed

Upper Limit of foreign equity allowed

100%

60%

100%

100%

Minimum Investment Amount (M $)

No

0.3

0.3

0.15

Customs duty on import of PME

5%

0%

5%

0-5%

Tax relief (IDA, % of PME cost)

50%

50%

.

.

Royalty & Technical Fee

No restriction for payment of royalty & technical fee.

Allowed as per guidelines - Initial lump-sum upto $100,000
- Max Rate 5% of net sales    -  Initial period 5

CONTRIBUTION TO THE LOCAL ECONOMY

As a potent profit-generating industry, Indus is contributing immensely to our national economy in terms of massive revenue generation and job creation.

Indus Motor Company being the second largest local manufacturers of cars in the country is accounting for the 19% of the total market share in the current fiscal year. Indus Motor Company looks forward to achieving production of over 50,000 units in 2006 from 35,874 units in 2005.

The Indus Motor Company provides jobs to some about 1720 persons. The revenue contributed to the Government of Pakistan comprises 25 to 35 per cent of the car price.

INDUS HELPS IN EARTHQUAKE RELIEF EFFORTS

Indus Motor and Toyota Motor Corporation have contributed Rs.60 million to support the victims of the disastrous earthquake. In addition they set up camps in Muzaffarabad & Mansehra providing medical assistance, distribution of food, clothes, blankets & other items to the earthquake victims. The company has also assigned eleven new Toyota Hilux vehicles to support & transport to reach remote settlements. IMC's employees have donated one-day salary to the President's Earthquake Relief Fund.

INDUS CONTRIBUTION TO THE EDUCATION SECTOR

Toyota Motor Corporation, Japan and Indus Motor Company, as a good corporate citizen and to promote technical education in Pakistan, have established the Toyota Technical Educational Program (T-TEP). The T-TEP program involves up-grading the syllabi of automobile engineering, providing training material and equipment, including simulators, training the trainers, audio visual aids etc. The first T-TEP institute was set up in Pakistan four years ago in Lahore and the second at St. Patrick's Institute of Science and Technology in Karachi.

IMC has also contributed Rs. 5 million to Lahore University of Management Sciences (LUMS)

INDUS MOTOR'S FY06 EARNINGS INCREASED BY 78% YOY

According to the Indus Motor Company Limited's FY06 financial results, the company's earnings depicted 78% upsurge to Rs2, 648 million as against Rs1, 485million for the same period last year.

Net sales soared 28% to Rs35,237million, while cost of sales depicted relatively lower growth at 24% to Rs31,089million. Distribution costs, administrative expenses, other operating expenses and finance costs were respectively higher by 35%, 26%, 75% and 35%. On the other hand, a massive 127% increment in other operating income to Rs1,021million as against Rs449million previously boded extremely favorably for the bottom-line.

The effective tax rate of the company also declined by 56bps to 35%. Indus Motor has declared Rs7/share final cash dividend for the year ended June 2006, thereby taking the cumulative pay out to Rs12/share. The share transfer books of the company will be closed from September 22 to September 28, 2006.

Indus Motor's profitability to continue its ascending trend despite an anticipated decline in other operating income during the coming years.

Across-the-board production augmentation coupled with the recent government interventions to reduce the delivery period is the major cause towards the decline in other operating income.

The new Tariff Based System (TBS) is also expected to reduce dependency on the Japanese yen by encouraging localization of auto parts. To enhance the localization, the company must have a supporting vendor industry. Indus Motor has played an impetus role in the automobile industry by promoting and encouraging the downstream vendor industries. Indus Motor's FY07 earnings are expected to depict 9% upsurge to Rs2,885million translating into an EPS at Rs36.70. Our DCF fair value for the scrip is Rs245 and we recommend a positive stance.

PAK SUZUKI

Over the years, Pakistan Suzuki has emerged as the star performer in the economy of Pakistan in general and in the automobile industry in particular.

The financial results of the company indicate that earnings of the company depicted a 168% exceptional upsurge to Rs2,061million as against Rs770million during the corresponding period of the preceding year.

Improved profitability emanated from the dual impact of higher margins and increased other operating income. The net sales of the company registered a growth of 44% to Rs24, 265million compared to Rs16,873milion previously.

At the same time, cost of sales depicted relatively lower surge at 34% to Rs20,959million as against Rs15,584million previously. Therefore, gross margins of the company reflected 6pps notable upsurge to 14% along with gross profit increasing by 157% to Rs3,306million.

Distribution and administrative expenses of the company also surged by 144% and 43%, respectively. Other income of the company depicted 152% massive increment to Rs515million attributable to higher interest earned on deposits.

Profit from operations also surged by 167% to Rs3,364million compared to Rs1,259million last year. However, 121% and 186% respective increase in financial charges and other charges restricted the growth in the bottom line.

HONDA ATLAS CARS

Honda Atlas Cars announced its financial results for the first quarter ended June 2006. The company's after tax earnings depicted a massive plunge at 38% to Rs121m as against Rs196m during the same period last year. This translated into an EPS at Rs1.69 compared to Rs2.74 previously. Lukewarm profitability primarily emanated from lower CKD sales volumes coupled with lower other operating income and higher financial charges. Operating expenses of the company increased by 38% to Rs78million as against Rs56million during the same quarter last year due to higher advertising and promotion expenses following the launch of new Honda City. On the other hand, other operating expenses of the company posted 40% decline to Rs13million.

The quarterly accounts of the company revealed that other operating income posted a sharp decline at 59% to Rs42m as against Rs104m previously mainly due to shrinkage in the customer deposits as buyers opted to wait for the Honda Civic's new model and the delivery period of Honda City reduced to almost zero. Furthermore, increased bank borrowings for the capacity expansion projects led to a thirteen times increase in finance cost to Rs54million as against only Rs4million previously.

According to the figures released by the Pakistan Automotive Manufacturers Associations (PAMA), Honda Atlas sold a combined 4,979 CKD units of Honda Civic and Honda City during the April-June 2006 period, portraying 40% decline compared to 8,246 units previously. Following the decline in sales volumes, net sales of the company also shrank 34% to Rs4,461million this includes Rs4,343million and Rs118m from sales of ýmanufactured goods" and "trading goods" respectively. Despite lower sales, gross profits of the company remained almost intact at Rs285m due to a 220bps increment in gross margin to 6.4%.

HONDA CIVIC'S ADVERTISING CAMPAIGN

Honda Atlas Cars has already started advertising and marketing campaign for its new Honda Civic. Honda Civic's sales remained lower during the last quarter as buyers have preferred to wait for the new model. According to the market sources, the new Honda Civic is priced in the range of Rs1,336,000 to Rs1, 506,000 and will be delivered within one and a half month. Going forward, earnings of the company will be highly dependent on the acceptance of the new Civic. At current levels, we maintain our HOLD stance on the scrip.

HUBCO

The power-generating sector was another area, which attracted a huge foreign investment through leading international power entities in Pakistan.

The Hub Power Company Limited's (HUBCO) which is among the top Independent Power Producers (IPPs) in Pakistan has contributed noticeably in the growth of the economy. The company intends to set up two more power projects to meet the growing need of power in Pakistan.

The financial results of 2006 indicated earnings at Rs3,005million, 44% lower as compared to Rs5,385million during last year. The decline in profitability is primarily attributable to the reduction in tariff. The turnover is expected to increase by 33% to Rs22.6billion compared to Rs16.9billion previously on the back of full operational status of four generators that went through routine maintenance during the first nine months of FY06. Furthermore, 25% increase in other income and 13% decline in financial charges are to bode favorably for the bottom line.

The Hub Power Company's July ˝ March 2006 earnings posted 48% decline to Rs2,060million as against Rs3,947million during the corresponding period last year.

Decline in the profitability primarily emanated from the reduction in tariff after the full repayment of senior debt; higher administrative expenses coupled with the scheduled turned down of one of its unit during the quarter. Revenues of the company increased by 20% to Rs16,139million as against Rs13,422million during the same period last year primarily due to the increased load factor.

However, gross profit depicted 38% decline mainly due to 59% increase in operating cost emanated from 89% increase in fuel charges to Rs10,359million.

On the other hand, other income soared by 31% to Rs209million while financial charges depicted 13% decline to Rs1,197million as against Rs1,377million last year. Furthermore, general and administrative expenses increased by 49% to Rs222million as against Rs149million during the same period last year.

SHELL PAKISTAN

Shell Pakistan is a major foreign company in the area of oil marketing and contributing significantly on the exploration side as well.

Earnings for financial year 2006 significantly surpassed expectations and portrayed a massive 27% increase to Rs3.1billion as against Rs2.4billion during 2005

The sharp growth is the result of higher sales, inventory gains and enhanced rupee margins resulting from the dual effect of revival in petroleum demand and upward revision in domestic petroleum prices during the last quarter.

Shell's net sales soared 19% to Rs117bn mainly on the back of better product mix and increasing international oil prices as well as company's strategy of shifting toward higher margin products.

Gross margins remained almost intact while operating margins improved 30bps to 4.3%. The company also declared 220% cash dividend taking the full year FY06 cash pays-out to Rs30.

The company has also announced 25% bonus pay-out.

Investors took the result announcement extremely positively with Shell Pakistan soaring almost 4% to Rs650.