Wednesday, October 31, 2012

Renewed Construction Boom in Pakistan

Renewed construction boom in Pakistan has helped the nation's cement producers significantly increase their sales and profits. Year-over-year, income at Lucky Cement, Pakistan's largest producer of building materials,  is up 33% while DG Khan Cement, second largest cement company, has quadrupled its profits.

Source: Credit Suisse Report on Pakistan Cement Sector
Cement production, an important barometer of national economic activity, was up 8% in 2011-12, according to a research report compiled by a Credit Suisse analyst.

CS analyst Farhan Rizvi says in his report that "higher PSDP (Public Sector Development Program) spending has led to a resurgence in domestic cement demand in FY12 (+8%) and with increased PSDP allocation for FY13 (+19%) and General Elections due in Feb-Mar 2013, domestic demand is likely to remain robust over the next six-nine months".

Nagan Chowrangi Interchange in Karachi
 Ongoing public sector projects include new large and small dams, irrigation canals, power plants, highways, flyovers, airports, seaports, etc. Most of these were already in the pipeline when the PPP government assumed control in 2008. Recent pre-election increases in PSDP funding allowed work to resume on these projects in 2011-12.

In addition to public sector infrastructure projects, there is a lot of privately funded real estate development activity visible in all major cities of the country. Big real estate developers like Bahria Town and Habib Construction are developing both commercial and housing projects in Islamabad, Karachi and Lahore. Other cities like Faisalabad, Hyderabad, Larkana, Multan, Mirpur, Peshawar and Quetta are also seeing new housing communities, golf courses, hotels, office complexes, restaurants, shopping malls, etc.

Artist's Rendering of Sheraton Islamabad Golf City Resort 
 Credit Suisse is bullish on Pakistan's cement sector in particular and Pakistani shares in general.

CS analyst Farhan Rizvi has initiated coverage with "an OVERWEIGHT stance, as we believe compelling valuations, improving domestic demand outlook, better pricing power and easing cost pressures make the sector an attractive investment proposition. Despite better growth prospects (3-year CAGR of 17% over FY12-15E) and improving margins, the sector trades at an attractive FY13E EV/EBITDA of 3.8x, 49% discount to the historical average multiple of 7.4x. Moreover, FY13E EV/tonne of US$74 is approximately 29% discount to historical average EV/tonne of US$104 and 50% discount to the region".

Another CS analyst Farrukh Khan, based in Credit Suisse’ Asia Pacific headquarters in Singapore,says in his research report that “liquidity in 2012 has been concentrated in stocks offering positive earnings surprises (e.g., United Bank, Lucky Cement, DG Khan Cement and Bank Alfalah), enabling them to be strong outperformers. With further improvements in liquidity, we expect a broad-based price discovery to take hold in attractively valued oil and fertilizer stocks as well.”

 A string of strong earnings announcements by Karachi Stock Exchange listed companies and the Central Bank's 1.5% rate cut have already helped the KSE-100 index gain 32% in US dollar terms year to date.

Related Links:

Haq's Musings

Strong Earnings Propel KSE-100 to 4 Year High 

Development in Pakistan-Defence.pk

Credit Suisse on Pakistan Cement Sector

Credit Suisse Research Report on Pakistan Equities

Tax Evasion Fosters Aid Dependence

Poll Finds Pakistanis Happier Than Neighbors

Pakistan's Rural Economy Booming

Pakistan Car Sales Up 61%

Resilient Pakistan Defies Doomsayers

Land For Landless Women in Pakistan

Friday, October 26, 2012

Eid al Azha & Rising Meat Consumption in Pakistan

Media coverage of Pakistan's brisk Eid-ul-Azha livestock sales are a reminder that the nation is among the world's top ten consumers of goat meat and beef based on USDA data.


Pakistan's goat meat consumption of 779,000 tons in 2011-12 ranks it among the top 3 in the world. 1.7 million tons of beef consumption in Pakistan is ranked  9th among beef consuming nations. In addition, 834,000 tons of poultry meat consumption puts it among world's top 20.

Source: Economic Survey of Pakistan 2011-12
Along with rising meat consumption, there has also been a big surge in milk consumption with the ongoing livestock revolution in Pakistan. Pakistanis consumed nearly 39 million tons of milk in 2011-12, according to Economic Survey of Pakistan. This translates into 223 Kg of milk consumption per person which is about the same as the developed world's per capita milk consumption and more than twice that of neighboring India's 96 kg per capita.

Although meat consumption in Pakistan is rising, it still remains very low by world standards. At just 18 Kg per person, it's less than half of the world average of 42 Kg per capita meat consumption reported by the FAO.



Being mostly vegetarian, neighboring Indians consume only 3.2 Kg of meat per capita, less than one-fifth of Pakistan's 18 Kg. Daal (legumes or pulses) are popular in South Asia as a protein source.  Indians consume 11.68 Kg of daal per capita, about twice as much as Pakistan's 6.57 Kg.

Another ingredient popular in South Asian cuisine is vegetable oil.  It's an important source of fat and protein for a nutritious and tasty diet. Edible oil consumption soars during the holidays as hundreds of millions of people eat sweets and fried foods during the September-December festive season.   Pakistanis use about 20 Kg of oil, the per capita amount recommended by the World Health Organization, while Indians consume about 13 Kg per capita.

Source: USDA Report 2013

Celebratory occasions like Eid or Diwali push sugar consumption in South Asia. Pakistan's per capita sugar consumption is about 23 Kg while India's is about 20 Kg per person per year.

Fish Farming Growth in Pakistan. Source: FAO

Although still below average relative to the world, per capita consumption of meat, milk and edible oil is rising with rising incomes and standards of living in both India and Pakistan. As the dietary habits change, it'll be important for policy makers and health and fitness professionals to watch the changes and help educate the people about healthy eating.

Here's a video of MeatOne, a meat packer in Karachi:


Post by Meat One.

Related Links:

Haq's Musings

Livestock and Agribusiness Revolution in Pakistan

Pakistan's Rural Economy Showing Strength

Solving Pakistan's Sugar Crisis

Food, Clothing and Shelter in India and Pakistan 

Is India a Nutritional Weakling?

India Tops World Hunger Charts



Monday, October 1, 2012

Private Equity and Venture Capital in Pakistan

US is providing $80 million to create multiple VC and PE funds in Pakistan. These funds will be run by professional fund managers who will be required to manage and raise additional money from other sources to start multiple funds. US Embassy in Islamabad told Express Tribune that they expect that "there will be substantial interest from local, regional and international investors”.

Polish Model:

The initiative is based on the Polish American Enterprise Fund model which was started with $140 million from US government and has now grown to several billion dollars of investable funds, according to Express Tribune.

US AID's Theodore Heisler said that co-investment was essential in bringing the size of each fund to a level where it can cover operating expenses. The funds will focus on investing in small and medium entrepreneurial companies which, the US Silicon Valley experience has demonstrated, are major drivers of innovation, economic growth and job creation.

History of VC and PE Funds:

 In 2010, the Overseas Private Investment Corporation (OPIC) provided JSPE Private Equity Fund II $50 million with a target capitalization of $150 million.

Venture capital investing is not entirely new in Pakistan, according to Venture Beat. Silicon Valley insiders like Reid Hoffman, Mark Pincus and Joe Kraus, along with Draper Fisher Jurvetson (DFJ) and EPlanet Ventures have already started. In 2003, Hoffman, Pincus and Kraus invested in Monis Rahman, a Pakistani-American who left Intel for entrepreneurship. Rahman had successfully launched and sold a start-up in the Bay Area, eDaycare.com.

There are several investment firms in Pakistan, such as BMA Capital, Indus Basin Holdings and JS Private Equity, that offer examples of professionally managed funds. In addition, there are Social Entrepreneurial Funds like Acumen Fund, Dawood Foundation and Kashf Foundation which are very active in the SME sector in Pakistan.

Opportunity in Pakistan: 

Pakistan has the world’s sixth largest population, seventh largest diaspora and the ninth largest labor force. With rapidly declining fertility and aging populations in the industrialized world, Pakistan's growing talent pool is likely to play a much bigger role to satisfy global demand for workers in the 21st century and contribute to the well-being of Pakistan as well as other parts of the world.

 With half the population below 20 years and 60 per cent below 30 years, Pakistan is well-positioned to reap what is often described as "demographic dividend", with its workforce growing at a faster rate than total population. This trend is estimated to accelerate over several decades. Contrary to the oft-repeated talk of doom and gloom, average Pakistanis are now taking education more seriously than ever. Youth literacy is about 70% and growing, and young people are spending more time in schools and colleges to graduate at higher rates than their Indian counterparts in 15+ age group, according to a report on educational achievement by Harvard University researchers Robert Barro and Jong-Wha Lee. Vocational training is also getting increased focus since 2006 under National Vocational Training Commission (NAVTEC) with help from Germany, Japan, South Korea and the Netherlands.



A 2012 World Bank report titled "More and Better Jobs in South Asia" shows that 63% of Pakistan's workforce is self-employed, including 13% high-end self-employed. Salaried and daily wage earners make up only 37% of the workforce. Even if one chooses to consider just the 13% who are high-end self-employed as entrepreneurs, it's still a significant population willing to take risks who can do better with greater availability of venture and private equity money.
 
A recent Pew Survey of 21 countries reported that 81% of Pakistanis believe in hard work to achieve material success. Americans are the second most optimistic with 77% sharing this belief followed by Tunisians (73%), Brazilians (69%), Indians (67%) and Mexicans (65%).

Conclusion:

Promoting venture capital and private equity investments in Pakistan is a welcome initiative. It has the potential to unleash funding of new profitable ideas in small and medium size entrepreneurial businesses for significant returns to investors while also helping Pakistan achieve much needed economic stimulus with new jobs to lift more people out of poverty.  

Related Links:

Haq's Musings

Pakistanis Lead the World in Faith in Hard Work

Entrepreneurial Pakistanis

Financial Services Sector in Pakistan

Venture Capital Investing in Pakistan

Minorities are Majority in Silicon Valley

String Food and Beverage Demand Draws Investments to Pak Agribusiness

Strong Earnings Propel Pak Shares to New Highs

Pakistan's Underground Economy

Tax Evasion Fosters Aid Dependence

Poll Finds Pakistanis Happier Than Neighbors

Pakistan's Rural Economy Booming

Pakistan Car Sales Up 61%

Resilient Pakistan Defies Doomsayers