Our views on Pakistan’s economy and market

Dear Friends,

As we are entering the political season, in this week’s blog we explored and analyzed the market from a political ownership perspective.

A Revisit to the “22 Families”

The question regarding concentration of business ownership has been an interesting economic case study and even a political slogan, ever since 1968 when Dr. Mahbub-ul Haq (then the Chief Economist of the Planning Commission)  published his presentation on Pakistan’s 22 Families (click here to purchase a collection of Dr. Haq’s papers compiled by his wife, Dr. Khadija Haq). According to Dr. Haq, the 22 families controlled 66% of Pakistan’s industries and 87% of the financial sector (those who want to find the list of families can click here).
While Dr. Haq’s work was across the whole economy, as a research question, we looked at the concentration of ownership among the 517 companies listed on Pakistan Stock Exchange.

Indeed this question is also pertinent as, over the past few years, corporate M&A has created large holding companies, often controlled by a family, which have a cross holding in multiple businesses. For example, Lucky Cement of the Younus Brothers group (Tabba family), has shareholding across chemicals (ICI), power (Wind, Coal), Textile (Gadoon etc) and have recently entered into auto manufacturing through a joint venture with KIA Motors. Other large cross sectors holding companies which we analyzed include Engro, Fauji Group, Dawood Hercules, Nishat Mills, Packages. We found interconnections for 11 Family Group Companies across 53 companies (which is roughly 9% of the listed companies).

Our results are in the picture of the week. The top 11 family-controlled groups have 53 listed companies which have a collective market cap of $27bn, which means they account for around 35% of the market capitalization of Pakistan Stock Exchange. The Top 10 families account for 34.5% of the market cap of PSX.

Some interesting insights:

  • Firstly, In 2017, collectively, these companies generated $15bn in revenues and $2.2bn in Net Profits. This means that they accounted for around 1% of Pakistan’s GDP in 2017.
  • Second, It also means that in aggregate these companies are trading at around a PE of 12.6x, which is a premium to the market.
  • Third, contrary to expectations, the top position neither goes to Fauji Foundation nor to Mansha Group but belongs to the Ali Family, whose listed companies (Packages, Nestle, IGI Insurance, Tri-Pack Films, IGI Life, Sanofi-Aventis) account for 7.4% of PSX total market capitalization. Indeed Wazir Ali family also featured in the original Dr. Haq’s list.
  • Fourth, according to our analysis, the top three positions go to Ali Group, Dawood Group and Fauji Foundation.
  • Fifth, Ali Group’s companies command the highest valuation multiples and are trading at trailing PE multiple of 28.3x (versus 12.5x for the sample). The most richly valued company in our sample is IGI Life (52x) followed by Nestle (39x). The lowest multiples are for the Bestway Group (UBL/Bestway Cement) which are trading at a trailing multiple of 8x.
  • Sixth, our “Rich” list ranking are as follows: 1) Ali Group, 2) Dawood, 3) Fauji, 4) Mansha, 5) Habib 6) Bestway 7)  Tabba 8) Atlas 9) Chinoy 10) Saigol and 11) JS Group.
  • Seventh, the analysis above is mostly based on market capitalization. In terms of revenues, the top slot goes to Dawood Group by a significant lead. His Group of Companies, which we think include Engro Corp, Engro Foods, Engro Fertilizers, Engro Polymer, Engro PowerGen, Dawood Hercules, Dawood Lawrencepur) generated PkR409bn in revenues and PkR49bn in profits in 2017. This was followed by the Mansha Group (MCB, DG Cements, Nishat Mills, Adamjee Insurance, Nishat Chunian, Lalpir Power and Nishat Power) which generated PKR228.2bn in revenues and PkR41.4bn in profits in 2017. The third was Fauji Foundation Group.
  • Lastly, the highest profit margin was of Bestway Group, which generated 30% Net Profit Margin in 2017. The average for the group was 15%.
Disclaimer: Our analysis only took the market caps, revenues and net profits of the listed companies. We did not include private/unlisted companies. This analysis is purely from a perspective for the understanding concentration of ownership in the capital markets and not for any political implications. Lastly, all the data used for this has been taken from Zakheera (click here) and has been compiled by my colleague Hadi Hafeez.
The stock performance of Holding companies under different political regimes

From an investment perspective, a key risk for investors looking at holding companies of dominant family groups is the political risk associated with the relationship between the family and the government in power. To measure this, we tracked the stock performance of some of these holding companies under different political regimes in Pakistan.

We analyzed stock performance relative to the KSE-100 index under 5 political regimes:
1) PML (N): Feb 1997 – Oct 1999
2) Army : Oct 1999 – Nov 2002
3) PML (Q): Nov 2002 – March 2008
4) PPP: March 2008 – May 2013
5) PML (N): May 2013 – April 2018

The stocks we analyzed were:
1) Lucky Cement – majority controlled by the Tabba Family.
2) Enrgo Corp – Dawood Group.
3) Fauji Fertilizer (FFC) – Fauji Foundation Group
4) DG Khan Cement – Mansha Group
5) Dawood Hercules – Dawood Group
6) Nishat Mills – Mansha Group
7) Thal – Habib Group
8) Packages – Ali Group
9) Kohinoor Textile Mills – Saigol Group
10) IGI Insurance – Ali Group

Contrary to our a priori hypothesis and generally held views, we couldn’t find any pattern of political linkages. For example, FFC which is a Fauji Group company underperformed significantly during General Musharraf’s and PML (Q) period. In fact, it only outperformed during PPP’s tenure (which may be reflective of PPP’s pro-agricultural policies). The results of absolute stock performances and their relative performances are in the tables below. The data shows that generally, these holding companies have outperformed more during PML(N)’s tenures. That of Habib Group is the only company which outperformed throughout the past 21 years. Engro, Thal, IGI and KTML outperformed under both of Nawaz’s Sharif’s tenures. I will avoid making more inferences based on the results but I think the data is interesting on its own.

We expanded our research coverage to the Auto sector and my colleague Syed Abbas Zaidi published a report titled “Cyclical dips could create good entry points” on the 9th of May. Abbas also published the interviews of the CEOs of two leading digital car sales and trading platforms, Pak Wheels and Car First in his report. Based on his analysis and channel checks with the supply chain, Abbas believes that Indus could be best positioned structurally to deal with the cyclical headwinds facing the sector. I strongly recommend you to read his research and for our clients to reach out to him to discuss his views (syed.zaidi@kasb.com)

We look forward to working with you.

I am, yours truly,

Muhammad Ali

Ali Farid Khwaja, CFA
Khadim Ali Shah Bukhari Securities

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Research Views

Autos: Cyclical concerns could create good entry points

We initiated coverage on the Auto sector on 9th of May 2018 with stock initiations on Indus Motors, Honda Atlas Car and Pak Suzuki Motors. We think the sector could remain under pressure due to cyclical headwinds, especially due to unfavourable FX movements. However, we think the structural drivers will remain intact and companies like Indus Motors could be well positioned to deal with the headwinds. Our industry channel checks confirm our view that Indus has a strong brand and pricing power. Indus has a strong balance sheet (15% of market cap is in cash), cash generative business model (8% FCF yield) and benefits from high barrier to entry.

Pakistan: Digitalization Boom & CPEC Wave

In this report, published on 1st March 2018, we tracked more than 500 early-stage tech companies in Pakistan and produced the first market map of the sector. We think digitalization will drive the next wave of earnings growth and investment returns. On the back of the report, we hosted the first Tech Investment Conference in Pakistan. Hadi Hafeez, our digital analyst focuses on this sector and is on the looking out for interesting companies.

Banks: Digitalization, Consolidation & Compliance

We initiated coverage on the banking sector on 11th of April 2018 with stock initiations on UBL, Bank Alfalah, MCB and HBL. We think digitalization could lead to 120-150% increase in the profits of the sector over the next 5 years and would drive relative out performance. The other two drivers of share price returns would be consolidation and compliance risks. Please contact us if you want the full report