KARACHI: Pakistan’s largest listed conglomerate Engro Corporation is planning to shape its future growth by targeting country’s vast population and expanding middle class as it strategises to spend its $500 million cash pile.

Pakistan’s chemicals-to-energy conglomerate Engro Corp has seen its fortunes rise on the back of massive Chinese investment. The corporation is best known for its fertiliser and petrochemicals factories as well as engineering projects.

It is Pakistan’s largest listed conglomerate, and after recovering from a brush with bankruptcy in the early part of this decade is now sitting on Rs 60 billion cash pile.

It has been a major beneficiary from Beijing’s Belt and Road Initiative (BRI) splurge, working with Chinese firms on coal and power projects worth billions of dollars.

Engro’s rising fortunes since 2012, when its factories were crippled by gas shortages, mirror the improvements in Pakistan, a nuclear-armed nation where economic growth has accelerated due to vast Chinese investment and a sharp decline in militancy and power outages.

In the near term, Engro’s outlook is linked to a mile-long $1.5bn coal mine in the Thar desert near the Indian border, part of Beijing’s pledge to invest about $60bn in Pakistan.

But with reports of government’s intentions to review BRI contracts due to higher costs, analysts see rising risks for Engro and say planned power plants around the mine may struggle to obtain financing.

Ghias Khan, Engro’s chief executive, told Reuters this week he was “pretty confident” the government would not re-open deals with sovereign guarantees. “If they do, that will have a very negative impact,” Khan said.

Pakistan’s economy has been shaken by a shortage of dollars, and speculation that Islamabad may turn to the International Monetary Fund (IMF) to ease current account pressures.

Closer to consumer

Undeterred by Chinese investment jitters and the wobbly economy, Khan said Engro was weighing acquisitions and looking to invest in agriculture, healthcare, real estate, communications and other consumer-linked sectors to profit from rising incomes in the Muslim majority country of 208m people, 60 per cent of whom are aged under 30.

“We’ve come to a realisation; what has gotten Engro where it is today is not good enough for our next phase of growth,” Khan said in an interview at Engro’s ocean-front headquarters in Karachi, an Arabian Sea metropolis. “What we are proud of is our ability to execute large-scale projects and put up large industrial complexes. We acknowledge the need to get into businesses which are more related to the population growth, and take us closer to the consumers.”

In Karachi, mushrooming shopping malls and ever-rising number of cars on the road point to a multi-year consumer boom as people’s disposable incomes have doubled this decade, analysts say.

Khan compared Pakistan’s current economic level, population growth and per capita income – at about $1,600 – to where China, South Korea and India were at earlier stages in their development.

“If you look at sectors that did well when they were where Pakistan is today ... like real estate, automobiles, healthcare, logistics - everything is somehow related or linked to population growth or the middle class,” Khan said.

Coal Bonanza

The company, born out of an employee buyout of Exxon’s Pakistan operations in the 1990s, was also looking to penetrate deeper into the petrochemicals sector, and was exploring projects to set up naphtha, ethane crackers or polypropylene facilities at the ports of Karachi or Gwadar, Khan added.

What Engro will do with its 60bn rupees ($490m) cash pile has been under a lot of discussion in the Pakistan’s equity market. “One thing is very clear: how we invest these 60bn rupees ... will determine how this organisation looks 10-15 years from now,” said Khan, adding a decision would be made “hopefully soon”.

In the meantime, the company is expanding its coal projects in Thar, located in the remote desert of Sindh province. Pakistan says it has the world’s seventh largest coal reserves, but it is of the low-grade lignite variety. Successive attempts at large-scale mining have failed over the decades.

Helped by Beijing’s cash and Chinese expertise, Engro began digging the Thar coal mine in 2016 with China Machinery Engineering Corporation. The extracted coal will feed into a 660MW power plant — which is also built by Engro — part of about 4,000MW of power generation planned by various Pakistani consortiums by 2021.

Analysts say Engro has locked in returns on equity of about 30pc per annum – in dollar terms – with a sovereign guarantee on the power projects. Engro declined to reveal equity returns on power projects, but with Pakistan looking to control its ballooning current account deficit to avoid another IMF bailout, Khan said the new government was likely to want power plants that do not rely on imported fuel.

Published in Dawn, September 15th, 2018