A seller of optimism

October 21, 2019

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In the absence of a Forbes-like list for Pakistani billionaires, political influence becomes a good proxy for assessing a businessman’s true station in society.

A toehold in the ‘establishment’ goes a longer way in Pakistan than a few extra billions tucked away in a bank account.

No wonder that the debate following the army chief’s meeting with a select group of businessmen earlier this month was centred more on the guest list than the actual points of discussion.

The economic Pearl Harbor in the shape of devaluation created a crisis that’s still unfolding

Admission to the Woodstock of Corporate Pakistan was by invitation only. Poor Abdul Razak Dawood had to fend off calls for his ouster by the country’s apex body of businessmen because he could not get the chamber’s president a seat at the high table.

One of the 20-odd invitees was Arif Habib, a stockbroker-turned-industrialist who runs a conglomerate of eight listed companies with interests in steel, cement, energy, financial services, fertiliser and real estate development.

“The army chief himself decided who should attend the meeting. He understands the economy very well,” says Mr Habib, adding that former ICI Pakistan CEO Waqar Malik has been advising the army chief on economic matters.

So how much net worth a businessman should have for him to be a part of that exclusive club?

It’s hard to say because only a fraction of total assets are listed on the stock exchange to be valued accurately, according to Mr Habib.

“There are about 50 to 100 people who own listed assets and are considered serious players,” he says. He was tight-lipped about his own net worth, saying it was ‘confidential’.

The balance-sheet size of his holding company — Arif Habib Corporation — is Rs38.6 billion, latest regulatory filings show. Compared with other celebrated business houses, the group’s holding company is no Fort Knox of capital it’s sometimes made out to be.

The value of his company’s total shares is a little over Rs10bn, which is barely 0.7 per cent of the overall market capitalisation.

That’s because Mr Habib, by his own account, prefers to keep many assets out of his holding company to save on taxes.

“I made the holding company when I was young and needed recognition.

I needed a strong balance sheet to borrow funds on its basis and do new projects,” he says.

But the structure of holding companies in Pakistan is ‘tax-inefficient’. The government first collects taxes on dividends that a subsidiary gives to its holding company. Then it taxes the same funds again when that holding company gives dividends to its sponsors or ultimate owners.

“It’s better to have family members as (direct) shareholders in a company to eliminate one layer of taxation. We will not do any new investment under our holding company now.”

All that Mr Habib would say about his own net wealth was that it was down to 40 per cent of what it was two years ago.

“That’s what I told the army chief. Our borrowing capacity shrinks when valuations go down. That’s because we take matching loans against our earnings and invest immediately,” he says.

The benchmark index of the Pakistan Stock Exchange has gone down by 27.5pc since July 2017. The rupee lost 48.5pc of its value against the dollar over the same period.

Recent capacity expansion in Power Cement, a group subsidiary, from 900,000 tonnes annually to 3.5 million tonnes was supposed to cost Rs25bn. But it ended up costing the group more than Rs30bn. Capacity expansion in Aisha Steel, another group entity, from 220,000 tonnes per year to 700,000 tonnes faced similar cost overruns because of the devaluation, he adds.

In this way, Mr Habib is quite the opposite of his American counterparts like Warren Buffett — shrewd investors who emerge even stronger after every market crash by scooping up undervalued companies at throwaway share prices.

“You’re looking at it from the perspective of the secondary (share) market. You can’t just sell your shareholding if you’re a sponsor. Shares are pledged in most cases,” he says, adding that he did not foresee such a massive and sudden devaluation.

Unlike many corporate titans, he does not shy away from praising the “immediate past government” for its pro-business policies: 10,000 megawatts of energy were added to the national grid, steel production capacity grew by 100pc, cement sector’s expansion was in excess of 50pc and so forth.

But call it a self-serving calculation or moral cowardice, the corporate sector wasted its endorsement of the PML-N by holding it back until it became irrelevant in the 2018 general election. What most of them believed would be a short and shallow recession turned out to be a long and deep one.

The economic Pearl Harbor in the shape of devaluation created a crisis that’s still unfolding for businesses months later. Their loud complaints to the powers that be, therefore, sound a day late and a dollar short.

“The government has availed (loans of) $4.5bn out of the $20bn promised (under CPEC). I told the prime minister that he should avail all of it (to kick-start growth) and make repayments from the future annual development budget of around $12bn,” he says.

We don’t know whether it’s his grandstanding or genuine belief, but he says the worst is finally over

We don’t know whether it’s his grandstanding or genuine belief, but he says the worst is finally over. Economic indicators for the current quarter (Oct-Dec) are going to be better than before, he claims. “I sell optimism.”

Like the savant Gurukant Desai in the 2007 Indian film Guru, Mr Habib says he takes pride in the fact that his investments also help others become rich. While listing his brokerage house in the early 1990s, he came up with Rs40m as sponsor with an 80pc stake in the company. He raised another Rs80m by selling the remaining 20pc shares to the general public.

“Against that Rs120m, we have given dividends to our shareholders to the tune of Rs4bn while their shares were worth Rs18bn (at one recent point).”

Similarly, the old casino complex in Clifton on which Dolmen Mall and Harbour Front now exist was originally purchased for only Rs100m. Today, the value of the listed portion of that property is in excess of Rs50bn.

The first phase of Naya Nazimabad, a housing project under Javedan Corporation, another Arif Habib company, was sold to the general public at the rate of Rs6,300 per yard. It’s worth Rs60,000 today, reflecting net wealth generation of Rs95bn for 6,000 families that bought 120-, 160- and 240-yard units a few years back.

“We see ourselves as custodians of public interest, although wealth creation is seldom appreciated in our society,” he says.

Published in Dawn, The Business and Finance Weekly, October 21st, 2019