Making wire and cable sounds at first like a pedestrian undertaking meant for unimaginative businessmen. But the seemingly unsophisticated industry plays an integral role in electrifying homes, shops and factories across the country.
In fact, it’s a useful proxy for the development pace of large infrastructure projects like power plants as well as small housing units.
For Pakistan Cables, one of the country’s oldest and largest wire-makers, 2019-20 was the worst year in recent history. It posted a net loss of Rs92 million, a first in many years. Although the company has crawled back into profitability, with record quarterly sales of Rs3.8 billion in January-March, its bottom line for the trailing 12 months is still nowhere close to that for 2016, 2017 or 2018.
Moreover, its net profit margin for 12 months through March has shrunk to merely 1.9 per cent from the peak of 5.9pc in 2017.
“Our nine-month numbers are so far tracking quite well. Things have started to move in the right direction,” said Fahd Chinoy, the 42-year-old, INSEAD-educated CEO of Pakistan Cables, in a recent interview with Dawn. He took over the reins of the family business in 2019 when his father decided to hang up his boots after 27 years as CEO.
‘There’s a possibility we can get to profitability levels of goods years. We are tracking in that direction’
Covid-19 has been disastrous for the company. Annual sales dropped 6.4pc to Rs9.1bn as lockdowns happened in the last quarter of 2019-20. Retail markets closed down and even getting the factory operational proved to be challenging.
The first quarter of the current fiscal year was also bad. Rains in August 2020 disrupted factory operations and the company posted a net loss of Rs37m. But numbers have been ramping up since then, with nine-month earnings clocking up at Rs311m, up more than 14 times from a year ago.
“It took us some time to recover. As things move ahead, there’s a possibility we can get to those (profitability) levels of good years. We are tracking in that direction,” he said.
The international price of copper has a major impact on the company’s business. It constitutes anywhere between 60pc and 80pc of the cost of wire and cable. The commodity is currently trading around $10,000 per tonne, which is its highest level in more than a decade.
“When copper prices go up, our ability to pass on those prices to the customer becomes more and more difficult because of the inflationary impact. That affects our (net) margins.”
Imports from China
Based on insiders’ estimates, the size of the wire and cable industry in Pakistan is approximately Rs50bn. Three major companies compete neck and neck while controlling a 60pc collective market share. Imports from China have a share of about 15pc while the rest is distributed among smaller players. Almost half of the market is driven by demand from the utilities like K-Electric, Wapda and the National Transmission and Distribution Company. The rest of demand comes from the industrial and retail segments.
“The cable industry has been under a lot of pressure in the last five years. We were being hit by imports of Chinese cable. The government was giving tax breaks to anyone who was importing cable under the China-Pakistan Economic Corridor or other special exemption projects. The government is finally paying attention to this issue. As a result, imports have gone down considerably this year,” he said.
Domestic versus foreign sales
Pakistan Cables gets one-quarter of its total sales from the retail market — wire that you and your electrician buy from the shop around the corner for household use. “There’s a trust deficit when it comes to electrical products. Our brand is very strong. We sell at a 25pc premium to our competition in the retail market,” he said while calling the premium an “anomaly”.
A most basic and highly commoditised product like wire should logically never sell at a premium. Mr Chinoy believes the retail consumer is acutely aware of the dangers that a poor quality wire can pose to safety. Copper is more than two-thirds of the product cost. A wire-maker can save 5-7pc simply by opting for scrap copper or alternatives. In a business where net margins hover around 2pc, a little shortcut can bring a lot of money to the manufacturer. “One can achieve the specs on scrap, but you cannot guarantee consistency.”
The consumer seems to intuitively know that benefits of such a shortcut are small and visible, but the side-effects are potentially severe and invisible.
A strong brand equity in the domestic market is perhaps one of the reasons why the seven-decade-old company has still not established itself as a fully fledged, export-oriented entity. Less than 2pc of its annual sales originate from foreign markets.
“About 70-80pc of our costs come from imported raw materials like copper. It comes in, gets converted and fabricated, turned into cable and then sold. But we have to compete in the export market against China, India and Turkey, which have fully integrated ecosystems with copper refining and integrated supply chains for all inputs. They don’t pay duties and their lead times are short,” he said.
Secondly, Mr Chinoy believes, entering a new market means going through a “very cumbersome process” of getting approvals by different governments and local utilities. “If we define a market today, it takes two to three years by the time we go through the prequalification process.”
Yet he insists that the company has been “aggressively looking at potential export opportunities”. Growing the export base is one reason why the company is setting up a new factory on a 42-acre plot in Nooriabad. It will start operations in early 2022.
Pakistan Cables currently has the capacity to process about 8,000 tonnes of copper per year. The new facility will increase its capacity up to four times by 2023. “More than capacity, what we’re aiming for is more efficiency and modernisation.”
Published in Dawn, The Business and Finance Weekly, May 31st, 2021