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CONTENTS 16

11 PSX’s hospitality and taxation troubles - this week in Pakistan’s business and economics Twitterverse 13 Don’t mess with rich parents

16 Is Tapal worth $1 billion? 23 The saga at HUM continues 24 Semiconductor chip shortage to impact Pakistan

28 30 Confusions galore as Rs 0.75 tax on calls sends telecom industry scrambling 33 Three eCommerce ideas gaining mainstream traction in Pakistan Mehwish Aslam

Profit

Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Ariba Shahid l Babar Khan Javed l Taimoor Hassan Abdullah Niazi l Meiryum Ali l Shahab Omer Regional Heads of Marketing: Muddasir Alam (Khi) l Zulﬁqar Butt (Lhr) l Mudassir Iqbal (Isl) Layout: Ahmad Salahuddin l Photographers: Zubair Mehfooz & Imran Gillani l Business, Economic & Financial news by 'Pakistan Today' Contact: proﬁt@pakistantoday.com.pk

Readers Say TCS has the infrastructure but doesn't return COD payments on time. Has horrible customer care/vendor portal. Also considerably more expensive due to hidden charges. This is all based on personal experience of course, but I know people who've had to call the agencies on Traxx and still have not received compensation/parcels declined by customers. Haven't had a pleasant experience myself. In my opinion, Call Courier and Traxx are the best ones out there. Apropos: In the war between TCS and the startups, who will emerge the King of eCommerce logistics? @saadahsan, Twitter Delivery companies in Pk withhold millions in cash from e-commerce marketplaces, they destroy cash flows, so new startups are sorely needed to whip up the dinosaurs in shape, they were a monopoly for too long! Apropos: In the war between TCS and the startups, who will emerge the King of eCommerce logistics? @valkyrie786, Twitter If the current e-commerce logistics companies continue to repeat 20-25 years old ideas and concepts, it will not work out. This is not a sustainable way to run and everyone will be a loser in this scenario. Infact, there is no room in the future for these old logistic companies that are so stuck in their ways. Apropos: In the war between TCS and the startups, who will emerge the King of eCommerce logistics? Haroon, Website

facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com.pk

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It is not a war between company A and company B here. No. This is a war of opposing mindsets, and the sides are very clear. It is a war between an old mindset and a new mindset, conventional approach versus unconventional approach, technology versus manual system. The goal is to take the industry towards technology focused solution orientation. I must say, this is the time of transformation. Remember, the giants of the phone world when cell phones became a thing were Nokia and Blackberry, but now they are nowhere to be seen because they could not innovate and think outside the box. Just look at business pre and post covid, and the numbers will tell you the reality of where businesses shifted worldwide. And the reality is that every business will be online eventually, and those that have the guts to identify the niche pain points of their customers, and then come up with innovative solutions that make the lives of their customers easier are the ones that will survive and lead. Apropos: In the war between TCS and the startups, who will emerge the King of eCommerce logistics? Khaled Bhattie, Website The main reasons for downgrading Pakistan from its current emerging market status to its former frontier market status are more political than eco-

nomic. Apropos: Everything you need to know about Pakistan’s likely fall from emerging to frontier market Anonymous, Website Pakistan will become the worst market because of the fact that this country has absolutely no solid stance. We have two options over here. Either we can come together and become a nation, or we can follow the Musharraf formula which involves giving out bases to the US, tolerating bomb blasts, fostering terrorists, but becoming the best emerging market that no one can visit because it is unsafe to travel to. I think we should all stand with Imran Khan in this situation and behave like a nation rather than a crowd. Apropos: Everything you need to know about Pakistan’s likely fall from emerging to frontier market Anonymous, Website Please don't act like a desi YouTube video with a flashy title. To know everything there is to need to know about it, one would first need to know the reasons behind why it happened, updates on the issue, why it is happening, and what it means. Then one would need to figure out the GoP efforts, impacts this has on stock prices, what course of action should be taken etc. All this is telling me are the academic meanings of terms which can be googled. Apropos: Everything you need to know about Pakistan’s likely fall from emerging to frontier market @AL_tabaahi, Twitter Response: We applaud the user on such keen insights and his depth of knowledge on the subject. And while, humbly, we would like to say that we have answered many of the questions @AL_tabaahi has asked in this tweet, we would also like to point out that not everyone is as knowledgeable as our esteemed tweeter. The goal of Profit’s ‘Explain-it-like-I’m-Five’ section is to, well, explain things in the simplest terms possible so that everyone can understand them. Hi, question. Let's assume eetl gets sequoia and now has 780 or 900 mmcfd capacity, do we in our local network of pipelines have the capacity to transport this? I ask because I remember in peak covid, we had issues that all the pipelines were also full and lines were gonna burst etc. Apropos: Everything to know about Engro Elengy’s dry docking drama @ahfazmustaf, Twitter No. Having extra re-gasification capacity doesn't mean you can't dial it back when putting it into the system. Also pressure plus flow are two very different things. Current plant provides gas based on requirements which can be less than it's stated output. Apropos: Everything to know about Engro Elengy’s dry docking drama @Nutellastaan, Twitter

COMMENTS

IN BRIEF $25.3 billion:

Pakistan’s exports of goods recorded their highest level of $25.3 billion during the fiscal year 2020-21 (FY21), higher than the $25.11 billion recorded in 2013-14 (FY14), Advisor to Prime Minister on Trade and Investment Abdul Razak Dawood said.

“The provision of relief to farmers is amongst the top priorities of the government for which reforms are being introduced to the agriculture sector under a comprehensive strategy” Prime Minister Imran Khan during a phone call with agricultural minister Fakhar Imam

The Oil and Gas Regulatory Authority (OGRA) has hiked the price of Liquefied Petroleum Gas (LPG) once again up to Rs19 per kilogramme. LPG Association Chairman Irfan Khokhar said that the price of an 11.8 kg LPG cylinder for domestic consumers has been jacked up to Rs224 and commercial cylinder up to Rs863.

Pakistan’s telecom operators have rejected the government’s proposed tax of Rs0.75 on voice calls exceeding five minutes, stating that it is impossible to collect such a tax. They said it would result in the withdrawal of free minutes and bundles.

The Ministry of Finance has directed the National Bank of Pakistan (NBP) to furnish details of four most senior officials from the bank for the position of acting president, after the IHC ordered the removal of NBP President Arif Usmani and BofD Chairman Zubair Soomro.

The Petroleum Division has chalked out a plan to control the shortage of Liquefied Natural Gas (LNG) under which Terminal-II will provide a maximum 600 Million Cubic Feet per Day (MMCFD) regasified LNG during the closure of Terminal-1.

The National Accountability Bureau (NAB) has reportedly given its approval to the Power Division for clearing the pending dues of Independent Power Producers (IPPs) established under the power policy 2002, in accordance with the revised contracts.

The value of mobile banking, internet banking and e-commerce transactions have more than doubled during the third quarter of the current fiscal year (Q3FY21) compared to the same period in FY20, the State Bank said in its latest report.

PSX’s hospitality and taxation troubles this week in Pakistan’s business and economics twitterverse

lot was happening this week, with suggestions to have the PSX learn something from lawn mania, SMEs having a smug moment, Pakistan being treated like an uncool kid, and KFC trolling McDonalds. Ariba Shahid brings you all this and more in this week’s social media roundup.

Just read it again

You can’t sit with us

Remember when you were young and weren’t invited to sit with the cool kids. Well that’s Pakistan right now. Maybe next semester? To be fair and a little bit hopeful, some people do have glow ups later on and become cool. Those cases, however, are not that frequent and usually come as the result of making a conscious decision to improve. Many don’t. In the case of entire countries, well, let us just say they are a little more set in their ways and it takes a tad bit longer.

Pick up please

Honestly, you’ll need to read the tweet at least twice to understand whats happened.

K electric with some poetry

Khurram Schehzad highlights two key issues. One, the new tax. Two, the fact that calling banks takes more than 5 minutes and is nothing but sheer torture.

SOCIAL MEDIA ROUNDUP

No tweet by K electric has ever been this beautiful. While its funny seeing corporate twitter accounts act like humans with their cheesy humor, seldom do we see anyone doing it so effortlessly

Fight for those stocks

KFC vs McDonalds

Sales as clothing stores get pretty intense. Imagine how crazy the PSX would get if people flocked to open up accounts the same way they do at sales. But the PSX needs to make itself more approachable for that. Maybe change their colour scheme? Have more sales? Anything to have people rolling on the floor trying to tear some shares away from each other’s hands. Perhaps they should hand the PSX over to Sapphire for a couple of days.

Treat yourself

Austerity and humbleness is all great and dandy but sometimes you should just spoil yourself. Besides, you need to stay well rested and comfortable to stay fresh enough to make money. You definitely should get that upgrade to business class.

Don’t you just love it when corporations troll each other? This is one of our recent faves where KFC just made the first move. We’re interested to see what comes next from McDonalds. Although, McDonalds has stayed mum in the past over situations like this, particularly when KFC opened a branch close to McDonald’s in Lahore and put up signs on that road where McDonalds started that had an arrow and read “KFC ahead … Keep moving.”

Win for SMEs

Taxes keep taxin

Gup shup is part of the job. Let people have their phone calls especially in a country where internet penetration is low. This tax is regressive towards the poor. We also condemn all of the fun being made at the expense of lovebirds who are in crisis after hearing the news that their late night phone calls will now be even more of an expense than they were before. Their problems are serious and should be taken so. We should also maybe pay some attention to those that don’t have the benefits of Whatsapp.

You often hear people say that banks don’t loan out to SMEs and loan to big companies. This is a smug moment for all the SMEs. Will it stop banks from continuing their behaviour? Unlikely. No matter what they’re never wrong.

SOCIAL MEDIA ROUNDUP

By Meiryum Ali

magine yourself as a parent. You are a good parent (or at least try to be), you adore your child, and you want the best for them. You also happen to have the means to give them a head start in life. No one can or should hold that against you. So when little Abid, or Majid, or Ambreen or whatever you name your child is born, you decide they will get the best of the best. After all, you are the founder and CEO

PSX

of a corporation that has about Rs20 billion in assets. Your take home salary is Rs25 million a year. You’re not just invested in your child’s grades; you’re now the kind of person invested in which school your child should go to. But the problem is that every other parent at your child’s elite school is also wealthy. And they have to be; after all, the annual school fees at your child’s school is upwards of Rs2 million.. So when the parents run into each other and small, private, scuffles and tensions outgrow themselves and come crashing into the real world, it is a recipe for disaster. This is exactly what happened to Ali Jameel and Sabiha Sultan, the respective CEO and director of TPL Corp., a publicly listed company. In the drama that has unfolded, TPL Corp has come head to head with the news channel Bol. What happened between these parties? Two powerful business families had a personal dispute over a position at an elite high school. When one of the families (TPL) decided to complain, the other side (Bol) ran a media campaign against them on their television channel. It is a frightening instance of the personal bleeding into the very public, and what should have been a very private affair ending in talks of arrest warrants and clarifications being given in press releases to the Pakistan Stock Exchange. And it all started with a school.

The Bol connection

ere is what happened, at least according to an official press release sent to the Pakistan Stock Exchange, on June 25. A woman named Ayesha Sheikh was appointed as a trustee of the Karachi American School (KAS). So far so good. The only problem was that Ayesha Shaikh is the wife of Shoaib Shaikh, the owner of Bol News, and this did not sit well with Ali Jameel and Sabiha Sultan. Yes that is right. The same Shoaib Shaikh you are thinking of. The one that was arrested in 2015 and charged with fraud, forgery and illegal electronic money transfers, after the New York Times broke the news that his biggest money making software company, Axact, was nothing but a front running hundreds of fake online education websites. Axact was one of the larger scams exposed in Pakistan, and it was also one of the more embarrassing ones because the news was picked up and broken by a prominent foreign publication. The government was swift to respond, sealing Axact offices in Karachi and Islamabad, and even requesting help from Interpol and the F.B.I. For Sheikh, it could not have come at a worse time. When the news about Axact broke, he was in the process of launching Bol news - a new television news channel that had already poached some of the biggest names in

electronic journalism in Pakistan like it was nobody’s business. Large studios and sets had been created, and two former Presidents (Asif Ali Zardari and Pervez Musharraf) were being given their own shows. It was supposed to be a massive operation. But when the news about Axact broke, the whole empire came crashing down. Kamran Khan, arguably the country’s most famous anchorperson, resigned as the channel’s editor-in-chief and others followed. Despite this, Sheikh soldiered on, and Bol limped across its first milestone and began operations in 2016. While the channel continues transmission to this day, it has several problems. For instance, it does not pay its employees for months on end, even when they come out onto the streets in protest. It has also been the platform for some of the most ridiculous moments (Amir Liaquat cooking on live television in a feud with the late Rishi Kapoor) and ridiculous personalities (both Waqar Zaka and Mathira on the same stage hosting the same show) that Pakistani television has ever seen.

campaign by a non credible news channel Bol TV regarding issuance of purported arrest warrants against our Chief Executive Officer and sponsor, Ali Jameel. This is nothing but a useless attempt to maliciously defame our esteemed sponsors and Chief Executive Officer by the sponsors of Bol TV. In this regard, The Company reserves the right to seek civil and criminal action against the sponsors of Bol News including lodging a formal complaint with PEMRA for running such a malicious campaign by BOL News against our Sponsor and Director.” Furthermore, the other notice repeated: “This is an attempt to defame and malign the reputation of Mr. Ali Jameel and Ms. Sabiha Sultan, and has no involvement whatsoever with the Company or any of the group companies of TPL Corp Limited. The said actions are highly condemnable and results directly out of a personal vendetta against the said personalities.”

Schoolyard drama

ow, to be fair, it was Ayesha Sheikh that was appointed as a trustee of the school, not her husband. And it was her husband, and not she, that was sentenced to 20 years in prison. This did not matter to some of the parents that sent their children to the school. Perhaps some parents thought that the reputation of the channel, and its owner, would rub off on the school, or reflect poorly on the school. That is when several parents, including but not limited to Ali Jameel, and Sabiha Sultan, banded together and wrote confidential letters expressing concern over the appointment. Bear in mind, Ayesha Sheikh also has children enrolled in KAS as well (which would mean that the letters could be seen as direct criticism and an attack on the parents of another child enrolled in the school. At the least, it was enough for Ayesha Sheikh to feel slighted). How do we know about these confidential letters? Because somehow the letters were leaked to Ayesha Sheikh, who filed a private complaint against Ali Jameel and Sabiha Sultan. But now, TPL claims that she through her husband initiated a smear campaign against them on Bol News, which included news about Ali Jameel being arrested. Now, Ali Jameel is a wealthy man, but he does not have a news channel at his disposal. He also has a company whose investors would be deeply alarmed if they saw news that their CEO had been arrested. So to cover their bases, TPL sent out a press release to the PSX in which they would explain the following: “This is to inform the general public that TPL Corp Limited (Company) has come across a smear

Why is trusteeship such a big deal?

ll of this - over a seat on the board of trustees. Typically, trustees for schools usually work in a ceremonial capacity and are given the title as an honorary. So, does it matter who is a trustee of a school? Yes, absolutely, said the company secretary Danish Qazi, when contacted by Profit. “The role of a trustee is quite sacred,” he explained, “The school had asked parents of nominees, what their view on nominations were, and some parents raised reservations on Ayesha Shaikh, citing the history of Axact and Bol. In their personal capacity as parents they have every right. This was a matter of school and parents, it was never meant to be leaked.” In one of the press releases issued by TPL Corp, the explanation they gave for Ali Jameel and Sabiha Sultana sending the letters in the first place was that “the concern through letters, which were written in confidential capacity to KAS by the parents, was a legitimate concern in order to maintain the sanctity of KAS.” It is this idea of “the sanctity of the school” that goes to the heart of why being a trustee is such a huge deal to these parents. Particularly when it comes to a school like the KAS. According to its website, it was founded in 1953, and functions as a selective co-educational day school, which offers an instructional program from Pre-Nursery through Grade 12. ‘Founded to serve American and other expatriate children, Karachi American School has developed into a premier learning institution following an American college preparatory curriculum.’ the website explains. To be clear, there are few actual Americans in the school. The historical reason for

this, according to one alum, is that after the 1990s, most Americans working in Pakistan came alone, without their families and children. This dwindled even further in the 2000s. The school still has some American and other nationalities’ teachers, but most of its student body is now entirely Pakistani. And it is a very specific class of Pakistani children that go there. The annual school fees for a child just starting school is $5112, or nearly Rs800,000. By the time the child leaves high school, the annual school fees have shot to $15,321, or Rs2.4 million. Assuming a child attended the school throughout, that is roughly $200,000, or around Rs32.5 million that one would have spent on school fees alone. Not surprisingly, class sizes are small. Since 1979, the average annual graduating class has been just 35 students. According to the 2020 KAS Profile, almost 90% of graduating seniors went to college in the United States or Canada. As one alum told Profit (only half-jokingly), “The stereotype of a KAS kid is the kind of person who is announced as director of a publicly-listed company when they graduate from college.” Those fees cover some excellent facilities, even by other private school standards in Karachi, including a gymnasium, squash and tennis courts, playing fields, and a swimming pool, all located on 25 acres of prime real estate in KDA, one of the oldest neighborhoods in the city.

KAS is not just any random school - it is where the children of a tiny elite attend. And typically, elite Pakistanis tend to be on the board. For instance, Miftah Ismail, the former finance minister of Pakistan, used to be a trustee of KAS (he is not anymore). As another example, Sima Kamil, the former CEO of UBL Bank, and current deputy governor of the State Bank of Pakistan, used to be on the board of Karachi Grammar School (another private school in the city). And it matters to schools as well who sits on their board. One could perhaps stretch a little and say it matters even more to the Shaikhs. There is little we know about Ayesha Sheikh’s personal financial circumstances, but her husband definitely did not grow up as a child who could afford the fees of KAS, by his own accord. According to a Herald article, Sheikh was the only son among the four daughters of a Sindh High Court lawyer. According to the NYT, he grew up in a one-room house, and he wanted to be “the richest man on the planet, even richer than Bill Gates.” Never mind, instead that he was involved in one of the largest scams in the country’s recent history. If they had not been, then perhaps parents would have not have raised objections. Why prestige positions matter, and who gets to sit on what board, is a conversation about class, wealth, and power that go beyond

the scope of this magazine. However, what we can say is that in the realm of business, TPL Corp said that the misinformation caused a reduction in the market capitalization of TPL Group shares. It is unclear why TPL Corp said this: according to the PSX website, TPL share price has only risen from Rs14.03 on June 21, to Rs16.21 on June 23, to Rs17.04 on June 25, and Rs17.20 on June 28. In fact, this is the best performing share price in the last six months: the share price was hovering around the Rs6 range since February, before spectacularly shooting upwards starting end May, and again starting June 14. The reason for saying this might be because they are planning a defamation case against Bol and want to present their own version of events. Even if the claimed fall in market capitalization never happened, that Bol News aired apparent arrests is cause enough for Ali Jameel and Sabiha Sultan to now take legal action ‘against such malicious prosecution’, which includes filing for damages (because of the alleged drop), and lodging a formal complaint with PEMRA for defamatory material aired. So to recap, a property tycoon is filing a complaint against a media group for defamation, which was allegedly operating on the instructions of the owner’s wife - all over the internal politics of one small school. Parents, these days, we tell you. n

PSX

COVER STORY

By Farooq Tirmizi

bout one in every three cups of tea consumed in Pakistan is using Tapal Tea. As a brand, it is one of the most well-known names in the country, a market leader in a category that touches everyday consumption in virtually every single household in Pakistan. In a country with a thriving capital market, such a company would either already be public, or its choice to remain private would be an anomaly. In Pakistan, however, Tapal’s decision to remain private is entirely within the norm. News hit the wires this past week that Pakistan’s equity markets are on the verge of being downgraded by the global benchmark provider MSCI from its Emerging Markets Index to its Frontier Markets Index. This is as opportune a time as any to ask: what is it about the Pakistani capital markets that keeps some of the country’s biggest, most prominent corporate names from becoming publicly listed on the Pakistan Stock Exchange. Unlike most other pieces that will address this question this week, we decided to use a real case study: Tapal, a company that is probably worth a lot of money and, by some admittedly aggressive valuation methodologies, may even be worth more than $1 billion. (Wait, so if we are admitting that Tapal is probably worth less than $1 billion, is the headline just clickbait? Yes. Yes, it is. But now that we have your attention, please do read on.) What is the story of Tapal and what makes it such an iconic Pakistani brand? What would it be valued at if it decided to list itself on the stock exchange? Why does it choose not to? And how does the decision of companies like Tapal affect Pakistan’s downgrade on the MSCI indices?

The story of Tapal

he tale of this company begins shortly after Partition in Jodia Bazar in Karachi, where the Tapal family began their tea business: importing tea from Sri Lanka and then selling it wholesale in the markets in Karachi. Jodia Bazar is, to this day, one of the largest wholesale markets in Pakistan. It helps that it is located just a few miles from Karachi Port and is located in the city that has the single largest concentration of the Pakistani urban middle class. The founder of the company was Adam Ali Tapal, grandfather of the current CEO Aftab Tapal. The store in Jodia Bazar soon grew as Karachi went from being a relatively minor city in British India to becoming the largest city in Pakistan. The tea business outgrew the store and began marketing itself far beyond the retailers and occasional consumer buyers who would come to the store. It took Aftab joining the family business in 1975 after having received a foreign education, however, for Tapal to go from being a thriving mid-sized business to becoming the household brand name it is today. The foreign educated son returning to shake things up in the family business may be a bit of a cliché, but sometimes it really is true, and it certainly seems to be the case for the Tapal family. The first thing that Aftab noticed and changed was the packaging. When you are competing against the likes of Unilever, with their sophistication and high-quality brand management, you should probably start by at least putting your name on your product, and then maybe making the packaging more appealing to the consumer. The company began expanding in all sorts of ways. It set up a massive factory in Korangi, one of three major industrial areas in Karachi, to set up a packaging plant. Tapal also went beyond the Ceylon tea that was the norm in Pakistan and introduced tea from Kenya. And the company went after both the

major segments of the market: the slightly more affluent urban middle class that preferred granular tea, and the rural market that could only afford the tea dust. Tapal began to make a name for itself as the third name that Pakistanis knew of when they thought of tea. Unilever was still the big name with Lipton, and then there was the other British company in the tea business: Brooke Bond. For a local company to make its name in that milieu was no mean feat. For them to have continued to hold their ground even after Unilever bought Brooke Bond to become the dominant tea player in Pakistan… well, that just takes a lot more than luck. It takes skill and determination.

So how big is Tapal?

n a phrase, very big. As of the financial year ending June 30, 2020, Tapal had gross revenues just short of Rs56 billion and net revenues (after subtracting trade discounts and sales taxes) of Rs45 billion. This is one of the biggest food and consumer goods companies in Pakistan, bigger than many names that are currently publicly listed. It has also managed to retain a market leading position in a segment that is still dominated by a well-financed foreign incumbent with all the capital and financial muscle it takes to stay number one. And did we mention that it has managed to not just grow its revenue at a healthy pace, but also increase its profit margins? Gross margins have gone from as low as 11.5% in 2010 to around 24% for the past five years, meaning that even in as commoditised a market as tea, Tapal’s brand name ensures that it can command hefty margins. This is especially impressive when one considers the fact that the tea is imported, meaning that the volatility of the rupee is a significant factor that could easily dampen the company’s pricing power. That does not mean that the company’s product is something people are willing

Personally, I think it is a good idea. At 2 bps (0.02%) of MSCI EM, Pakistan will continue to be ignored… Since 2010 China’s weight in MSCI EM has gone from 15% to 40%, killing the interest for smaller emerging markets. Today four markets (China, Taiwan, South Korea and India) make up more than 80% of MSCI EM. For the active managers generating 6% alpha from the top four is equal to generating 30% on average from the remaining 28 markets. It is a no-brainer where they should focus Mattias Martinsson, chief investment officer at Tundra Fonder

to pay for, even when prices rise sharply. Intuitively, it makes sense, though. Tea is something most Pakistani adults consume every day and for something in such daily use, you want to trust the quality of the product you will be consuming. Tapal’s brand gives them that trust. One other factor that makes Tapal’s achievement even more impressive: tea used to be categorized by the government as an essential food item and subjected to minimal sales taxes. However, since 2017, tea has been subjected to a full sales tax regime. To have your core product go from facing very little in terms of sales taxes to suddenly having to pay full sales taxes – when you have several informal sector competitors who evade sales taxes – makes the company’s ability to command high margins even more impressive. Brand-building, however, is not all there is to running a successful business. There are operations, supply chains, distribution, and administrative costs, all of which can start rising rapidly if a business is not managing a tight ship. On that front, too, Tapal appears to be a well-run company. Operating margins – what is left over after a company is done paying its suppliers, all employees, all rent, utilities, and other expenses – went from a low of 3.2% of net

revenues in 2010 to 14.1% in 2020 and have been consistently above double digits for most of the past decade. Tapal is not just a recognizable consumer brand: it is a well-run business that is able to not just maintain its profitability, but grow it as it achieves economies of scale. If this was a company that was looking for outside investors, it would find them quite easily.

What is Tapal worth?

e want to state categorically: we have absolutely no reason to believe that Tapal is seeking an initial public offering or an equity sale of any kind. Owing to timing issues, we were not able to speak to the company’s management ahead of the publication of this story, but Profit is not in any way implying that Tapal either needs the equity investment or wants it. They most certainly do not, as far as we are aware. The point of even asking this question is to explore just how valuable one of Pakistan’s best-run private companies could be, as a means of commenting on what is available to public equity investors versus what could be available to investors if the market were deeper, and better functioning.

With those caveats aside, let us dig into our rudimentary valuation for Tapal. To conduct a valuation of Tapal, we looked at its financial metrics – revenue, profits, etc. – and compared them to those of publicly listed food and tobacco companies of a comparable size. We compiled a list of nine publicly listed companies that appear to be most directly comparable in terms of size. They were Pakistan Tobacco Company, Nestle Pakistan, Unilever Pakistan Foods, Frieslandcampina Engro Pakistan, Rafhan Maize Products, Philip Morris Pakistan, Unity Foods, National Foods, and Ismail Industries. In an ideal situation, we would have had a tea company to compare directly, but Pakistan’s economy is too small and has too few players in most markets for that to be available, let alone having a directly comparable publicly listed competitor. The broader category is the best we could do, and for the purposes of this analysis, that is probably good enough. We then looked at those nine companies across five valuation multiples: n Enterprise value to revenue (EV / Sales) nE nterprise value to earnings before interest, taxes, depreciation, and amortization (EV / EBITDA)

COVER STORY

E nterprise value to earnings before interest and taxes (EV / EBIT) n Price to earnings (P / E) n Price to book value (P / B) n

We looked at the valuation of each of these companies based on those metrics as of their publicly traded prices at the close of trading on June 26, 2021. We then compiled the average for the nine companies in question, and then applied that average multiple to the relevant financial metric for Tapal from financial year 2020 to arrive at an estimated valuation for Tapal. Like any valuation exercise, we got a range of values. The lowest was on the basis of EV / Sales, where the peer group had an average enterprise value multiple of 2.6 times most recent 12-months revenue. By that metric, Tapal is worth approximately $556 million. The highest was through price-tobook value, where the peer group multiple was 9.48 times book value, which resulted in a valuation for Tapal of $1 billion. If Tapal were to list itself on the public markets, it would likely find its valuation somewhere between those two numbers. It would be one of the most valuable companies listed on the Pakistan Stock Exchange and the third most valuable food and consumer goods company, behind only Pakistan Tobacco and Nestle Pakistan. (Yes, it would probably be worth a bit more than Unilever Pakistan Foods and Frieslandcampina Engro Pakistan.) So is Tapal worth $1 billion? Probably not, but it is close enough to where it will probably cross that threshold within the next three to five years.

The chicken-and-egg problem

o why even talk about the valuation of a company that has no intention of ever being listed publicly or even being sold to other private investors? Because it represents a core problem that Pakistan’s equity markets face: some of the most attractive businesses in Pakistan

remain private and have no intention of ever being publicly listed. And even those that do become publicly listed tend to remain closely held, which means there is often not enough trading volume in those stocks for investors who may want to buy their shares. It becomes a chicken-and-egg problem: global investors have limited interest in Pakistan because so few of the most promising investments in the country are publicly listed, and so few of them are publicly listed because not enough investors want to come into the market, meaning that the companies that do consider getting themselves publicly listed do not get attractive enough prices to

It becomes a chicken-and-egg problem: global investors have limited interest in Pakistan because so few of the most promising investments in the country are publicly listed, and so few of them are publicly listed because not enough investors want to come into the market, meaning that the companies that do consider getting themselves publicly listed do not get attractive enough prices to come to market 20

come to market. Tapal, for instance, is a cash-rich company. Let us assume the hypothetical scenario in which they do decide to come to the market and list 20% of the company’s shares on the Pakistan Stock Exchange. Assume for a minute that the valuation they receive is around $750 million. So in order to sell 20% of those shares, they would get $150 million. That seems promising enough until you realise that Tapal has very little debt on its balance sheet and that they could raise an equivalent amount in loans from banks while giving away 0% of their ownership. To entice them into the market, the price they would have to receive from it would have to be quite attractive. But in order for that to happen, there would need to be a bidding war for Tapal shares, which means that those with big cheques to write – the international investors – would need to be interested. In order for enough of them to be interested in Tapal, however, they would first need to be interested in the Pakistani market, but because so many companies like Tapal are not listed (and very few interesting companies are publicly listed), most of the big-cheque international investors stay away. You see the circularity of the problem?

TEXTILES

The index downgrade

his is a problem that came to the fore over the past couple of weeks when the world’s leading equity investing benchmark provider – MSCI, Inc. (formerly known as Morgan Stanley Capital International) – announced that it was reviewing Pakistan’s place in its widely followed Emerging Markets index and will downgrade Pakistan to the lower-prestige (and much less followed) Frontier Markets index. What does all of that mean? Briefly, investment management companies all around the world that invest in global stocks tend to use the MSCI indices as benchmarks against which to compare their performance. Each country has its own market index, but if you invest outside your own country, especially if you invest across multiple countries, you probably use the MSCI indices as your benchmark. Why does this matter for Pakistan? Because nearly all of the international investors who invest in Pakistan are the ones who create multi-country investing portfolios and therefore utilise the MSCI indices as their benchmarks. That means that if MSCI suddenly decides that a country no longer falls into one index, investors who benchmark themselves against that index no longer feel the need to buy stocks in that country. Indeed, they may actively seek to sell what they do own there. Why is the Emerging Markets index a bigger deal than the Frontier Markets index? Let us give you a very simple set of data that will answer that question. There are currently $14.5 trillion worth of assets that use the MSCI indices as their benchmarks. Most of those track developed markets, but about $1.8 trillion of that tracks the MSCI Emerging Markets indices. The equivalent number for the MSCI Frontier Markets index? About $20 billion. The downgrade, in other words,

matters quite a bit. And, embarrassingly for Pakistan, this is not the first time that Pakistan has been downgraded from the Emerging Markets index to the Frontier Markets index. MSCI first started including Pakistan in its indices in 1993, and included Pakistan in the Emerging Markets Index in 1994. However, after the Karachi Stock Exchange stupidly decided to effectively shut down in August 2008 in the face of a market crash, MSCI kicked out Pakistan from its Emerging Markets index in December 2008. It took nearly a full decade of effort by Pakistan’s capital markets professionals, but by June 2017, MSCI was willing to reclassify Pakistan into the Emerging Markets index. Now, however, it looks like Pakistan’s place in the Emerging Markets index will be short-lived, and the country may get kicked out as soon as September of this year.

The better index?

he downgrade is certainly bad, but there are those who believe there is an upside to this. The most sophisticated of these is Mattias Martinsson, chief investment officer of Tundra Fonder, the Stockholm-based investment management company that is one of only a handful that operates a Pakistan-specific fund. In a note he published on LinkedIn, Martinsson argued: “Personally, I think it is a good idea. At 2 bps (0.02%) of MSCI EM, Pakistan will continue to be ignored. The theoretical weight in MSCI FM would be 2% but Pakistan would probably become a 6-10% weight given its current liquidity and the theme it represents.” He went on to suggest that the EM index is too China-dominated for any of the smaller countries to get any interest from global investors. “Since 2010 China’s weight in MSCI EM has gone from 15% to 40%, killing the

interest for smaller emerging markets. Today four markets (China, Taiwan, South Korea and India) make up more than 80% of MSCI EM. The fifth largest market (Brazil) stands at just above 5%. For the active managers generating 6% alpha from the top four is equal to generating 30% on average from the remaining 28 markets. It is a no-brainer where they should focus. Smaller EMs like Philippines, Indonesia, Egypt etc are forgotten. The fact that index funds have become significantly more popular has of course aggravated the focus on the large EMs further. Neither actively managed funds nor index funds (for more obvious reasons) have incentives to become experts in small emerging markets.” He certainly has the numbers on his side. Even if you look at just the index values alone, the Frontier Markets index looks more attractive for Pakistan. At 0.02% of an index tracked by $1.8 trillion in assets, Pakistan’s share of those assets comes out to a paltry $360 million. MSCI, however, said that if Pakistan moves to the Frontier Markets index, its share of that would be 5.8%. Assume that only $20 billion track the MSCI Frontier Markets index, that puts Pakistan’s share of the global index-linked investing market about $1.16 billion, or about 3.2 times higher. So, what is better? What would entice companies like Tapal to list themselves on the market? The specialist investors who manage those Frontier Markets funds would certainly appreciate it more, and they can clearly allocate more of their money towards Pakistan to justify a good price. But ultimately, it will take the trillions sitting in Emerging Markets funds and beyond to get that bidding war going that will offer the truly attractive price to Tapal. The solution, then is to not just make it into the Emerging Markets index, but also have a reasonable weight there. But for that, we would first have to stay in the index, and for now, that looks increasingly difficult.n

COVER STORY

The saga at HUM continues With a second straight year of losses and fall in revenue, things are still not as bad as they could be

fter a full year of waiting, the HUM Network has finally released their annual report for the financial year 2019-20. A glance at the report might indicate that the network delayed releasing the report for so long because it shows how the company has now faced a second consecutive year of straight losses and a lower revenue than before. However, things are not always what they seem, and while the HUM report is no glowing recommendation, it also shows that the company has managed to control some of the outrageous losses it could have had instead. To recall, Hum Network’s revenue

Hum Network

reached a peak in 2017, at Rs4.6 billion. It began to decline to Rs3.9 billion in 2019, and then Rs3.7 billion in 2020. Net income also fell from a peak of Rs1 billion in 2017, to Rs729 million in 2018, to a loss of Rs536 million in 2019. Now, however, the loss stands only at Rs113 million much smaller than what others had previously predicted. What happened to this once glowing success of a company, that it should now be forced to be content with ‘at least the loss is not as bad as before?’ The story of the HUM Network over the past few years has been no less than any one of the many dramas that the network has gotten so good at putting up regularly.

To recap, Hum Network is entirely the brainchild of Sultana Siddiqui, who is the sister of investment banker and financier Jahangir Siddiqui. Hum network fundamentally is a product of three key factors: the first, her own career in media; second, her brother’s financing; and the third, former president Musharraf. On the second point, Sultana joined Pakistan Television (PTV) as a producer in 1974 in SIndhi programming, before moving into Urdu programming in 1981. She then had a long career at the state-owned broadcaster (effectively the monopoly on entertainment in Pakistan until 1992). This is where former president Musharraf comes in, whose government

allowed private television channels in Pakistan starting in 2001. That is when Sultana began contemplating starting her own television network. And who did she turn to for help? Her brother, Jahangir Siddiqui, who had become by this time one of the richest men in Pakistan, and certainly one of the richest self-made billionaires in the country. He was in a comfortable position of being able to help Sultana launch her television network, which she did in 2004. She launched her entertainment network with the name Eye Television (later renamed Hum Networks), and the company was listed on the Karachi Stock Exchange shortly thereafter. In the years since, Hum Network has consistently produced some of Pakistan’s most famous television dramas. Almost every Pakistani can remember the national obsession with the 2011 show Humsafar, starring icons Fawad Khan and Mahira Khan. It was the channel's biggest hit drama generating Rs200 million for the company in revenue on its first television run, the highest for any Pakistani television show until that time. In the last decade, the company consistently ranked at number one or number two in the ratings. Today, the company is run by Duraid Qureshi, Sultana’s son, while his wife Momina Duraid is the CEO of Moomal Productions. But everyone knows that it is really Sultana who calls the shots, still. She is in part helped by her reputation in the TV industry from her PTV days, and also with her vast network of contacts in Pakistan Electronic Media Regulatory Authority (PEMRA) - key to running a successful TV show. Yet all the contacts in the world could not stop the events of 2017 - and why there is such a clear break in the company’s finances,

particularly when expressed in charts.In 2017, the Imran Khan Administration came into office and slashed the government’s advertising budget. The federal and provincial governments are the biggest source of advertising revenue for television news channels and the print media, accounting for up to a third of revenues for the industry before the recent cuts. Hum TV was still sheltered to a degree, compared to other channels, as a good chunk of its advertising comes from consumer goods companies. But this explains the drastic shift. And to top it off, the year 2019 was not kind to the company either. The first half of 2020 saw a wave of lockdowns, which meant that the companies; film distribution units practically collapsed (as cinemas essentially shut down). The only reason the company still managed to pull through, is because it drastically

cut costs. In 2019, cost of production stood at Rs3.4 billion, practically close to revenue at Rs3.9 billion. In 2020, cost of production was slashed to Rs2.7 billion, allowing some breathing room for other expenses. Its why operating profit stood at Rs105 million in 2020, compared to the loss of Rs311 million in 2019. Instead, what costs the company was their financing costs, which jumped from Rs143 million in 2019, to Rs241 million in 2020. Ultimately, this is what led to the loss after tax of Rs113 million in 2020. Will the company see profits again? It is aggressively promoting its news channel, which is competing with existing, established giants. But it remains to be seen if the company can continue to keep a check on costs of production - particularly considering Covid-19 pandemic is still not over.

Semiconductor chip shortage to impact Pakistan

The global shortage has already delayed deliveries of middle to high end cars in Pakistan

he first commercially available semiconductor chip in the world was manufactured in 1971, by Intel (a company which itself had only been created a few years prior, in

1968). Since then, demand for the chip has exploded - as the world discovered new ways to use the chip: computers, medical appliances, gaming devices, and yes cars. There’s only one problem: there’s a global shortage of the chips, and that’s

The slowdown in production is apparent by observing the delays in order fulfillments by HCAR and INDU (additional 2-3 months) despite lower utilization, although the order book is healthy. The average monthly sales of Yaris and Corolla in the first eleven months of fiscal year 2021 were recorded at 3,901 units, or 18.5% lower than the peak of 4,788 units in fiscal year 2016 Sarosh Saleem, analyst at AKD securities

having a ramification on major automobile companies. And as Saraosh Saleem, analyst at AKD Securities pointed out in a note sent to clients on June 17, that also has ramifications on Pakistan. But first: why is there a shortage? It turns out, it is notoriously difficult to create a semiconductor chip. A recent graphic article in Bloomberg pointed out several design hurdles: to create a semiconductor chip, there has to be essentially no dust in a room, which means that there are very few humans (and they are usually covered in head to toe protective equipment). Instead, factories involve robots as much as possible. To create a semiconductor requires at least 57 different types of specialized equipment. No wonder then, that the average costs of an entry level factory is $15 billion. There are three global companies - Intel (in the United States), Samsung (Korean) and TSMC (Taiwan) that account for most of the world's sales of chips. These three companies are able to dominate because they have already made the requisite large investments (remember, Intel has been around since 1968). A typical factory for these three costs $20 billion. The absurdly high and prohibitive costs

mena that it is actually very hard for new players to enter the market. And that constricts the supply of manufacturers. The only problem is the demand for semiconductor chips has boomed - particularly in cars. As an example chips are used in vehicle electrification, safety and driver assistance, connectivity, switching, amplification and energy conversion. The shortage was inevitable, but Covid-19 made it worse. The pandemic meant a surge in sales of electronic devices, as everyone stayed home, and also a snowballing of electronic content in cars. To top it off, Taiwan, which supplies two-thirds of semiconductor chips globally, received 60% less than the average annual rainfall so far in 2021, causing reservoir levels to drop. There just isn't enough water in Taiwan, which is a problem, because the semiconductor industry requires huge amounts of very pure water for cleaning at each stage of manufacturing. All of this to say that the prices of semiconductors have shot up - by 20.3% in 2020. In fact, the entire industry grew by 10.8% yearon-year to $464 billion. And the trend is set to continue: the prices in 2021 are expected to remain on the higher side, and the industry is

expected to increase by 12.5% to $522 billion. The price surge and shortage have caused a disruption in supply chains around the world, impacting the production of global automobile companies like Ford, Volkswagen Jaguar and Land Rover. According to Saleem, the global shortage has had a trickle-down effect on the production of the local auto industry, causing a slowdown especially in the luxury SUV and 1300CC+ sedan segment in which the use of semiconductors chips is higher. “The slowdown in production is apparent by observing the delays in order fulfillments by HCAR and INDU (additional 2-3 months) despite lower utilization, although the order book is healthy,” explained Saleem. According to him, the average monthly sales of Yaris and Corolla in the first eleven months of fiscal year 2021 were recorded at 3,901 units, or 18.5% lower than the peak of 4,788 units in fiscal year 2016. Meanwhile, the average monthly sales of Civic and City is 2,040 units during the same period, compared to the peak of 3,568 units in fiscal year 2018, or a drop by 43%. Tangentially, there has also been a rise in prices for cold rolled steel and hot rolled steel, which has increased the cost of production for local manufacturers. According to Saleem, the supply of chips will remain under pressure till the end of 2021, but the slowdown in production will last well into fiscal year 2022. “Assuming the avg. price and margins to remain constant in FY22, an assumption of 5% decline in volume of INDU will result in a decline in EPS by PkR7.6, from PkR156.6 to PkR149,” Saleem predicts. He pointed out the 1300CC+ segment as one to watch out for, as the new Honda City and new Toyota Corolla which are expected to release in 2022, will support sales momentum in the long run. Additionally, he was optimistic on Pak Suzuki, mostly because its small cars simply don't have as much electronic content, and therefore will not be as impacted as other companies. n

AUTOMOBILES

OPINION

Ali Asad Sabir

Can online petitions signing bring PayPal to Pakistan?

The short clarification is that working in Pakistan is anything but a decent business alternative for PayPal at this moment. Following different reasons let us rapidly trust them

side from the political turmoil, Pakistan is a nation brimming with exceptional talent and possibilities. Batches of top-notch freelancers across the country and the e-commerce market are growing. A new online firm is launching every other day. The availability of a reputable online payment processor is a basic feature that Pakistan’s online industry needs. Without which, most entrepreneurs’ efforts are rendered meaningless. Freelancers must rely on the bank to bank local transfers, pay orders, and cash on delivery for their payment procedures. A few Pakistani banks have attempted to address this by offering online payment alternatives, but these are prohibitively expensive for startups and mid-sized businesses, and the procedure is extremely cumbersome. Several attempts have been made by the officials to bring this initiative to the country to relieve the oppressive difficulties which may ease their workload, but all are in vain. Surprisingly, Extreme Commerce has started a campaign to persuade PayPal to expand its operations in Pakistan by circulating an online petition across the country. He expressed his displeasure on social media, encouraging Pakistanis to file a complaint using the

Ali Asad Sabir is a former research fellow at the Centre for Security, Strategy, and Policy Research at the University of Lahore. He can be reached at aasad6889@gmail.com COMMENT

Citizen Portal App. But, will a queue of petition signatures bring PayPal to Pakistan? PayPal is a digital payment firm that enables people to quickly trade money over the internet. With 361 million active users globally, the firm is completely operating in over 190 countries. With Amazon’s return to Pakistan, the freelancing community is calling for the development of a Pakistani PayPal extension. Pakistan has received some positive news in recent weeks, particularly among the youth. Amazon has announced that Pakistan would be added to its vendor list. But, Amazon’s expansion into Pakistan is futile since PayPal, the most trusted and secure means of online payment, does not operate in Pakistan. Until now, the Pakistani freelancing community’s main problem has been the unavailability of PayPal. Almost all online job boards provide PayPal as a payment option. Some only take PayPal. Payoneer, Wise, and Union Pay are some of the other PayPal alternatives. PayPal, on the other hand, stands out among its competitors due to its user-friendly interface, timeliness, and interoperability. Because they only trust PayPal for online transactions, most excellent clientele refuse to engage with Pakistani sellers. PayPal’s disappearance is felt particularly keenly among the online working community. PayPal’s arrival in Pakistan piqued the interest of exporters, freelancers, and IT firms looking for a simple way to make payments. Nonetheless, when people voice their disappointment with PayPal’s reluctance to work in Pakistan, the question should be posed: how could we result in these present circumstances? For what reason worldwide installment entryways like PayPal, Google Pay, or Stripe are not accessible in Pakistan? Notwithstanding, the fact that they are accessible in different nations. Furthermore, more essentially, the organizations in the planet’s fourth-biggest freelancing nation are not permitted to send solicitations to unfamiliar customers that they can pay with a self-contained instant. The short clarification is that working in Pakistan is anything but a decent business alternative for PayPal at this moment. Following different reasons let us rapidly trust them.

Digital payments are a crucial component of Pakistan’s digitalization. One of Pakistan’s biggest issues today is the attitude around the digital economy, as well as our leadership’s low priority for it. Unfortunately, the advanced environment has consistently been and keeps on being a sideshow. Pakistan should make a more extensive environment to captivate a professional PayPal to enter the market. For anyone maintaining an online business and wishing to pay a merchant in, say, China, State Bank accommodates a 35 percent rebuilding of money for exporters, however, the interaction is intricate and makes sending cash abroad troublesome. Our administrative ethos is additionally a factor in our present position. In the event that PayPal needed to work in Pakistan, it would need to pay a $2 million permitting expense to the State Bank of Pakistan. Maybe the world would not see any semblance of Elon Musk and Peter Thiel, who established minuscule organizations like PayPal to smooth out installments in the US if similar laws applied in the US. Indeed, even a $100 million exchange a year couldn’t legitimize a $2 million permitting cost for a systematic PayPal, which makes somewhere in the range of 2% and 3% on exchanges. Most organizations would be put off by this. Just as tough guidelines forced by the FATF and the consistent fear of monetary misrepresentation. While the government might address this issue in a number of ways, such as by establishing an indemnity fund for these businesses, doing so would need a significant amount of work on the part of the government.

For anyone maintaining an online business and wishing to pay a merchant in, say, China, State Bank accommodates a 35 percent rebuilding of money for exporters, however, the interaction is intricate and makes sending cash abroad troublesome After everything is said and done, PayPal can just capacity as an exchange firm. PayPal can’t utilize its foundation for individual-to-individual exchanges or installments in nations like India because of tight laws. PayPal is the sole method to send cash to Indian banks. Customers in Pakistan do not have access to a common system or platform via which they may send money to any bank in the nation. PayPal may connect to any bank to deal with installments without acquiring a permit in countries like India and the United States. PayPal will require a permit just as a pledge to exacting monetary guidelines to offer a similar help in Pakistan. Pakistan’s digital payment environment needs substantial improvement. This is the possible solution to coordinate our “genuine cash” economy into the tax assessment framework. It will permit business visionaries, shippers, and specialists to work together locally. Yet additionally worldwide, expanding our fares. The objective is to make it workable for our specialists as well as merchants in huge urban areas to build up online business sites and offer their products to the remainder of the globe. Accomplishment in the advanced

installment field, for example, expanded charge card utilization, online installment clients, online traders, bigger volumes, and the achievement of other installment passages may allure PayPal to come to Pakistan. These substances will keep on opening organizations in the United States, the United Kingdom, or the United Arab Emirates to work for their organizations from outside the country. We don’t extend our advanced impression since they can’t get installments from clients and pay their merchants abroad that we don’t grow our computerized impression. The cost is high, and the cash hasn’t gotten back to Pakistan. Pakistan is an outcast in the international digital market due to the lack of businesses like PayPal, Google Pay, and Apple Pay. Pakistan will not be accepted as a trustworthy international market entity unless it is financially compatible with the rest of the globe. Now that Amazon is here, the inclusion of PayPal may open up all of the other platforms that Pakistani service providers and dealers have been wishing for. No optimism can be connected with a Pakistani PayPal chapter by signing petitions and running online campaigns unless we see some activity in the pertinent departments. n

COMMENT

By Taimoor Hassan and Shahzad Paracha

hen Finance Minister Shaukat Tarin announced that the government was imposing an additional tax of Rs0.75 on each call exceeding the 5 minute duration during his budget speech, it took a moment and a half for it to set in how insidious the larger implications of the tax could be. The initial reaction, as with most things these days, were jibes on twitter. People joked how the tax would only really be worrying lovebirds with long calls to make regularly, and how they would now have

to switch to WhatsApp and rely on the effectiveness of their Wifi connections. This then prompted another thought - the tax would most disproportionately affect those that do not have Wifi connections and Whatsapp. That means if a rural migrant labourer in Lahore calls his family back home for more than five minutes, they will be charged this extra tax because they either cannot afford a smartphone or do not have a stable internet connection to call over platforms like Whatsapp. Now, the government hopes to collect an estimated Rs20-30 billion through this tax. The first problem is that they are trying to milk this money disproportionately out of segments that are already pressed financially. Then there is the problem that the tax has thrown a spanner in the way the entire tele-

com industry works in Pakistan. Phone users in Pakistan are used to buying packages and getting free minutes, and once again, it is people on a budget that rely on these packages. The same concerns were conveyed by the telecom industry in a letter to the finance and IT ministers, in which they outrightly called the additional tax ‘unworkable’. The industry says it is almost impossible to implement the additional tax in their billing cycle, it will fundamentally change the consumer behaviour and will distort the service model of the telecom industry. Furthermore, it was stressed that the additional tax would bring a disproportionate tax burden on the poor and that will bring ‘extreme desolation and distress’ to them. The problem here is that while the tax is definitely badly affecting the poorest segments of society, it has also backed the entire telecommunications industry into a corner, and will fundamentally end up changing consumer behaviour. This is how.

Telecom’s hue and cry

“T

he demand in this segment is highly elastic,” said a source in the industry. Put in simpler words that don’t make you shudder from memories of economics class induced trauma, this means that if prices rise in the telecom sector, then the demand will fall at a significantly higher rate than it might for other products or industries. A slight change in the price will significantly change consumer behaviour and consumers in this segment are responsive, and used to, when the prices are lower. According to the recent report published by the Pakistan Telecommunication Authority (PTA), in Pakistan, the average revenue per user (ARPU) per month in the telecommunication industry is low and the market predominantly is prepaid subscription-based where subscribers enjoy the flexibility of altering their usage patterns in response to any price fluctuations introduced by operators. The telecom industry’s ARPU is composed of revenue from voice services, which

Then there is the problem that the tax has thrown a spanner in the way the entire telecom industry works in Pakistan. Phone users in Pakistan are used to buying packages and getting free minutes, and once again, it is people on a budget that rely on these packages dominates as the top revenue source for the industry, and data services. The report notes that the service providers face challenges in maintaining their ARPUs and the cellular mobile industry ARPU per month (voice+data) stood at Rs214 in FY2020. The revenue was 10 per cent less as compared to the preceding year. “The industry data ARPU stood at Rs240.5 in FY2020 as against Rs262.3 during FY2019,” the report reads. As the report notes, the average revenue per user dropped in response to the decrease in prices introduced by operators during Covid-19. While the revenue decreased because of drop in prices, there was a rapid increase in subscriptions. Here’s the worse part: although a 10 per cent decrease in total average revenue per user occurred because consumers shifted away from traditional voice services and moved to OTT (over-the-top) services like WhatsApp, Zoom and Skype that could all be accessed directly via internet, there was an 8 per cent decline in average revenue from internet data service as well that can only be justified with reduction in prices as data usage increased by 77 per cent. Now, the industry revenue has been shrinking and the consumer is price sensitive. It makes sense then that all the telcos have offered the lowest possible prices, introducing different packages and bundles and free minutes to keep services attractive for users. Any additional taxation is likely to affect the package prices but the telcos are tied here that they are faced with the tough option of passing on these taxes to consumers. To maintain their already shrinking ARPUs and because of the price sensitive nature of the service, telcos would have to keep the prices intact and absorb the additional taxes to

Now, the industry revenue has been shrinking and the consumer is price sensitive. It makes sense then that all the telcos have offered the lowest possible prices, introducing different packages and bundles and free minutes to keep services attractive for users. Any additional taxation is likely to affect the package prices

avoid any change in consumer behaviour: an option they would be unlikely to resort to because almost all the telcos suffered losses during the Covid-19 period. For some perspective, Jazz, which has the highest market share (37 per cent) in terms of number of subscribers on its network, made a profit of Rs36.8 billion in 2020. This was 7 percent less than the year before. Meanwhile Telenor, with the second largest market share at 27 percent, made a profit of Rs4.1 billion which was 79% less than the previous year because of a massive subscriber loss. Zong made a loss of Rs3.6 billion for the year 2020, down from a profit of Rs12.9 billion in 2019. Zong’s market share is 21.9 percent with a subscriber base of 36.7 million. According to an official from Ufone, the industry prices are structured to offer low prices to consumers. For instance, there are bundles that would cost only Rs2 or Rs3 for the day. “If a consumer on these bundles makes even five calls that are beyond 5 minutes in duration, the taxation would be higher than the price of the package,” they say. It is quite clear by now that this new tax has done a number on the telcos in Pakistan. However, one of the claims they have been making is that the tax is virtually uncollectable and implementation is the reason they cannot go through with it. In reality, they are wrong about this not-so-little detail. According to the FBR, the telcos have softwares which are sophisticated enough to implement new charges. A source in the industry also said that implementation of new billing was going to be difficult but doable. “The problem is that there are certain voice call packages that we have yet to figure out how to charge. For instance, if a person has bought a voucher and subscribes to a package and after subscribing, his account balance is nil, how do we charge that customer for the calls, which went beyond five minutes, that he made using the package minutes. Should he have a negative balance? We still have to figure that out,” says an official from one of the telcos. “On the same note, for the users that have positive balance, we can give him alerts during calls but that is going to create nuisance for him. We are still trying to figure out what can be done,” he adds.

TELECOMMUNICATIONS

The scope of taxation

hile the measure has been announced and passed through the lower house of the parliament, there’s a discrepancy as to how much can potentially be collected through imposing additional Rs0.75 on calls above five minutes. From what the Federal Board of Revenue (FBR) told Profit, the government is planning to collect an estimated Rs20-30 billion through this measure. However, officials in the telecom sector believe that only an estimated Rs12-15 billion can be collected through this measure, though calculating the final numbers is going to be a mammoth task for the telcos themselves due to the complexity of analysing consumer behavior and quantifying it to estimate taxes. The problem is compounded because the scope of taxation has been estimated by the current behaviour of the customers, on rates that are presently in place. While individual telcos refused to share exact volumes of calls that were below 5 minutes or above 5 minutes and the most common durations of calls for us to reverse calculate and make some sense of the estimates of how much can potentially be collected, the telcos said the whole calculation exercise could be in vain because when new charges are in place, consumer behaviour will fundamentally change and that could turn all calculations upside down. For instance, people can learn to disconnect calls before 5 minutes and then redial again, which could significantly increase the

number of calls above 5 minutes. That reduction, however, is not even known to telcos, or at least that is what they tell us, because there can be no accurate prediction right now of how consumer behaviour could be after this tax is imposed. “We need at least 12 months to figure out consumer behaviour. There is significant ambiguity right now as to how things will change. Nothing can be said concretely right now,” said an official from Telenor. Though individual numbers were not shared, sources in the industry told Profit that industry average is 8-10% of the calls that are below 5 minutes. While the FBR has planned to collect Rs20-30 billion, and telcos estimate tax collection of Rs12-15 billion, according to a source in the telecom sector who is a consultant to the telcos and the PTA, the potential of tax collection through this measure is not in billions of rupees. It's in the millions of rupees. According to the source, a cellular service subscriber on average consumes 260 to 270 minutes per month. Citing a research conducted on the telecom sector which was furnished to the PTA, the source says that the APRU on calls was in actuality even less than a dollar after doing certain adjustments in the calculations and the revenue from voice calls for 2020 was approximately Rs115 billion. The revenue, however, will be falling to only Rs50 billion by 2025, the source said, which is why it was concerning that taxes had been imposed on a service that is declining in usage. Which is why it is also reasonable to argue that the FBR perhaps did not do its

homework and levied a tax because it just had to get some taxes from somewhere. Profit reached out to the FBR for comment on how the number, Rs20-30 billion that the Board plans to collect through this measure, was calculated. No response was received, however, till the filing of the report. On the contrary, the telecom industry’s revenue from internet data packages would be enhanced as telcos would be collecting Rs500 billion by 2025 which was Rs210 billion in 2020. Tax on data was earlier imposed but later withdrawn. “You collect taxes on services that are progressing. Here the opposite has happened,” said a source. As per the source, by 2025, 80 percent of the cellular subscribers would be using data for calls against just 20 per cent who would be using voice service for calls. “As it stands, it’s absurd to impose tax on voice,” the source added. So here we have an FBR that imposed taxes on a service which according to the source was not the right thing to do. Secondly, the FBR’s estimates are out of sync, which goes on to say that the FBR perhaps did not know what it was doing. On the other hand, PTA also did not respond to our queries and neither did they provide any data of calls or calculations done to work out the tax collection number. Almost all the telcos Profit reached out to refused to give any concrete statements, saying it was too early for them to say anything and they were also waiting to see how it was going to play out. n

TELECOMMUNICATIONS

OPINION

Mehwish Aslam

Three eCommerce ideas gaining mainstream traction in Pakistan The pandemic led boom in eCommerce has changed a lot

he pandemic transformed the world of e-commerce irrevocably. Where many industries hit rock bottom, some sky-rocketed to new growth levels. As lockdown and curfews became the new normal, more and more people shifted to purchasing items online, hence raising the eCommerce market share by 35% between Q1 FY 2021 vs FY Q1 2020. Global forecasts show that by 2040, 95% of all retail sales will be made online. Similarly, where global growth used to be driven by a domestic buyer buying from a domestic seller, recently purchasing from foreign sellers gained traction as the share of buyers climbed from 15% to 21%. This increase in buyers demanded that all businesses make tough decisions, adapt, and most importantly think on their feet.

Mehwish Aslam is building a universal payment solution called bSecure and can be reached on mehwish.Aslam@bsecure. pk for consultation on accelerating eCommerce go to market across all B2C product categories COMMENT

The success of e-commerce platforms is based on the fact that consumers desire comfort and ease not just as a fashion trend but also in their shopping experience. After COVID-19 became the new normal E-retail outlets were the first to realize change; swiftly shifting from office wear to casual wear as the consumers in developed economies started Work from Home. In the coming months of lockdown, they served consumers with comfortable, friction-free shopping. Next, it was the furniture industry’s turn. While it usually saw its peak in the wedding season, it also found a new opportunity as people started putting up their home office and workstations and looked for reasonably priced tables and chairs. The third industry that simultaneously adapted was the delivery services. They provided hassle-free deliveries as the demand for the best and healthiest products and the trend for home-cooking rose. While some stores went online using social media platforms like Whatsapp Business, others went out of business! All this evolution led to three key trends: i) the rise of social commerce, ii) the advent of quick or now commerce, iii) and finally the arrival of headless commerce.

The rise of social commerce

ocial commerce is a subset of e-commerce that uses social platforms to enable sale transactions, by allowing individuals and organizations to buy and sell products within the platform. This model moves social media beyond its traditional role in the discovery process by encouraging users to complete the

entire purchase process without leaving their preferred apps. Research suggests that individuals use social media to get advice and reviews from trusted sources before making a purchase. Hence, any brand that is “advised” more often than others can gain the trust of a customer over other retailers. These benefits and many more have made social commerce a growing portion of a company’s marketing-driven revenue. According to The State of Social Media Investment Report, about eight in 10 businesses expect to be selling their products or services via social commerce within the next three years. In 2020, Facebook, Instagram, and Pinterest launched revamped social commerce tools to help retailers streamline online shopping experiences amid the pandemic. This model is beneficial because it provides a ready-made audience for brands looking to market online. Every day more and more users join Facebook, Instagram, WeChat, TikTok, and other social networks creating more and more users that can become potential customers. The icing on the cake however is that the interaction of a brand is based on the customer’s social behavior on the platform, this allows organizations to streamline their communications and avoid interacting with irrelevant audiences. As more people shop through screens, the chances of cart abandonment inevitably go up. Hence, the key determinant of a business’s conversion rate has become design seamless checkout journeys that minimize drop-off points. The ease of buying from social media platforms means that customers do not have to navigate away between the discovery and purchase stages. Social shops can also serve as a focus group. Advertisers can collect instant feedback and listen to messages directly which would be lost in translation between the many stakeholders involved. Brand engagement on these platforms can also help in optimizing search ranking by directing more traffic towards your social media pages. Since social media platforms like Facebook generate their own traffic, the cost of customer acquisition for businesses decreases. Easy and seamless checkout processes result in higher conversion rates, higher average sales, more frequent sales, better reviews, and even more referrals. Measuring the success of social commerce campaigns is a matter of tracking retweets, likes, shares, and clicks. Another indicator can be the amount of people that decided to click on your shoppable ads. Shoppable adverts have checkout capability which triggers when a customer clicks the “shop now” or “buy now”. These buttons enable customers to make instant purchases.

This model is beneficial because it provides a ready-made audience for brands looking to market online. Every day more and more users join Facebook, Instagram, WeChat, TikTok, and other social networks creating more and more users that can become potential customers Headless Checkout

n a traditional online shopping experience, a customer lands on an ad or email and is then directed to a website. After locating the product they saw on the ad (God help if the website is not mobile optimized), they are directed to Checkout. 70% of people drop off here and, if somehow the customer makes it through the checkout, a purchase is finally made. The journey can be as short as 8 clicks or as long as 13 clicks, bear in mind here that every click is an opportunity for the potential customer to change their mind. It’s no surprise then that the current check-out processes are ineffective and increase the risk of cart abandonment. Take those unnecessary clicks away and bring your customer to what we call a headless checkout. Here a customer clicks the ad, link, image, or whatever media is on display and is directed straight to checkout and for instant purchase. It separates the purchase and payment experience from the company’s store entirely. With headless checkouts, buyers can make purchases from virtually anywhere. bSecure is a pioneer in the headless checkout journey in Pakistan. Their first campaign in April 2021 with Reciktt’s “Veet Men’s Cream” gave a conversion rate of 3.8% vs an industry average of 1.2%1.3%. How did they achieve this? It was not sorcery but the magic of removing needless redirects and building a quick seamless journey in just 3 clicks. Now imagine the power of social commerce with headless checkout capability wrapped in a delightful customer experience with almost immediate delivery. Quick commerce or Q-Commerce turns this dream into a reality.

Qcommerce

-commerce is the future of online retail operating on the exciting edge of innovation in delivery. Q-commerce stands for quick commerce – meaning consumers enjoy ultra-fast delivery service and have their goods in under an hour. Delivery Hero, founded in 2008 was one of the first food delivery apps and now delivers household goods to customers’ homes in less than half an hour, often

even faster. During lockdowns and curfews, customers had no choice but to look for safe, reliable, and swift options. PandaMart, Bykea, and Careem services, as well as other etailers like “jaldi saman” or “24seven.pk” and hypermarkets like Carrefour all, introduced same day delivery and some even provided ultra-fast 60 minutes delivery. Currently, Pandamart delivers some items in 25 minutes which is valuable for customers because it means that it is quicker to order in than to go out. This gears the industry towards customer’s ease and convenience and is also encouraging brands to get on the bandwagon of instant gratification. With rising customer expectations, we are not far from the time when the concept of quick commerce will be a norm and only those that can adapt to this new normal will survive, unfortunately as 2020 showed, the rest will go to dust.

Trends to keep an eye out for

1. Dark stores, where a former supermarket space is converted into an e-commerce fulfillment warehouse for online demand, such as those used by Pandamart by Foodpanda, Airlift, and Cheetay. 2. Plug-and-play solutions coming to the rescue for headless commerce to scale. 3. Omnichannel businesses built on a single platform that connects workflows and data sources, as well as manages all the sales channels in one place with third-party integration options. E-commerce is an indispensable part of the retail market that has gone under substantial transformation since the pandemic hit. As digitization increases, consumers from all over the will be able to enjoy an online shopping experience. This opens endless doors of opportunity for brands, marketers, and sellers to improve their existing processes and make them fit the virtual bill. The true solution needs only two simple things; an idea or product which truly solves a problem and secondly a streamlined purchase journey - one which makes the purchase process easy and starts where the customer is most active.n

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