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CONTENTS

07 Not much has changed at Mitchell’s. Why then is it amongst the best performing stocks? 11 Is Malik Riaz’s House of Cards about to come tumbling down?

15 15 Why can’t the government sell one of its most sellable assets? 19 Why can’t the government sell one of its most sellable assets? 23 Record-breaking year expected for Pakistan’s rice exports; is that a good thing?

24 PSX gives compulsory buyback direction to Dewan Auto. What does it mean for the company and its shareholders?

Profit

25 PIA pays $13mn to reclaim aircraft stranded for two years

Not much has changed at Mitchell’s.

Why then is it amongst the best performing stocks? Mitchell’s auditors think that the company might have to shut down. The market thinks otherwise By Saneela Jawad

ypically, you buy the stock of a company which you think is doing well. If company X announces it has made a lot of profit, more people will buy the stock, inflating the share price. Similarly, if it has made a loss, the share price will fall. Which is why one pays attention to when the inverse is happening: when a company has been publicly making losses for years,

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and yet its share price seems to be soaring. Thus is the case with Mitchell’s. Whether it’s jams or beverages, Mitchell’s has been a ubiquitous brand for generations. It has also been notorious for the last few years for failing to keep up with its competitors, losing market share, and struggling to turn a profit. In its latest annual report for the year ending June 30, 2023, the company incurred a loss of Rs 59 million, and its short-term liabilities exceed its short-term assets by Rs 371 million. That’s not all: the accumulated losses are such that the company’s reserves are

depleted, and it is in the middle of negotiating with banks to renew loans. This is why the company’s auditors said, “These events or conditions…indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern.” This is how auditors speak when they want to say that a company might have to be closed down. This is hardly the picture of health. And yet: the company’s share price has more than tripled in a matter of two months, from Rs 78 on October 2, 2023 to Rs 264 on December 1,

2023. As of December 7, the share price stood at Rs 200, translating into a 150% return (900% annualised) if one had invested in early October. It’s the kind of sharp increase that has left onlookers baffled. Mitchell’s own auditors are concerned that the company might not exist. But the share price rise is as if Mitchell’s has announced a successor to its famous Chilli Garlic Sauce. What’s going on? Is it because Mitchell’s financial turnaround is imminent? Or is it because it was severely undervalued before? Or is it about to be bought? Profit breaks down what’s going on with Mitchell’s stock.

Trip down memory lane (feel free to skip)

itchell’s was initially founded as Indian Mildura Fruit Farms Ltd in 1933 by Frances J. Mitchell, the namesake of the company. The company underwent a significant transformation in 1958, when it was acquired by Syed Maratib Ali. He in turn wanted to settle his son-in-law, S.M. Mohsin, as the head of both orchards and the Mitchell’s brand. Throughout the 60s and 70s, the company focused on its fruit jams and marmalades, but in 1980, the company diversified into confectionery, making sugar candies, milk toffees and chocolate eclairs, doubling its annual sales. In 1993, it became a public limited company, listed on the Karachi Stock Exchange. In 1998, Mitchell’s achieved ISO 9001 accreditation, and in 2001, it established the first moulded chocolate line. It started the production of enrobed chocolate bars in 2004. However, challenges arose as competitors like National Foods entered the market, leading to a struggle for Mitchell’s to keep pace. While National Foods makes significant revenue from its spices business, both Mitchell’s and National compete in the jams, jellies, and marmalades business as well as the tomato ketchup business. In 2008, recognizing the need for modernization, the company underwent a revamp, upgrading facilities and distribution strategies. Yet despite some revenue growth driven mostly by general inflation, Mitchell’s faced financial stagnation from 2013 to 2020, experiencing losses each year since 2016. As new competitors entered the packaged foods industry, Mitchell’s grappled with legacy costs. Management changes occurred, with Mujeeb Rashid appointed as CEO from 2009 to 2016, who was succeeded briefly by Muhammad Zahir, who was CEO until September 2018. The farm commands political clout in the region. Yet, despite their influential role, the Mohsins reached an impasse in 2018, looking for a buyer for Mitchell’s. Blaming poor man-

agement and financial woes, their efforts to sell encountered obstacles amid family discord. By mid-2018, the family recognised the challenges and opted for a sale, appointing Habib Bank Ltd as sell-side investment bankers. By July 2019, negotiations with Bioexyte Foods – a sister company of Getz Pharmaceuticals – to sell management control of Mitchell’s approached fruition. However, the coronavirus pandemic struck in early 2020, and the deal collapsed. Mitchell’s stock price, which had skyrocketed by 77% during the deal announcement to Rs 345 per share, nosedived after the collapse (though did stay slightly above pre-announcement levels). Following the botched sale, Najam Sethi took charge.

stood at Rs 1.7 billion. Consequently, net loss stood at Rs 55 million. The next year, in 2021, Mitchell’s actually managed to experience a bright spot. Net sales increased to Rs 2.2 billion, while cost of sales stayed around the Rs 1.7 billion mark. Additionally, a slight dip in administrative costs that year meant that Mitchell’s just managed to scrape a profit of Rs 10.4 million. It was not to last. The next year of 2022 proved to be the worst year in Mitchell’s history. Net sales slightly increased to Rs 2.4 billion, but the cost of sales ballooned to Rs2.3 billion. Other costs like distribution costs and administrative expenses also ballooned, leading to a net loss of Rs 622 million – the greatest in the company’s history. This loss proved to be the last nail in the coffin for Bhatti, who was replaced in October 2022.

Chairman Sethi’s report card (2020-2022) CEO Sethi’s report et’s take a look at how the company has financially fared the last few years. card (2022 to present)

Since 2020, Mitchell’s fortunes have been run by one man in varying capacities: Najam Sethi. This can further be subdivided in two periods: Sethi the chairman (2020 to October 2022), and Sethi the CEO (October 2022 to present). To recap, following the failed attempt to sell Mitchell’s to Bioexyte Foods in 2019, Jugnu Mohsin stepped in. She is the granddaughter of Syed Maratib Ali, who acquired Mitchell’s in 1958, and she along with her husband, Najam Sethi, took over from S. M. Mohsin and Mehdi Mohsin in 2020. Sethi opted to take a less active role for himself, as the chairman of the board of directors of the company. Instead, he brought in Naila Bhatti as the chief operating officer (CEO), who had previously worked with Sethi at the Pakistan Cricket Board. The results were erratic. In 2020, net sales stood at Rs2.1 billion, while cost of sales

his brings in Sethi as the CEO directly in charge. How does he fare? Let’s take a look at each quarter. According to the annual report 2023, in the first quarter, the company experienced a loss of Rs 98 million (this was before Najam Sethi assumed the role of CEO in October 2022). Following his ascension, the subsequent two quarters showed profitability: profit in the second quarter stood at Rs 40.5 million, and in the third quarter stood at Rs 32.4 million. However, despite the positive trajectory in the second and third quarters, the company faced challenges in the last quarter. This suggests that even with a change in management and profitability in the middle two quarters, the losses in the latest quarter – at around Rs 34 million – do not bode well

for Mitchell’s. The year’s total annual loss stood at Rs 59 million, or roughly where Sethi had initially found the company in 2020. Still, there are some bright spots in the year. For instance, revenue climbed to Rs 2.7 billion, and gross profits managed to rise from Rs 193 million in 2022 to Rs 648 million in 2023. “This diminution in losses demonstrates the impact of strategic and operational improvements,” a Mitchell’s spokesperson asserted. So then, what gives? The main factor that led to the company’s net loss in 2023 was that finance costs more than doubled, owing to increased interest rates. Additionally, Mitchell’s is still struggling with legacy baggage. According to the spokesperson, “While the operational and administrative costs have declined, discrepancies compared to certain industry players might exist due to unique operational intricacies or legacy systems. Addressing these factors to align with industry standards remains a priority for us.”

Fix that gross margin

k, so the overall financials of the company are not great. But another way to think about Mitchell’s is that it is also poorly run. In the face of runaway inflation in Pakistan, where almost every manufacturer under the sun was raising its prices, Mitchell’s forgot to do a very basic act: raise its prices. This severely affected its gross profit margin. To recall, gross profit margin is the revenue left after subtracting the cost of goods sold, and it is expressed as a percentage of total revenue from sales. Roughly speaking, the higher the gross margin, the more efficiently a company is being run. Mitchell’s typically maintains a gross profit margin between 20% and 23%. However, in 2022, its gross profit margin experienced a significant drop to 7.8%. This decline was attributed to the company’s failure to adjust product prices in response to an increase in raw material costs. Now, this drop doesn’t necessarily have to be a bad thing. Companies often intentionally undergo a period of low gross profit margins to gain market share. But Mitchell’s was not making a strategic decision in this case. In fact, the company’s own chairman Shazad Ghaffar noted in the 2022 annual report that not increasing prices for the final product was a ‘misstep’. In 2023, the gross profit margin returned to a more standard level at 23.8%. This figure aligns with competitor Shezan, which maintained a gross profit margin of 23.8% in 2023. Meanwhile, both Nation-

al Foods and Nestlé boasted gross profit margins exceeding 30% in 2023, suggesting that Mitchell’s might need to either increase prices or further reduce the cost of sales to enhance annual gross profit margins, ultimately leading to a better net profit. That is because Mitchell’s still has an abysmal net profit margin: at -2.1% in 2023. In contrast, companies with gross profit margins above 30%, like National Foods and Nestle, enjoy a net profit margin of around 10%. The analysis indicates that maintaining a gross profit margin in the 20% range barely breaks even, as observed in Mitchell’s 2021 performance with a 22.1% gross profit margin, which in turn led to a minimal net profit margin of 0.5%. For Mitchell’s to become significantly profitable, it needs to elevate its gross profit margin to levels comparable to those of National Foods and Nestle. As mentioned earlier, quarterly reports show that the company approached a 30% gross profit margin in the second quarter but faced challenges in the third quarter, leading to a loss in the fourth quarter. When questioned about the fourth quarter loss, a Mitchell’s representative attributed fluctuations in gross profit margin to various industry factors, including seasonal variations in specific product ranges and raw material costs. The Mitchell’s representative said: “The shifts in gross profit margin may be a result of adapting pricing strategies for managing costs differently in different quarters.” The representative added, “Factors like fluctuations in raw material expenses, operational costs, and market competition can influence our ability to consistently sustain or increase gross profit margins.”

2024 first quarter

eeing the fluctuating efforts of Sethi the CEO, and some glimmers of hope in the quarterly results of 2023, perhaps the market was expecting a change in the company’s outlook come the new year? If so, the market must have still been sorely mistaken. On November 29, 2023 the company announced the quarterly results for the first quarter of fiscal year 2024. The first good news: it was an improvement from the previous quarter, with a profit of Rs 11.1 million, and a gross profit margin of 24.9%. But that still translates into a paltry earnings per share of Rs 0.49. Projections estimate that this will be approximately Rs 2 by fiscal year end. Consider the price to earning ratio, a measure of the company’s share price to the company’s earning per share. The higher this ratio, the more overvalued one can consider a company’s stock. In the case of Mitchell’s (taking the approximate values of Rs 200 and Rs 2) that ratio is a clean 100 - an absurdly high indicator.

Valuation conundrum

rofit would like to now point your attention to another odd figure when analysing Mitchell’s financials. That would be the book value per share, or the ratio of equity to against the total number of shares outstanding. This indicates a company’s net asset value per share. In theory, it is the amount that shareholders would receive in the event that the firm was liquidated, all of the tangible assets were sold and all of the liabilities were paid. The higher this figure - and if it’s greater than the share price - then it indicates that perhaps the stock is undervalued. That is obviously not the case at Mitchell’s. The book value per share is reported at Rs 6.29, which is very low. But it is also a bit

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suit for investors or a sale. The spokesperson of Mitchell’s also denied the existence of any potential deal. However, one source close to Mitchell’s confirmed to Profit that the sponsor shareholders are actively looking to find a buyer again. “The owner of one of the potential buyers walked away from exploring Mitchell’s acquisition, because he was uncomfortable in negotiating with Najam Sethi. But that doesn’t mean the family is not looking for other buyers”, the source said.

What’s next for Mitchell’s?

P too low. Are Mitchell’s assets fairly valued? That’s because Mitchell values its asset on an historical cost basis. A quick recap: in accounting standards one can decide how to value assets. Either you can value your assets on a historical cost basis, which is the value of the assets, the plant, and equipment at the time you purchased them. Or, one can use fair market value, which is that every year your company gets fixed assets reevaluated, so that the correct value is reflected on the balance sheet. So why is this relevant here? Recall that Mitchell’s has extensive farms in Okara, encompassing 47-acres as outlined in the financial reports. Reputable evaluation firms have assessed the farms to be valued currently at anywhere between Rs 40 million to Rs 70 million per acre. This could represent a severe potential undervaluation in the company’s financial reporting.

Buyers on the horizon?

ut when in fact would it even be relevant to figure out whether Mitchell’s land is correctly valued? Well, if a buyer came along and decided to figure out what to offer Mitchell’s. They would have to assess what value to assign to the land, plant etc. and also what value to assign to the brand of Mitchell’s. After all, the company has been around in Pakistan for decades, and has cultivated an image over the years. That brand value is an intangible assets ie. it is not something that can be reflected on a balance sheet. A source within Mitchell’s told Profit that even if the land was correctly valued and a buyer was willing to pay also for the value of the brand, it still would not justify the very high current share price for Mitchell’s. But then again, that would depend on if news has spread already within the market that buyers

are on hand. That is because the spike in share price is reminiscent of the company’s situation between 2019 and 2020, when the stock price experienced a stunning 77% leap, which raises questions about the driving forces behind the recent surge. Investors and analysts are puzzled whether this surge signals an impending market boost deliberately orchestrated before a potential sale, as seen in the past when the deal with Bioexyte Foods was in the pipeline. According to an insider linked to the company, there was a notable ‘buzz’ surrounding the interest of major players looking to acquire a majority stake. These potential buyers were reportedly expressing a willingness to offer a premium for both the company’s land and brand, in addition to the listed assets. Was the market reacting to rumours in the market? The top four contenders for the potential buyer role were: the dairy conglomerate ShakarGunj, the snacks and chocolates company Mondelez, the spices and snacks company Shan Foods, and finally industrialist Abdul Razzak Dawood’s engineering company, Descon. Profit reached out to all four. Sources within ShakarGunj said they were not in a financial position to buy another company at the moment, to the extent that they are having difficulty paying their employees’ salaries on time. Mondelez explicitly denied any such reports. Profit was unable to receive comments from Shan Foods by the time this story was filed. Finally, Descon issued a ‘no comment’, and sources within the company said it was not actively pursuing this option. To be clear, there has been no official confirmation yet on whether there is an active deal on the horizon. During a November 10 board meeting, the management at Mitchell’s emphasised that considerations for raising funds shouldn’t hastily be construed as a pur-

oor gross margins, failure to raise prices, and consistent losses: it is very clear that there has been no such turnaround in the fortunes of the company. And talks of potential buyers also seem dim. So what can the bubble possibly be attributed to? Some of it has nothing to do with Mitchell’s. A source linked to the company said that the market had generally been optimistic. The prevailing optimism had been fueled by the resurgence of IMF programs and an influx of foreign funds, and it was casting a favourable light on companies operating within this economic climate. Additionally, Mitchel’s has made some attempts to rectify the situation. In the annual report for 2023, the company noted that it has taken some steps, including disposing of selected assets, improving its pricing and discount structure, and exploring new geographical markets for increasing export sales. It was also expanding new business avenues like toll manufacturing. Mitchell’s is also negotiating for the continuance of the existing capital lines and exploring the possibility of entering into further loan agreement with the sponsors of the company. The same was reiterated to Profit : that new strategies could involve debt restructuring or exploring growth opportunities, with the specifics outlined in the forthcoming corporate plan. Will it be too little too late? Sethi as CEO still has to actually make the difficult decisions to revamp pricing and sort out revenue streams to get Mitchell’s into a marginally healthier position. To recall, the auditors are not particularly optimistic about the company’s future. The share price bubble will burst - as it has already shown of dropping - and when it does, the buzz will die down, the rumoured buyers will exit imagination, and the management will be left picking up the pieces of an half-century old company, to see if it can make it in this century as well. Unless, there is something that “the market” knows, that no one else does. n

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Is Malik Riaz’s House of Cards about to come tumbling down? As the Rs 460 billion Bahria Town needs to pay to the Supreme Court catches up with them, will they have to go down the default route?

COVER STORY

By Shahab Omer

here is something incredibly unassuming about Malik Riaz Hussain. Small, dour, and largely unimpressive he fits more into the image of a property dealer than he does of a property tycoon. In fact scratch that. Even property dealers have a certain annoying relentlessness and snakeoil charm. With the Big Kahuna of Pakistan’s real estate market all you get is stale statements and boring platitudes. And that isn’t because Malik Riaz is some sort of media shy, behind-the-curtain, keep-your-wealth-to-yourself, property tycoon. No. Over the past three decades he has built possibly the largest property empire this country has ever seen and become one of its richest

residents in history. All of this he has done with himself at the centre. Malik Riaz is Bahria Town and Bahria Town is Malik Riaz. So does that mean if Bahria Town comes crashing down Malik Riaz will come down with it? Over the past few months prices of plots in the new phases of Bahria Town have fallen dramatically. Plots that were worth over 1 crore four months ago are having a hard time finding buyers at Rs 60 - 70 lakhs. On top of this the group is facing troubles in their projects in Peshawar and Karachi where all manners of permits and bureaucratic hullabaloo is stopping them from creating the usual ugly but effective upper middle class communities they have come to be known for. The reason behind this sudden downturn? Rumours that Bahria Town is in fact on the brink of default. On the ground property agents and land providers are both concerned that the downturn in the Bahria Town market is the direct result of the gamut of legal problems that the company and its divisive founder are facing. At the core of these troubles are the Rs 460 billion that Bahria Town is supposed to pay to the Supreme Court of Pakistan in a case that also has to do with the Al Qadir Trust that has gripped the nation. With a mire of other legal troubles, Malik Riaz and his Bahria Town are facing perhaps their biggest challenge ever. If the group defaults, it will affect a company that employs more than 35,000 people. On top of that, what will become of the massive Bahria Town projects all over the country. Will they fall to disrepair? Will their value plummet? Or will Malik Riaz slink through for all to be hunky dory once more? To understand the current scenario, it is necessary to take a look at just what got Bahria Town in this mess in the first place.

Reliable origins

here is simply one thing that sells more than anything else in Pakistan’s real estate market: Reliability. As we’ve covered numerous times before in Profit, there is an entire army of reasons behind why Pakistanis invest so heavily in real estate (in particular residential real estate) and why it isn’t a good idea. You can read some of our earlier investigations to understand that. But the reality is that anyone with money will think of buying a plot as a very safe bet both to park their money and to get a good return. As a result there has been a massive proliferation of the concept of the “housing society.” Pick up a rock anywhere near Pakistan’s big cities and you will probably find the office of a real estate agent that will try to sell you plots in all manners of societies named Something Gardens, What’s-it-Villas, or Gimmick City. What they sell you is simple: Buy a plot

for cheap in what is currently a wasteland and we will develop it into an operational housing society. And not only that, even if you don’t want to live here, you can buy a plot now and sell it later for a profit once the society is developed. But these real estate projects rarely take off. They more than happily take investments and then fall prey either to over ambitious plans or permission issues. In all of this, the money of investors is indefinitely frozen. That is why the average investor’s priority when looking at real estate is finding it in societies that are reliable. The prime example of this reliability is probably the Defence Housing Authority (DHA) because of its transparent processes and the fact that it is run by the Pakistan Army. But perhaps a close second has been Bahria Town. Interestingly enough Bahria Town was also originally a military foray into real estate. Malik Riaz started the project in partnership with the Pakistan Navy which later backed out. But as the result of a court decision, Malik Riaz got to keep the “Bahria” name. That is actually what gave the project some of its early reputation. But it quickly became clear that Malik Riaz had a knack for both acquiring land and developing it. In the early days, in particular with Bahria Town Lahore, his pitch was there would be no load-shedding in this society. In the dark days of the 2008 energy crisis this was a big selling point. On top of this Bahria’s transfer mechanisms were simple yet ironclad and the society developed a reputation for being reliable. Quickly it spread beyond Lahore and Malik Riaz became one of the largest land developers in the country. There were, of course, controversies. From accusations of bribing media persons with plots to land grabbing and fraud there was plenty about Malik Riaz himself that made him a divisive figure. But through this all Bahria Town remained clean. This was largely because none of their projects faced any issues as a result of the controversy created by Malik Riaz. That is until now.

Declining fortunes

here are a few things happening at the same time right now with Bahria Town. For starters, the real estate market in Pakistan is generally on the downturn. Inflation is at an all time high, people don’t have money, and the appetite to both invest and construct is in the doldrums. As a result, Bahria Town’s projects are also seeing a dip. Now the two main ones that are ongoing are Bahria Town Peshawar and Bahria Town Karachi. On top of the declining market both of these projects are facing serious risks. Bahria Town Peshawar, for example, has not received

an NOC or permission to conduct business at their project location. Normally this is something that happens to very small scale projects. But in this case Bahria Town had marketed the project despite not receiving the NOC and their agents had collected investments as well. Now that the NOC has still not been received, all of those payments remain frozen. The investors are running after the agents and the agents have now been very openly complaining against Bahria Town and Malik Riaz — something unheard of until a couple of years ago. Since the land in Peshawar where Bahria Town started its residential project was disputed, the project has practically been shut down. Many people booked plots for this project and paid money to the Bahria Town administration through different property dealers, but now they too are worried and uncertain about the future of this project. The reputation of the Peshawar project can be gauged from the fact that the district administration of Peshawar has filed a case against it, in which Malik Riaz is named. Therefore, if we talk about the Peshawar project, Bahria Town’s project there has failed miserably. All kinds of development work on this project have stopped. Profit has heard from within the walls of the Bahria Town HQ that a similar situation is brewing at the site for their ambitious Karachi project. And the reasons behind the Karachi project is that pesky sum of Rs 460 billion that has become a thorn in the foot of Bahria Town.

Legal situationer

o here is what we have. There is a downturn in the real estate market. Bahria Town’s Peshawar project has been grounded. The land for the Karachi project is disputed in a highly watched and politicised case of the Supreme Court. So how did we get here? It starts off in May 2018. Supreme Court Justice Ejaz Afzal Khan had written a decision under which the agreement made by the Malir Development Authority (MDA) with the private developer Bahria Town for the exchange of land was declared null and void, and the National Accountability Bureau (NAB) was directed to start an inquiry against Bahria Town and complete it within three months. Bahria Town had acquired 16,896 acres of land from the MDA in exchange for land near Dadu and started a large housing project on it. Former Chief Justice Saqib Nisar asked Bahria Town to pay one thousand billion rupees and when NAB started action against Bahria Town following the Supreme Court’s decision, Bahria Town filed a review appeal against the Supreme Court decision in June 2018. Bahria Town made a counter offer and the Supreme Court accepted that instead of

COVER STORY

Rs 1000 billion they would pay Rs 460 billion to be deposited to the Supreme Court in seven annual instalments. It was also stated that if Bahria Town failed to deposit two consecutive instalments, it would be considered a default.

The default part of the equation

his is where things get tricky for Bahria Town. So far the company has only deposited Rs 65 billion of this in the Supreme Court. This is because the hearing of this case was resumed again on the request of Bahria Town in which their lawyers have taken the stance that according to the spirit of the court decision, Bahria Town was supposed to receive 16,896 acres of land but instead received only 11,747 acres. Due to not receiving the full land, Bahria Town stopped the instalment payments. At least that is what they claim. The only problem is that this Rs 460 billion goes far beyond just this Supreme Court case. You see, outside of this case Malik Riaz and his family had been under a ‘dirty money’ investigation in the UK by their National Crime Agency (NCA). To cut a very long story short, the NCA announced they would be sending $190 million back to Pakistan. Apparently, as claimed later by the PDM government, this money was returned by Imran Khan’s cabinet to Malik Riaz. In exchange, PDM claimed, Malik Riaz gave Imran Khan and Bushra Bibi land for the Al Qadir Trust. And then this Al Qadir Trust case also became the reason for Imran Khan’s arrest. All of the details are present in our earlier coverage of the case. But to summarise everything the case behind the Rs 460 billion involves big politics and has left Bahria Town paralysed. That is all on top of a market situation that is incredibly slow and a project in Peshawar that has faced permission issues. What could be the reasons for this? The first is that Bahria Town simply doesn’t have the money to pay off this money which is why they are now trying to wriggle out of it. The second reason goes beyond this simple explanation. You see despite all of his earlier legal troubles Malik Riaz has always remained safe from the hands of the law and has been a veritable untouchable in this regard. As many political analysts have told Profit but only on the condition of anonymity, this security has been because he has had a cosy relationship with the powers that be. The recent murmurs are that the property tycoon is refusing to become a wadah maaf gawah in the Al-Qadir Trust Case. Look back at how it all played out. Well before Imran Khan was arrested Malik Riaz was summoned by NAB in the case. Even after Khan was arrested, then Interior Minister

Rana Sanaullah quite shamelessly avoided mentioning his name, simply calling him “a certain property tycoon.” The feeling was that Riaz, who has always been on the right side of the establishment, would simply become a state’s witness in exchange for leniency in the case which has him implicated too. Except he might have refused to do that, which is why he has been caught in the crosshairs. Since all of this has unfolded, Malik Riaz has left the country. He first went to Dubai where he still felt unsafe and went to an undisclosed location in Europe. Investors and agents within Bahria Town are getting antsy. The rumours are spiralling about him having taken a German citizenship and sold most of his major properties in Pakistan. At the same time he has also started trying to set up a media house in Dubai. According to the same sources, no one is currently looking after Bahria Town Karachi either. Bahria Town has to pay Rs 460 billion for the land acquired for Bahria Town Karachi, a case which is under hearing in the Supreme Court, and Malik Riaz and the Bahria Town administration are not ready to make this payment in any way. The NOC issued by the Sindh government for this project has also been cancelled. Now, if we look at it, the market of Bahria Town Karachi has also been severely affected. A 10-marla on-ground plot, which was easily sold for Rs 1.1 crore four months ago has now dropped to Rs 60 lakhs. The same is the case with one kanal plots and commercial plots. On the other hand, those who have on-ground plots, houses, and their possession, their capital is somewhat safe, but those who invested in plot files are in severe danger. Because no one is ready to buy the file of a Bahria Town plot. Currently, there is a common perception among investors in Karachi that perhaps the control of Bahria Town Karachi might go to the MDA in the future. According to these sources, the Bahria Town case in the Supreme Court and Malik Riaz leaving the country have severely affected the credibility of Bahria Town. That is why no one is currently looking after Bahria Town Lahore and Rawalpindi either. These sources believed that at this time, the future of Bahria Town was tied to the decision of the Supreme Court. One way to avoid paying the Rs 460 billion is for Bahria Town to declare itself bankrupt. However, these sources claimed that even if the court orders the sale of all assets of Bahria Town to meet the required amount, the value of Bahria Town’s assets would barely be Rs 200 billion rupees. A major reason for this is that some of Bahria Town’s projects are pledged in the bank, but these sources could not provide details of these projects.

Bahria’s stance

he administration of Bahria Town issued a statement in which they labelled the recent rumours as “Malicious Propaganda.” The statement read, “Bahria Town is one of the most prestigious Real Estate brands in Asia, firmly rooted in its commitment to contribute to the progress and economic development of Pakistan. Despite facing malicious campaigns and unwarranted criticism from a misguided faction of the media, we persist in our dedication to serving the nation and delivering worldclass projects. Through past challenges, we have weathered adversity, and our resolve to uplift Pakistan remains unwavering. Insha’Allah, this commitment will endure.” In a recently surfaced audio clip, Malik Riaz is heard refuting rumours and propaganda against him, declaring them to be false. He mentions that since 1996, he has been targeted by various organisations and individuals. However, he expresses his firm belief in the greatness of Allah. He credits Allah for always guiding them and expresses confidence in Allah’s protection over Bahria Town. Malik Riaz asserts that, with Allah’s blessings, Bahria Town remains secure and continues to thrive. He said that the more attempts are made to suppress Bahria Town, the higher Allah lifts it. He expresses faith that Allah will overcome those who oppose them and will ensure the success and prosperity of Bahria Town. He reassures that Bahria Town is secure and states that their dedication and commitment are entirely for Bahria Town and he is hopeful that Bahria Town will bring transformative changes to Pakistan. But all the Allah talk aside it is becoming clear that the past is catching up with Bahria Town. Over the past three decades Malik Riaz has built the organisation with a ruthless fervour. He has done so by being able to curry favour with the correct quarters and being in with every politician there could be. His immense wealth and vast connections have protected him. As a result, he has been able to grow and expand Bahria Town. Now, Malik Riaz’s personal safety and ability to operate in Pakistan is under threat. As a result, the fate of Bahria Town hangs in the balance. If the organisation were to default it would be detrimental to more than 35000 employees they have. But more importantly than even that, without these employees and the money the company has, their housing societies would fall into disrepair. Considering the size and scale of what they have built, it would be a disaster for many people that have invested in or are living in Bahria Town projects all over the country. n

COVER STORY

Why can’t the government sell one of its most sellable assets? Power plants are a coveted business opportunity in Pakistan. In the case of the Kot Addu-Muzaffargarh solar power plant, the government has botched it so badly that no one wants to go near it.

By Daniyal Ahmad

ince the early 1990s, one of the most coveted business opportunities in Pakistan has been owning and operating a power plant. Having the opportunity to ascend to the status of an Independent Power Producer (IPP) has been a dream for many corporations. And after all, it sounds like a pretty lucrative business. Here you have the opportunity to not just be in one of the biggest sectors in the country, but also have the government as a single, guaranteed client that will want to buy more and more power from you. One would imagine that corporations and investors would be lining up to bid for the solar power plant being planned at Kot Addu-Muzaffargarh. The plan for the 600 Megawatt project was made by the previous Shehbaz Sharif administration as part of a larger effort to produce up to 6,000 MW of energy through solar power. But in the months since the idea for the solar-powered IPP at Kot Addu was pitched, the government has failed to receive any bids for it. So why isn’t anyone interested? After all, the Kot Addu project will in effect be the newest and fanciest power plant that Paki-

ENERGY

stan will have. The paragon of Pakistan’s solar revolution — if someone decides to invest, and actually build it. The straightforward answer is that the Government has, thus far, mishandled the bidding process. However, the reasons for why they have done what they have till now provides an opportunity to rethink everything about our overarching energy framework so that we do not repeat the mistakes of the past decades with the potential to pile on new

mistakes this time around. Inadvertently, the Government of Pakistan has crafted an opportunity to establish a robust energy infrastructure that could serve the nation for decades to come, if they can break free from their existing modus operandi. If they fail to do so, we risk perpetuating the status quo, with the added twist of public scorn being directed at solar power, rather than the non-renewable power plants currently in operation.

One of the significant hurdles that the project developers encountered was that the benchmark tariff was unrealistic. At 3.4 cents, it was untenable Haneea Isaad, Energy Finance Specialist at the Institute for Energy Economics and Financial Analysis

Pakistan’s electricity generation 101

here’s a lot to unpack. Let’s start with how power plants are set up. Three terms underlie Pakistan’s electricity infrastructure: request for proposal (RFP), build-operate-transfer (BOT), and power purchase agreements (PPA). Whenever the government realises that it needs more energy in the grid, it initiates an RFP. An RFP is an invitation for bids to execute a new project proposed by the organisation that issues it. This is essentially the government soliciting someone to bid for the right to establish a power plant. An RFP is what the Government of Pakistan did for the Kot Addu-Muzaffargarh plant and failed. Twice. But, more on that later. The bids are for companies to operate a power plant on a BOT basis. Under a BOT contract, an entity — usually a government — grants a concession to a private company to finance, build, and operate a project for a period of 20 to 30 years. BOT contracts are typically used to develop a discrete asset rather than a whole network. Think singular power plants on a need-by-need basis rather than the entire grid. At the end of the specified period, agreed upon in the outsourcing contract, the BOT partner will shift the legal ownership of the project along with its assets back to the client. Once a company has completed the plant, it is then an IPP. So, how does the IPP make money and why did we say that companies lined up by the boatload in the past? PPAs. A PPA is a long-term contract between an electricity generator and a customer, usually a utility, government or company. PPAs can span between 5 and 20 years, during which time the power purchaser buys energy at a pre-negotiated price. It is the sine qua non of the arrangement. “These are very common in the power sector because whenever an investor comes in and sets up a large plant, they are essentially committing a very specific kind of investment. It is fixed in terms of its location — they cannot easily relocate the power plant. It is kind of a permanent thing, so PPAs assist in mitigating the investor risk,” explains Dr Ayesha Ali, Assistant Professor of Economics at LUMS. PPAs exist in Pakistan because it does not have a competitive market for electricity. There is a single buyer – the State of Pakistan. Consequently, our PPAs last 25 to 30 years so that they cover the operational life of the plant. Furthermore, because investing in Pakistan comes with a risk and these plants are expensive to set up, our PPA contracts have been indexed to the dollar. In essence, IPPs have a guaranteed dolla-

These are very common in the power sector because whenever an investor comes in and sets up a large plant, they are essentially committing a very specific kind of investment. It is fixed in terms of its location — they cannot easily relocate the power plant. Dr Ayesha Ali, Assistant Professor of Economics at LUMS

rised return for almost three decades. Do you now see why companies would want to line up? This makes it all the more mind boggling that there have been no bidders for the Kot Addu-Muzaffargarh plant?

The existing solar IPPs

he local solar firms that often come to mind are not Independent Power Producers (IPPs), but primarily Engineering, Procurement, and Construction (EPC) companies. These firms facilitate individual solar projects but do not supply power to the grid. EPC companies provide a gamut of services, from system design to equipment installation, and operation and maintenance oversight. However, their role diverges from IPPs, who are directly involved in solar energy production and distribution. The transition from an EPC to an IPP is a complex leap due to the vast difference in scale. For instance, Reon, one of Pakistan’s largest solar EPCs, manages approximately 200 MW of solar energy, while a single solar plant can boast over 50 MW. Despite the prevalence of solar EPC companies, some even supported by major business groups like Beaconhouse, only 27 solar IPP licences have ever been requested, with a mere 12 being granted. It’s an exclusive club, one that the Kot Addu-Muzaffargarh plant would grant access to if a bid is ever made.

What happened at Kot Addu?

ow that we’re well versed in the requisite vernacular, let’s talk about the plant in question, and its inability to find a suitor. The RFP for

the plant was floated in February with April being the deadline for the bids. This deadline was then extended to May, however, there were still no takers. The RFP was again floated in September with the project taken to Dubai as part of a roadshow in October — October 30 was the deadline for the bids as well. Again, no bids. Undeterred, the Private Power and Infrastructure Board (PPIB) has extended the deadline for bids to December 11. Why does no one want this plant? The answer may be found in a low benchmark tariff, and ghosts of decisions past. For starters, the initial RFP established a benchmark tariff that was too low for investors. A benchmark tariff, the price per kilowatt-hour (kWh) generated that the PPIB would have awarded any bidder for the duration of the PPA, represents the return any investor would have reaped from the project. This benchmark tariff was also unveiled at a reverse auction, and thus was the ceiling in terms of what could have been granted. “One of the significant hurdles that the project developers encountered was that the benchmark tariff was unrealistic. At 3.4 cents, it was untenable,” explains Haneea Isaad, Energy Finance Specialist at the Institute for Energy Economics and Financial Analysis (IEEFA). We talked to one potential investor who was contemplating making a bid for the project in the current round, as they believed that bids above the RFP would now be acceptable. Will they, or anyone else, submit a bid? It’s anyone’s guess. Is the benchmark tariff the sole culprit? Not entirely. There is also the general risk premium associated with Pakistan. “We are a very precarious market compared to everyone else in our vicinity. From an investor’s perspective, looking at other comparable investment

destinations such as India, Bangladesh or even Nepal and Sri Lanka, there is an added risk premium because of the state of our power market in terms of the circular debt and policy inconsistency,” explains Ali. “It is a very challenging environment for investors, both internally and externally. Externally, there is a lot of political risk, whilst internally, IPPs have struggled to receive payments from the authorities,” Isaad continues. Regarding the IPPs and their disputes with the authorities regarding payments, this is a recurrent phenomenon with IPPs frequently embroiled in tribunals, arbitration, and litigation against the authorities because they feel wronged. The Patrind Hydropower and Engro’s Powergen are just two notable examples. In terms of the delayed payments to the players in the energy sector, we’ve already covered the state of circular debt in 2023 previously. Read more: Circular debt is at Rs 2.31 trillion. What does it mean? The PPIB and the Government are in a bind. They cannot really entertain bids too high above their own benchmark tariff, assuming they did, because it would undermine the objective of the project: replacing costly fossil fuel energy with more affordable renewable energy. Similarly, the authorities are, well, the authorities, and they do have valid reasons at times for why they believe the IPPs might be inflating their costs. Is there a solution to the entire matter? Yes. A very simple one at that too. Reduce the length of the PPA down from 25 years.

Killing two birds with one stone

he reality is, with solar, any benchmark tariff the Government dispenses will invariably gravitate towards the lower end. They may

Advancements in solar panel technology have led to an average cost reduction of approximately 10%, while concurrently boosting the yield by 20% per technological iteration Farheen Irfan, Chief Operating Officer at ACT Engineering Services

find themselves in the crosshairs of accusations of lowballing prospective investors, yet it’s not entirely their fault that solar tariffs have taken a nosedive over the years. This is simply the natural evolution of the technology. The average levelised tariff awarded by the National Electric Power Regulatory Authority (NEPRA) for solar power plants has plummeted from 16.3 cents in 2014 to a mere 4.47 cents in 2022. This represents a staggering 72% reduction in less than a decade. The decline in the cost to generate solar electricity is an inevitable consequence of technological advancement, rather than anyone’s fault. IEEFA estimates that the current tariff for solar has been benchmarked at 4 cents/ KWh. Their estimation diverges from the average tariff handed out by NEPRA because they base their estimates on the recently operational Zorlu plant. NEPRA’s average tariffs for 2022 appear on the higher end because NEPRA had awarded tariffs to two other plants as well which originally accepted the

exorbitant tariffs back in 2014 and then had their tariffs negotiated downwards until the plants came online. Remember how we mentioned the authorities have their reasons to be wary of Independent Power Producers (IPPs)? So, what does IEEFA’s 4 cents/KWh entail? Pakistan boasts one of the cheapest regional tariffs awarded to solar power, especially considering the limited capacity installed at present according to IEEFA. Combine this with the risk premium, and it becomes clear why investors might be tempted to look elsewhere in the vicinity. Reducing the length of the Power Purchase Agreement (PPA) rather than just hiking up the tariffs for the sake of attracting investors provides a prudent solution that does not involve crippling capacity payments for decades to come. IEEFA estimates that reducing the project term from 25 to 14 years would raise the benchmarked tariff, based on the Zolru plant, to 4.6 c/KWh, or a 14% increase. Reducing the PPA’s life to 12 years would increase it by 24%, to 10 years would increase the cost by 37%, and finally to 7 years would increase the cost by 74% to roughly 7 c/KWh. In contrast, some thermal power plants running on fuel oil or high-speed diesel now have fuel costs of 16-22 c/KWh, while fuel costs for imported coal and regasified liquefied natural gas are 9.5-13 c/KWh and 12 c/KWh respectively. Solar-based power generation would still be the cheapest form of power generation by a margin. “A shorter contract term could lower risk for both the developer and the off-taker, especially as we consider the development of a secondary power market, post CTBCM, which the developer can sell to once the PPA with government ends,” asserts Isaad. There’s also another advantage of reducing the PPA to as short as possible: not being stuck with outdated solar technology. “Seven to ten years is a lot for the solar

ENERGY

industry. Things change significantly in just a span of two to three years,” asserts Farheen Irfan, Chief Operating Officer at ACT Engineering Services. “We saw the industry move from the 300-watt series of solar panels to 400-watt to 550-watts in a matter of 2 years apart from one another. Experts predict the current prevailing P-type panels across the industry to become obsolete by December. By the time the Kot Addu-Muzaffargarh project comes online in 2024-25, we might well see the N-type panels ready to be replaced by the next generation of panels,” Irfan continues. Could the choice between P-type and N-type panels significantly impact the performance of a solar plant? It’s a possibility. Solar panels, after all, have a theoretical efficiency limit of 30%. P-type panels achieve an efficiency of 23.6%, while their N-type counterparts reach up to 25.7%. Some argue that the solar industry has reached a plateau in terms of innovation. However, Irfan challenges this notion, asserting that “there is no immutable law stating that solar panels cannot surpass the 30% efficiency threshold should technology continue to evolve”. What truly matters, though, is how these incremental efficiency improvements translate into tangible cost savings. “Advancements in solar panel technology have led to an average cost reduction of approximately 10%, while concurrently boosting the yield by 20% per technological iteration,” Irfan reveals. These efficiency strides are not exclusive to the realm of solar energy. A similar trend is evident in the wind industry. Wind turbines installed in 2014 boasted efficiency levels of 30%, whereas the latest models being deployed across the sector exhibit efficiency rates exceeding 45%. Does it matter if we get this plant wrong? Is it that important?

The problem with not experimenting with Kot Addu-Muzaffargarh

n the grand tapestry of energy infrastructure, the Kot Addu-Muzaffargarh solar plant may seem like a mere stitch in Pakistan’s power grid. With a total installed capacity of 41,050MW, the 660 MW output of this plant is but a drop in the ocean. However,

it’s not the size of the plant that matters, but its symbolic significance. This is the inaugural project under the Fast-Track Solar PV Initiatives 2022, and as such, it will set the precedent for future developments. The looming spectre of lower tariffs in the future presents a tangible risk. A quarter of a century is a significant time span, and locking in rates now would mean cementing them for an entire generation. This is not to overlook the fact that Pakistan lacks both a competitive market and a proper wheeling market for electricity. In the current scenario, companies can only sell to the State of Pakistan, and with a capacity of 660MW, it’s improbable that any entity other than the State could absorb such a volume of energy. Unless the aforementioned issues are addressed, companies and the State will have to navigate within the confines of the status quo. However, the status quo is proving to be an inadequate solution for what is poised to be the vanguard of Pakistan’s solar revolution. There’s a separate discourse to be had about the necessity of mega projects of this scale for solar energy, but the Government and PPIB’s unwavering commitment suggests that this project is likely to materialise. The only question that remains is whether Pakistan is willing to experiment with its energy infrastructure and agreements, now that it has the opportunity to do so. n

ENERGY

UBank’s

strategy makes a sharp U-turn

Latest financials reveal UBank’s balance sheet shrinking at the same pace with which it grew By Mariam Umar

he long-anticipated financial statements of U Microfinance Banks (UBank) have finally emerged, albeit with a slight delay. After unveiling the half-yearly report on December 1, 2023, UBank quickly followed up with the financial statements for the nine months ending in September. The recently revealed statements have answered some questions about previous speculations that were making rounds. But on the whole, the statements have sparked intrigue across the financial realm. This is because the bank seems to have taken a sharp U-turn from its unconventional approach, labelled as overly aggressive, which led to an astonishing threefold growth in its balance sheet amidst industry turmoil in 2022. Instead, a noticeable change has emerged: the bank has witnessed a sharp decrease in investments in government securities and mutual funds on the asset side and a significant reduction in borrowing on the

BANKING

liabilities side. More alarmingly, the equity of UBank declined from around Rs 7 billion to Rs 5 billion in these nine months. Is there a possibili-

ty that UBank, which was once touted as one of the biggest microfinance banks, might not remain the biggest microfinance bank if its balance sheet continues to shrink?

Profit examines Ubank’s financial statements to make sense of what has changed at the bank.

UBank’s growth strategy

irst, to understand why the new statements are such a shock, let’s recap UBank’s previous aggressive strategy. This approach was spearheaded by Kabeer Naqvi, the chief executive officer at UBank up until October 2023. In an earlier conversation with Profit, he said, “I am building relationships with banks. And over time, they will start lending to me against my advances rather than government-backed securities. One or two banks are already comfortable enough with us to start doing this.” Read: Has UBank cracked the code to make a microfinance bank profitable? What did he mean by this? Read: Grow your company size by 3 to 6 times in just months. At least two Pakistani companies have done this & you can too. Here is how UBank essentially increased the size of its balance sheet using a quid pro quo arrangement. The financial statements of 2022 reveal that a major chunk of deposits was from banks and other financial institutions. These deposits were in a sort of give-and-take arrangement, where any funds received from a financial insti-

tution were funnelled right back into the same institution or its associated asset management company. Furthermore, these deposited funds were heavily concentrated, ranging from 25% to a staggering 77% of the fund’s assets. Read: A sneak peek into the deposit growth of U Microfinance Bank While UBank's credit rating flagged this concentration risk, it did not acknowledge UBank as the primary investor in these funds. So what was happening?

Financial institutions such as Faysal Asset Management, NBP Funds, and Allied Bank Limited seemed to orchestrate a method to inflate their balance sheets and consequently UBank's. This involved a complex process of depositing funds, purchasing securities, and pledging these securities back to the same banks or third-party entities, effectively allowing UBank to borrow more against these treasury bills (T-bills) and perpetuate the cycle. This cycle continued, spinning a web of financial manoeuvring that enabled the size of the balance sheet to grow by a factor of three. Investments increased to Rs 137 billion (Rs 13,733 crore) from Rs 46.5 billion. At the same time, UBank’s borrowings increased from 36.8 billion in 2021 to Rs 115 billion (restated). And deposits increased from Rs 55 billion to Rs 92 billion. Naqvi clarified UBank's investment approach, emphasising the utilisation of shorter-term instruments to capitalise on increasing interest rates. By borrowing at a fixed rate for a longer duration and investing in shorter-tenor instruments, they aimed to leverage interest rate fluctuations to their advantage. UBank's method, while aggressive and unique in the microfinance banking sector, aimed to mitigate advance book risks by borrowing heavily from banks and actively managing their necessary investments. And even if the bank made some loss on treasury operations due to unforeseen economic circumstances, for example, the logic was that his board and shareholders should still be happy as he was successfully securing the bank against a liquidity crisis.

Sharp U-turn

significant shift occurred in UBank's strategy in the nine months of 2023. The bank seemingly reversed its highly leveraged approach, expe-

riencing a substantial decline in both investments and borrowings, impacting its future profitability. The sharp decline in both investments and borrowings is almost matched 1 to 1. Borrowings have decreased by 58% from Rs 115 billion to Rs 49 billion. Similarly, investments have decreased by 56% from Rs 137 billion to Rs 61 billion. This means that the growth engine ((leveraged investment portfolio) is being unwound at a fast pace. Notes in the financial statements reveal that UBank has sold off all T-bills valued at around Rs 55 billion at the end of December 2022 in its possession. Moreover, investments in mutual funds have also declined from around Rs 22 billion in December 2022, to around Rs 7 billion at the end of September 2023. According to the annual report of 2022, UBank held mutual funds with Allied Bank Limited. On the borrowing side, the biggest drop is in borrowings from MCB Bank Limited (MCB): from Rs30 billion in 2022 to zero at the end of June 2023. According to notes in financial statements, these borrowings were secured against mutual funds units and Paki-

stan investment bond (PIB) or T-bills to be kept in an investor portfolio securities account maintained with MCB. Borrowings from Allied Bank Limited (ABL) have also declined by around Rs15 billion. This loan was again secured against ABL asset management units and PIBs or T-bills kept in IPS account managed with ABL. Both MCB and ABL are old banks that are considered to be more risk-averse. Borrowings from Meezan Bank also witnessed a decline of around Rs3 billion, which were again secured against government securities. Repo borrowing has declined by a whopping 85%, from approximately Rs 30 billion in 2022 to around Rs 4.5 billion at the end of September 2023. Interestingly, while other banks were withdrawing their finances, JS Bank extended a term finance facility of around Rs 2 billion. When asked for comments, the bank responded that the finance facility from the bank is still intact but from the asset management company (AMC) side has been withdrawn. Interestingly, UBank had only borrowed funds from the bank - so what AMC funds is this

source talking about? According to the VIS credit report of March 31, 2023, UBank had a high concentration risk. The top five depositors are asset managers NBP Financial Sector Income Fund (NBP FSIF), Faysal Income and Growth Fund (Faysal IGF), JS Microfinance Fund (MICR), followed by the two banks Habib Bank Limited (HBL) and Faysal Bank. They comprise 38% of the Rs 92 billion deposit base, meaning that Rs 35 billion are deposited by these five financial institutions. That would translate into an average of Rs 7 billion per institution. The VIS report highlighted that MICR is one of the biggest depositors of UBank. In other words, JS funds are the largest depositors of UBank, and UBank is the largest investor in JS Funds. At least that was the case until March 2023. However, as per the source’s comments, the funds have been withdrawn from the AMC side which means that JS funds have (possibly) withdrawn their deposits. UBank’s investment in mutual funds has also decreased which could mean that UBank has also withdrawn its investments. As per the September 2023 financial statement, the deposits have increased, but the report does not specifically mention which deposits have increased. However, the half-yearly reports of 2023 reveal a noteworthy shift in deposit trends. While deposits from banks and financial institutions still hold a significant part of the total deposits, individual deposits have surged impressively by approximately 87%, soaring from Rs 15 billion to Rs 28 billion. This surge has substantially increased the share of individual deposits within UBank’s portfolio, climbing from 16% to a substantial 28%. Meanwhile, deposits from banks and financial institutions have slightly dropped by around 14%, decreasing from Rs 43 billion to Rs 37 billion during the initial half of 2023.

Equity

hat’s intriguing in these newly released financial statements is the restating of UBank’s year-end figures for the concluded year of 2022. The statements offer surprising insights. The equity figure stood at Rs 5.3 billion at the end of June 2023, which increased to around Rs 5.8 billion at the end of September 2023. For context, microfinance banks are supposed to maintain a minimum capital of Rs 1 billion as mandated by the State Bank of Pakistan (SBP). The equity figure stands at five times the required amount, showcasing a significant surplus in comparison to the mandated threshold. Moreover, the bank reported an impressive Rs 1.7 billion in profit after tax in the first nine months of 2023.

BANKING

The SBP had concerns regarding the treatment of rescheduled loans under the expected credit loss (ECL) model of the IFRS-9 and directed the Board of the Bank to take certain corrective measures including aligning the matters relating to the implementation of IFRS 9, and adjusting retrospectively the financial position as at December 31, 2022 and directing further that in case of shortfall in related statutory requirements, capital to be injected by the sponsors of the bank. Consequently, the 2022 financials were restated, which resulted in net profit of 2022 of Rs 2.25 billion, turning into a loss of Rs 539 million. Adjustments were also made to the balance sheet. Moreover, the PTCL group injected Rs 1.6 billion into UBank post the balance sheet date, to meet the shortfall in statutory capital. Read: UBank puts speculations to rest with healthy Rs5bn equity

Profitability

uring the initial nine months of 2023, the bank managed to maintain its profitability, recording a profit after tax of Rs 1.7 billion. This achievement is noteworthy as it occurred despite a decrease in interest income derived from government securities. Simultaneously, there was a reduction in interest expenses linked to borrowings. As per the deposit rate sheet of UBank, markup on deposits ranged between 5% and 24%, while earnings on markup ranged between 30% and 50% on the advance book. On average, this implies the bank maintains a spread of about 25%. Despite the decrease in government securities during the first three quarters, the net markup income has consistently fallen within the range of Rs 1.6 billion to Rs 2 billion. This suggests that even if the bank were to reverse its growth strategy, it might not significantly impact its profitability. However, a substantial credit loss on the advance book could indeed have a considerable impact on the bank's profitability.

The current situation

hese statements paint a picture up until September 30, 2023. This possibly means that at this moment only the internal stakeholders were aware of the microfinance bank’s issues. The speculations about the microfinance bank’s financial health began in October when the leadership of the bank suddenly changed. On October 18, it was announced that Kabeer Naqvi, CEO of UBank had resigned. The next day on October 19, according to a press release by the bank, Mohamed Essa Al Taheri was announced as the acting President and CEO of UBank. This sudden change in leadership led

to viral online conjectures about the financial stability of both UBank and UPaisa, with claims of their capital reserves teetering into the negative. Social media rumours exacerbated the situation, prompting depositors to withdraw their funds. Consequently, in a press release issued on October 23, the PTCL Group vehemently dismissed all allegations and speculations surrounding the financial well-being of its wholly-owned subsidiary, UBank. The leading ICT services provider in Pakistan reiterated that UBank possessed a resilient capital base and that PTCL group would support UBank in meeting any future growth requirements which it did, as stated in the recent financial statements.

Future outlook

his means that any loss or major change that led to a leadership shuffle and capital injection would be reflected in the audited yearly

financial statements. There is a possibility that UBank, which was once touted as one of the biggest microfinance banks, might not remain the biggest microfinance bank as its size of balance sheet continues to shrink, as evidenced by the equity of UBank that has declined from around Rs 7 billion to Rs 5 billion in these nine months. There’s a looming possibility that UBank’s deposits, especially the ones from banks and financial institutions, could decrease significantly. At the same time, there is also a possibility that by year-end, PTCL Group will restore confidence in UBank, and any deposits that left the bank might return. For now, the future of UBank remains shrouded in mystery. The position will become clearer as the institution releases its yearly report. Thus we will have to wait till next year, when the year-end 2023 audited accounts of UBank are published, to see what happened. n

BANKING

Record-breaking year expected for Pakistan’s rice exports;

is that a good thing?

Rice exports are set to break the previous records due to a bumper crop and ban on rice exports by India, but it might not be as good as it sounds

By Ghulam Abbas

n a shift that was already on the cards, the international consumer markets are now favoring Pakistani rice, particularly the Basmati variety, over the Indian rice. This revelation was made by the office bearers of the Rice Exporters Association of Pakistan (REAP), the exclusive representative body for rice exporters, during a media briefing at the National Press Club in Islamabad on Tuesday. It has been noted in the past that some Pakistani products, including rice, were reportedly being exported under Indian

branding from Dubai for enhanced marketing and branding by Indian exporters. However, according to what REAP members told the press, this trend has changed. As per REAP, quality issues surrounding Indian rice in global markets, particularly in Europe is the reason for its demand in the global consumers. Chela Ram Kewlani, the current Chairman of REAP, says, “Now they (Indian exporters) are trying to sell rice as Pakistani brands or variants like Basmati, as Pakistani rice varieties are preferred in the international market for being pest-free and of good quality.” He further highlighted that with a bumper crop of rice this year, REAP is confi-

dent that rice exports will surpass the record $3 billion, marking an encouraging development for the sector. He said that despite being the second major export item after textiles, the rice sector currently receives no subsidy or support from the government.

Is Pakistani rice actually superior?

he REAP might believe that the shift to Pakistan is all about the quality of our product but a major factor as previously reported by Profit, is the ban on export of rice placed by the Indian government. Due to concerns of high food in-

flation and rising prices in their own country, the Indian government decided to put a ban on all kinds of rice exports except the aromatic and high-end Basmati rice. Being the largest exporter of rice, boasting a 40% market share, this ban gives Pakistan a huge opportunity. At the time of rice harvest and the placement of this ban by India, Toaufiq Ahmed, former vice president of the Rice Exporters Association of Pakistan (REAP), told Profit that with the looming possibility of reduced rice supply from India, the prices of Pakistani non-basmati rice have skyrocketed by over 20 % or at least $100 per ton. Since Pakistan’s fresh crop is nearly ready for harvest, growers have begun to raise prices for the new crop due to the uncertain global situation. He noted that rice exports had ranged from $2 to $2.5 billion in the past few years but could go much higher than that this year. The prediction is on track for now but what is the problem with high exports? Afterall Pakistan is a country desperately looking to narrow its current account deficit. The problem is a simple one, food security vs export. The industry wants increased protection and facilitation to export because the global market pays higher profits, however the people of Pakistan want cheaper rice.

The exporters’ side of the story

alking to media Kewlani emphasized the need for value addition in the rice industry by producing by-products, suggesting that this could generate more revenue from the sector. He lamented that despite contributing to the Export Development Fund (EDF), the rice sector has not yet been granted industrial status, indicating a lack of priority from the government. Last year, floods led to a decline in rice exports, but Kewlani pointed out that this year’s improved production and new opportunities in emerging markets signal positive prospects for the sector. While government facilities are available to rice exporters, high tariffs in various countries pose challenges, necessitating agreements with these nations. He expressed regret over missing the $3 billion target last year due to irrigation issues but remained optimistic about achieving the target in the current year. He stressed the importance of technology and innovative methods to enhance Pakistan’s $4.5 billion worth of rice export capability. The event at the National Press Club also honored REAP officials and members. Abdul Rahim Janoo, Group Chairman Sindh, predicted that the rice export sector would become the largest contributor to the national economy soon. Various members of REAP suggested that, with enough support from the govern-

ment, the export figure could reach up to $4 billion in the next two to three years. But how should the government extend its support? Afterall a taxpayer expects the government to protect his interests.

What is better, food security or dollars?

A potential downside of the surge in non-basmati rice exports could be a price hike in the local market. A rice shortage could have far-reaching impacts, affecting wheat, soybeans, corn, and maize prices, with potential consequences for food items and fuel. A shortage is already in effect resulting in panic buying by a lot of the countries. While the producers of rice at REAP celebrate high profitability, the government gears up for another big concern. The annual food inflation in November 2023 stood at a staggering 29.23%. What is however more interesting is the requisite inflation in rice. According to inflation data published by the Pakistan Bureau of Statistics (PBS), the inflation in the prices of rice was recorded at 58.32% in urban areas and above 60% in rural areas. With the REAP looking to break previous export records, the domestic market could be left with an even lesser amount of stock, resulting in worse levels of food inflation.

With a commodity as essential as rice, a tight monetary policy just might not be enough to curb a demand-pull inflation cycle. It is a question that other major rice exporters are also grappling with. Both Thailand and Vietnam emphasized that they will ensure their domestic consumers are not hurt by rising exports. “It’s unacceptable for a rice-exporting country to face tight supplies and high domestic prices,” Vietnam Minister of Industry and Trade Nguyen Hong Dien said in August. It must be remembered here that Pakistan has the opportunity to take some of the Indian market away not in the long-term but just this year in particular. India is facing high food inflation for the same reason that the rest of the world is: the Russia-Ukraine war. Next year, if India is not facing similar food inflation, they will be back to take their place as the biggest rice exporter in the world. The question that faces policy makers is whether or not a one time export boost is worth the immediate pain that short term inflation will cause the public. Therefore, the caretaker government might find itself at an impasse, let the free market dictate the trade and cause food insecurity or intervene and give up on crucial foreign exchange reserves that Pakistan desperately needs. n

PSX gives compulsory buyback direction to Dewan Auto.

hat does it mean for the W company and its shareholders? The company has been asked to buy back its shares but what purpose does it serve? By Zain Naeem

akistan Stock Exchange (PSX), on the 5th of December, issued a compulsory buyback direction to Dewan Automotive Engineering Limited (DWAE) which mandates the company to either address the non-compliances highlighted by the PSX or comply with the buyback direction before the 11th of December 2023.

This is not the first time that such an order has been passed against DWAE as the same was done in December of 2019. But why is there such a regulation and what is the utility of such a regulation being in place? When a company wants to get listed on the stock exchange, it makes a commitment that it will be more open to the market and will allow investors access to information which might be kept private or hidden in an unlisted company. As investors are willing

to hand over their hard earned money to the company, they are becoming part owners into the company. This allows them to get access to all the information that an owner would have or would want to have. This is the basic tenant on which the whole financial system is based. What can happen if this tenant is broken? Consider a company which wants to list in the market. Let’s call it Good Investments Limited. Good Investments is a company with a good track record and it feels that it needs to get an equity injection in order to expand its operations. As banks offer loans at strict terms, the company wants to get investors to invest. In order to do this, the company carries out an Initial Placement Offer (IPO) which allows individuals and companies to invest in the company. As the company raises the investments and gets listed, the investors are able to invest and divest their investments on a daily basis. Just like there is a moral agreement between the investors and the company, the company also makes a formal pact with the stock exchange that it will comply with all the requirements that are placed on it. In case any of these requirements are not met, the stock exchange has the power to reprimand the company. These regulations are placed for the interest of the investors and for the betterment of the market. In case the company is not working for the betterment of its shareholders or not following the rules, they can be checked and penalized accordingly. Regulation 5.11 of the PSX Regulations details the different non-compliances that can be flagged by the stock exchange itself. These include, but are not limited to, the company not starting its production as disclosed in the Prospectus, suspension of operations for more than one year, not holding its Annual General Meeting as per law, failing to submit its annual audited accounts, failing to pay the fees accrued, qualification being issued relating to the going concern of the company by its statutory auditors and/or license being revoked by the Securities and Exchange Commission of Pakistan. In all these cases, the company is disadvantaging the investors by not following through on their promises and falling short of their responsibility with the shareholders and the market aswell. In such a case, the PSX steps in and forces companies to either address these issues or be prepared to be punished. As any of these requirements are not met, the PSX has the power to place the company as being defaulted. Once this placement has been done, the investors are made aware of the placement. The PSX does allow the company a period of 90 days to rectify the non-compliance after which the company would be brought from the defaulters’ counter to the normal counter and shares can be traded again. If, however, the non-compliance is not addressed, the PSX can

stop the trading of shares on the exchange and give the company another 90 days to rectify the situation. If it is seen that the company has still not rectified the situation, the company is asked to carry out a mandatory buyback. Even at this juncture, the company is given a period of 90 days to either rectify the situation or carry out the formalities to put the buyback in place. DWAE seems to have come near this deadline to either comply or carry out a buyback. So what purpose do these regulations have? Consider an investor who had bought shares of DWAE in the past. They invested their hard earned money into the company. Now, through no fault of their own, the company is flouting the trust that was placed on them and not following through on their commitment. Investors expected the company to perform and earn a return on their investment. The company has not followed the

requirements of the stock exchange due to which they have been placed in the defaulters’ segment. In order to protect the investors, the PSX has made the regulations so that even if the company is being made to pay, the investors are still looked after. By making it compulsory for the company to carry out a buyback, the investors are being provided an opportunity to sell their shares back to the company and exit from their investment as they are not able to do so in the market. This is a great solution that has been placed by PSX where the company is being punished for not following their regulatory compliance. In addition to that, the investors are being given a way out to liquidate their holding and make back some of their investment by mandating the company to refund the investors. As the date comes closer to the 11th December, it has to be seen which path is followed by the company in the coming days. n

PIA pays $13mn to reclaim aircraft stranded for two years

AP-DLG returned to Pakistan on Tuesday, and the other is set to return following the other $13 million By Daniyal Ahmad

fter a gruelling two-year hiatus in Indonesia, Pakistan International Airlines (PIA) has reclaimed one of its two aircrafts, by parting with a hefty sum of $13 million to the leasing company. The Airbus A320, bearing the registration number AP-BLZ

(msn 2944), made its return to Islamabad International Airport on Tuesday night, having embarked on its journey from Jakarta and refuelling Bangkok. However, its companion, an Airbus A320 registered as AP-BLY (MSN 2926), remains ensnared in Indonesia. Yet, there is a glimmer of hope as it is anticipated to grace Pakistani soil within a fortnight. The root of this predicament lies in a leasing

agreement between PIA and AirAsia that has since expired. Ordinarily, aircrafts are dutifully returned to the lessor. This was also the intended fate for the AP-BLZ, which was scheduled to be returned in the autumn month of September in 2021. However, AirAsia declined to accept both aircrafts, citing their dilapidated condition after being utilised by PIA. As a result, AirAsia had the planes impounded in Jakarta in September 2021. “PIA’s aircraft procurement department is a hotbed of incompetence and corruption,” declares Tahir Mian, senior aviation journalist. “There is a glaring issue at hand, because it baffles me how and why PIA consistently secures the most problematic, the most troublesome lease deals – when the majority of the world airlines are securing the best deals for their aircrafts and everything proceeds without a hitch. This entire saga is a testament to how poorly managed PIA’s maintenance is, that they have consistently failed to deliver a leased aircraft in a condition that is acceptable to the lessor after the leasing term expires,” Mian elaborates. Mian’s remarks on the matter paint a grim picture, because not only are more fuel-efficient aircrafts available on more affordable terms, but this is also not the first time PIA’s aircraft has been impounded. Earlier in May, PIA’s Boeing 777-200ER, registered as AP-BMH, was seized earlier this year for the second time by Malaysian authorities in the span of three years. We have previously delved into how PIA found itself in this predicament to begin with, and how it subsequently navigated the situation. Read more: PIA bleeding millions paying rent for two A320s grounded for past nine months; PIA’s long dispute with aeroplane

leasing company seems to have ended; PIA resolves $26mn dispute with AACL through out-of-court settlement However, let’s take a moment to recap.

The issue at hand

n 2015, Pakistan International Airlines (PIA) entered into a six-year lease agreement with AirAsia, a Malaysian multinational air carrier, for two Airbus A320 planes. The monthly rent for each plane was a staggering $550,000. For the ensuing half-decade, these aircraft soared the skies under the PIA’s emblem, bearing the registration numbers AP-BLZ and AP-BLY. This was not an anomaly for PIA, as the airline frequently resorted to leasing older models from other companies. The two A320s in question had their inaugural flights in France in 2006, before serving AirAsia and eventually being leased by PIA. However, as the lease period drew to a close in 2021, PIA found itself in a quandary. The aircraft were to be returned to AirAsia in the exact condition they were received, necessitating extensive refurbishment, replacement of original parts, and meticulous cleaning. This process was not only costly but also time-consuming, and PIA was obligated to continue paying the rent until its completion. Typically, PIA would opt to purchase the leased aircraft from the original owners, especially if they were too antiquated to hold much value. However, in this instance, AirAsia declined to sell the aircraft, despite PIA’s offer. AirAsia insisted on having its aircraft returned, leaving PIA with no alternative but to comply. The redelivery process, however, was riddled with complications. PIA was supposed

to get the c check from a third party, It could not do the c check itself. Hence the planes were sent to Jakarta. There, a third-party company, FL Technic, was to inspect the aircraft. FL Technic, a global provider of aircraft maintenance, repair, and overhaul services, is headquartered in Vilnius, Lithuania. Upon arrival in Jakarta via Kuala Lumpur on September 19th, 2021, the aircraft were found to be in a state of disrepair, necessitating further repairs. PIA maintained that it had been paying the rent for the aircraft, but nothing more, and that the parking fee was covered. However, rumours circulated that the parking fee was included in the payment made to FL Technic and the engineering facility in Jakarta. PIA did not provide clarity on this matter. In an attempt to resolve the issue out of court, PIA dispatched a seven-member delegation to Jakarta in October 2023, led by the Secretary of Aviation, Saif Anjum. The delegation also included PIA CEO Amir Hayat, the Chief Technical Officer, and the Chief Financial Officer. Following negotiations with AirAsia and PIA’s legal team, PIA agreed to pay $26 million to settle the dispute and repatriate the aircraft to Pakistan. This was in contrast to the $31.3 million that AirAsia had demanded in a court case against the national flag carrier in the UK. This incident marked a significant setback for PIA, which has been grappling with financial difficulties for years. The botched aircraft rental deal lays bare PIA’s mismanagement, inefficiency, and lack of transparency. It also raised questions about PIA’s accountability, as no one was held responsible for the debacle. The PIA’s A320 saga was a classic example of how Pakistan’s national airline lost millions in a bad bargain. n