Corporates flush with cash

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AFTER a long time, cash is again the king. Corporates and high net-worth individuals are sitting on piles of cash, wondering how to put all the surplus money to profitable use.

“The economy is indeed flush with liquidity,” a senior economist associated with a foreign bank agreed. The State Bank of Pakistan’s recently released report, giving data for two-and-a-half months of the current fiscal year (July to mid-September) revealed that the private sector had retired debt instead of borrowing; the net borrowing by the sector during the period was negative Rs74bn.

Professor M.A Jabbar, who teaches economics at a local business school, pointed out that a glance at the balance sheets of big companies would show a sizeable increase in ‘current assets’ that are easily convertible into cash.

He identified three sources that have enriched corporates and individuals alike. The first is the booming stock market, which has multiplied investors’ wealth by giving out a huge return of over 120pc in less than three years. The second is the steady growth of 15-20pc in corporate profitability, and the last is the rejuvenation in the upscale property market.

The corporate sector is raking in cash due to higher earnings. According to the last economic survey, 15 blue chip companies had earned a cumulative profit-after-tax of Rs286bn in ten months of FY14

Large-scale construction activity, mainly in major cities — manifested by the demand and earnings growth of cement companies — is all too clear. Yet big and mighty property investors prefer to take money out into projects in adjoining countries. Dubai has again emerged as the favourite destination.

“In the last 18 months, Pakistani investors have invested a whopping $2.6bn in the property market in the UAE; 90pc of it in Dubai,” says Muhammad Azam Khan, a stock broker and CEO of Sunrise Capital. He was a member of a delegation that recently visited Dubai. He stressed that all that money is recorded with the Dubai Chamber of Commerce and went through the central bank of Dubai.

Azam believes, and several others agree, that according to the standard, three times that sum — or over $7bn (Rs700bn) — went to the Dubai market through irregular routes like hundi in just a year-and-a-half. Interestingly, the Pakistani investors are putting their money in greenfield projects like villas, which the constructors promise to deliver no earlier than 2017-18.

“Pakistanis are the third-biggest investors in the Dubai property market, after Americans and Indians,” a property dealer confirmed. However, no one wanted to name the biggest local investors in Dubai as they think it could hurt their local business interests.

Besides property, around 6,000 Pakistani companies operating in various industrial ventures in the Emirates are registered with the Dubai Chamber of Commerce. “More than return, it is the lack of confidence in the country’s economy which is chasing all that money out of Pakistan,” says another member of the delegation.

The country’s corporate sector is raking in cash due to higher earnings. According to the last economic survey, 15 blue chip companies had earned a colossal cumulative profit-after-tax of Rs286bn in ten months of FY14.

Corporates are investing mainly in consumer goods and the energy sector. Profitability of the cement sector for FY14 has improved by 10pc year-on-year due to a 7pc hike in prices. Combined earnings of cement companies rose to Rs31.5bn, from Rs28.6bn in FY13.

Lucky Cement has announced an equity investment of Rs27bn in its wholly owned 660MW coal-based power project in Karachi. Its main rival, DG Khan Cement, would invest Rs3bn in associated companies — Nishat Paper Products, Nishat Dairy and Nishat Hotels and Properties.

Other corporates are using money for their own interests. The Fauji Group, through Fauji Fertiliser and Fauji Fertiliser Bin Qasim, is venturing into the food business, including the ‘halal’ meat segment in foreign markets. Fauji Fertiliser Company, 44pc owned by the Army Foundation, plans to set up a $1.25bn fertiliser plant in Africa in collaboration with a consortium.

Packages Ltd, the flagship company of the Syed Babar Ali Group, has resolved to develop a real estate project in Lahore through its 100pc owned subsidiary. Attock Cement Pakistan has signed a joint venture agreement for the installation of a 3,000-tonne per day cement grinding plant in Basra, Iraq, at a cost of $35m.

International Industries, which claims to be the country’s largest steel pipe exporter, has announced its intention to establish a wholly owned subsidiary in Melbourne, Australia, with paid-up capital of AUD100,000.

Thal Limited, a listed company in the fold of the House of Habib, has proposed to acquire strategic interest of over 10pc in the Sindh Engro Coal Minining Company Limited by contributing $30m to the equity. This April, IGI Insurance paid Rs732m for the acquisition of American Life Insurance Company.

Even K-Electric plans to invest $350m to improve its transmission and distribution network. And the celebrated sale of Lafarge Cement Company concluded on July 25 when Bestway Cement Limited paid $218m for a controlling 75.86pc stake to Lafarge’s French parent, Safimo SAS.

Published in Dawn, Economic & Business, September 29th, 2014

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