An interview with Syed Sheharyar Ali, Executive Director, Treet Group

Treet Batteries going to be our flagship project

Below we edited excerpts of the conversation:

BR Research: Treet Groups diversification spree goes on. Your battery plant is one if the biggest investments the group has ever made. Please tell us the reasons you chose to ge with the specific business idea.

Syed Sheharyar Ali: Diversification has been a key pillar of our corporate strategy over the years. After developing feasibility for the number of projects, which includes the tertiary care hospital in Lahore, the group chose to go with the battery projects. We are only company in Pakistan that manufactures blades in the country. You know China has copied nuclear technology but they haven’t able to copy blades. It’s a much specified field. We wanted to go into something that isn’t currently being done in Pakistan. Maintenance-free batteries are the future and have already gained wide-spread adoption in most countries including our neighbors, Bangladesh and India where as Pakistan is still behind. After doing our due diligence, we found it to be a very lucrative business. Simultaneously we also decided to go with deep-cycle batteries because we foresaw that not only was there an electricity shortage but solar technology is also being encouraged by the government. Even globally solar powered energy is now touted to be the future. You see most people are not aware that the battery’s life starts when it produces rather than when usage starts. Most maintenance free batteries in Pakistan come through a grey channel and five to six months of battery life are lost during transportation. The other thing is that our battery life is double that of the ones found in the market. Due to this. Market response has been phenomenal so far. At the same time, we have also set up in Lahore recently as education takes a top priority on our social issues. During this period, we also found out about Renacon Pharma Limited which actually had a very good opportunity and decided to invest in it as well.

BRR: How did the Renacon Pharma Limited acquisition come about?

SSA: The company had orders but didn’t have enough money to fulfill them. That’s where Treet stepped in and acquired a 58 percent stake in the company. The existing Renacon management looks after the technical side, whereas Treet takes care of cash flows.

BRR: What’s the future plan for the company?

SSA: Renacon of already generating revenues and we are just going to shift them from their existing manufacturing facility in Lahore to the land adjacent to our battery plant in FIEDMC, Faisalabad. Currently Renacon is producing hemodialysis concentrates but we want to eventually expand into tablets and capsules as well. There is great opportunity available in this segment in the both domestic and export market. There are almost 3-4 million dialysis done in Pakistan in about 450 dialysis centers. It’s very unfortunate but dialysis is increasing in the country.

BRR: What’s the export to local sales ratio for Renacon?

SSA: currently we have production restraints and are unable to even meet local remand so with the expansion we will be able to capture additional local market and export. We are aiming of maximum of 30% for export.

BRR: Treet recently announced taking Renacon public. When is the IPO expected to take place and how much do you expect to raise?

SSA: The application to the PSX had been already been applied and is under approval. The mandate has already been given to Arif Habib and BMA Capital collectively. We expect the book building procedure to be started in June of this year by offering 50 Million shares through IPO/Book building process with a float price of Rs12.50/share which would translate to Rs625 Million at floor price with a maximum of Rs875 Million.

BRR: Let’s move to your existing business portfolio now. The blades/razor division has been Treet’s star performer over the year. But competition has intensified in the international market. How do you see the situation?

SSA: The blade division constitutes almost 35 percent of our total revenue and its performance has been great this year. But you’re right about the increasing competition. Treet has focused on targeted the mass market so our competition is not Gillette, which goes for Grade-A but rather than Indian blade manufacturers who have a similar target market. There’s a price war going on there which is hurting our margins in the international market. The other factor is that Treet uses German, Swedish and Japanese steel, where as our Indian counterparts use local steel, which means even though our costs us on the higher side, but the quality is far superior but because of lower selling prices our margins are under stress.

BRR: Going through your financial reports, it seems that the corrugation segment seems to be struggling. What do attributes this to?

SSA: one problem that we are facing in corrugation is that we have reached our capacities. Again, corrugation is very competitive industry. It’s a low margin and high volume business. There are about 80 corrugation units in Punjab alone. You have giants like Packages and Century on one side that has low price and economics of scale. On the other side is the cottage industry that doesn’t pay taxes and operates informally. Our volumes have remained the same but because of our overheads increasing, primarily material costs, we are having a difficult time passing it on the customer. Our fluting prices have gone up by 18 percent as a result of rising waste prices this time around in last 3 months alone.

BRR: How do you plan to address these challenges?

SSA: We have recently signed an agreement with Pakistan Packages to set up a corrugation unit in Karachi where prices of raw material are almost 10 percent cheaper. Almost 30 percent of our consumers are based in Karachi, while the remaining are in Punjab. This mill will be up and running in June, so from next year you’ll see healthy growth in corrugation. Currently, our capacity is roughly 2300 tons, and after this it will rise by almost 50 percent in first year.

BRR: The motorbike division also been in a rut for some time now. What do you plan to do about it?

SSA: This segment constitute a very small percentage of our overall sales mix so we’re not too worried. There are almost 80-85 manufacturers of bikes in Pakistan out of which Honda alone has 60 percent of overall market share. So the remaining 40 percent is divided amongst almost 80 manufacturers meaning there is intense competition. Then there is a fact that there are less than 2 percent manufacturers who are selling it on cash and Treet is one of them. We sell about 800-1000 units per month, because we don’t generally give credit except for some corporate clients and a very limited number of dealers. If you look at the top Chinese assemblers, they have poured in almost Rs3 billion credit in the market. We don’t want to take that route because the associated risks are high. The bottom line is that Treet is not losing money on bikes segment while also generating employment for almost 100 people. The plan is therefore continue production in the future.

BRR: Going forward what is the strategy of Treet Group in the term of operational focus and improving profitability of existing divisions?

SSA: As I mentioned earlier, our battery project is going to be the game-charger. We expect its revenue to surpass Treet’s revenue within the first three to four years. Naturally, Treet has invested heavily in project both in terms of management focus and financial capital. Once, the plant is up and running, our focus will be on improving existing operational segments. At the same time, our presence in both the healthcare and educational sector is going to increase as a result of our university project and Renacon Pharma. Overall the coming years are going to be an exciting time for both the company and its shareholders.