BR Research Newsletter

Inside this:

The return of BoP worries

ANALYSES & COMMENTS BY

New waves in insurance industry

BR RESEARCH

Cement: a jolly good year!

Urbansiation & human development

BR Research is the research wing of Pakistans premier financial newspaper, the

daily Business Recorder.

PLUS
Interview with Muneeb Maayr ,Co-founder, Daraz.pk

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Monday, September 22, 2014| BR Research Newsletter |

BR Research Newsletter

The return of BoP worries

Sadly, the prophecy seems to have come of truth, though at this point it is difficult to
say what exactly caused the most damage to exports.
Exports for 2MFY15 are down by $461 million year-on-year. From amongst known
components, it is textile that saw the biggest decline about $75 million year-on-year
as gains in knitwear, bed ware, readymade garments, and made-ups were offset
by declines in cotton yarn, cotton cloth and raw cotton. This was followed by a $23
million decrease in non-basmati rice exports, and a $38 million fall in jewelry exports.
Still, that only explains so much. The biggest decline came in what SBP classifies as
other exports that stood at a negative $178 million in 2MFY15, as against a positive
number of $179 million in same period last year. The SBP says that other exports
includes land borne export, export of samples, export processing zone, outstanding
export bills and refund & rebate, goods procured on ports by carriers less freight on
exports. The central banks export dataset released last week does not mention any
commodity for these other exports.

The balance-of-payment concerns are back again. The central bank reports that
2MFY15 current account deficit stood at 2.8 percent of the GDP, compared to 1.4
percent in the year-ago period, as payments for petroleum imports stoked total
imports whereas exports dropped by 11 percent year-on-year.
According to data released by the State Bank of Pakistan, current account deficit for
the first two months was $1.37 billion, more than double of what it was in same period
last year. Remittances continued with its growth spree - up 13 percent year-on-year
whereas balances on trade in services bettered by 31 percent to a deficit of $409
million in 2MFY15.
Recall that the current account deficit had stood at 1.18 percent of the GDP for the
full year in FY14, as against 1.06 percent in FY13. Commenting on full year numbers in
July, this column had cautioned that growth in exports isnt just going to take off,
unless the much-needed reforms are rolled out soon in the energy sector, and there
are improvements in law and order and the security situation.
2 | BR Research Newsletter | Monday, September 22, 2014

While this column awaits some clarity about exports, situation at the import front is
clear: imports rose by about $1.02 billion in 2MFY15 year-on-year, of which the
biggest contribution ($550mn) came from petroleum group. Imports of petroleum
products rose by $306 million whereas that of petroleum crude increased by $244
million. Other major increases in import came from iron & steel segment, assorted
food items, whose import rose by $93 million and $97 million respectively year-onyear.
In its latest monetary policy, the central bank expects that if latest trends in exports
and imports are any guide, the trade deficit will dominate the story of external
account deficit, despite healthy growth in workers remittances. Add to that the
declining private capital inflows, especially foreign direct investments, and what we
have is a balance-of-payments position that should be giving worries for some time
to come.

BR Research Newsletter

New waves in insurance

industry
Good times seem to have come to mark the insurance industry. Investors are wildeyed about investing in the sector while mergers and acquisitions are gaining
momentum. To recall, in April 2014, IGI Insurance acquired a controlling stake in
American Life Insurance (ALICO). Later Rosewood, a Switzerland based venture
capital, expressed its intentions to acquire 74.9 percent stake in TPL Direct Insurance,
which was then followed Bestways expression of interest to attain 12.23 percent
stake in UBL Insurers.
Whether the latter two deals materialise or not is another debate; but the point is
that Pakistans insurance sector is being considered as a sector with huge potential.
Thanks to the unfolding regulatory mechanism, the industry is lining up to catch up
with the pace. Mind you, owing to sluggish growth and dearth of innovation,
Pakistani insurance industry is ill-rated when compared to the growth in insurance
industries elsewhere in the world. In terms of insurance penetration, Pakistan is ranked
as the lowest in the region.
Low insurance penetration coupled with major attempts taken by the regulator to
improve insurance regulations, is helping the insurers to hunt for innovation. In this
context, the whopping growth in Bancssruance network, the allowance of takaful
window operation for conventional insurers, introduction of microinsurance
regulations have been the major triggers.
Moreover, with the insurers collaborating with telecommunication companies and
asset management companies to expand their outreach, the industry is unveiling
alternative modes and channels to tap the untapped segment of the population,
which has remained the key culprit behind insurance industrys lackluster growth over
the past many years.
Also, the recent SAARC conference organized by SECP, where delegates from a
number of countries were invited, also warrants some brownie points as it helped the
regulators from different countries to share their viewpoints on the potential
opportunities and the hurdles in existing mechanism.
3 | BR Research Newsletter | Monday, September 22, 2014

Rosewood, Bestway and IGI Insurance seem to be smart enough by deciding to

capitalise on the opportunities at the right time. Over the last three years, insurance
sectors aggregate profitability grew by a decent average annual growth of 33
percent and with the insurers entering into takaful and microinsurance along with
using making use of technological development to introduce alternative distribution
mechanisms, the growth rate doubling over the next 5-10 years appears to be within
reach.

BR Research Newsletter

Cement: a jolly good year!

I While the governments claims on economic growth may be an eye-wash, there is
reason to believe that not all is dull when it comes to business growth. Or so
suggest the numbers from one of the leading LSM sectors, cement and
construction.

In an earlier column, it was highlighted that FY14 had proved to be rather good
year for the sector, with local sales volumes reaching record heights (see BR
Research column A ripe year for cement sales dated July 9, 2014). But more
importantly for cement makers, their earnings seem to have kicked off well too,
signaling attractive avenues for institutional investors.
A recent report by Topline Securities sheds light on the performance of the cement
sector, accounting for 97 percent of the total listed cement companies market
capitalization. Of the 19 companies, 12 were included in the sample, with the
remaining ones being those who either havent announced their results yet or
have been under losses.
According to the report, the sector registered 13 percent earnings growth
accumulatively, posting Rs42 billion in net profits during FY14. Higher cement
prices propelled revenues through the year, contributing 12 percent to the sectors
net sales.
Recognizing rising costs, including electricity tariff and power hikes, prices were
raised by 13 percent during the year. Consequently, profit-before taxation rose by
18 percent, amounting at Rs56 billion. At the same time, average profitability was
subdued by up to 6 percent due the increase in effective taxation.
However, an important element in supporting net margins has been a widespread
decrease in financing costs owing to smooth deleveraging (finance costs came
4 | BR Research Newsletter | Monday, September 22, 2014

down by 28 percent). Furthermore, other operating income also rose by a

significant 49 percent.
Thatta Cement, Bestway Cement, and Fauji Cement turn out to be the stellar
performers this year, registering 101 percent, 36 percent and 27 percent growth
respectively. Lucky Cement, holding the largest market share, posted growth of 16
percent.
The sector indeed seems to be performing well locally, while exports markets
continue to shrink. This has led quite a few players to pursue expansion plans,
thereby increasing the total capacity of the sector. Aside from the activities in the
public and the private spheres, the sector will also get a boost from the nature as
reconstruction activities take foot once the floods recede. Mother nature is
generous in ways more than one!
.

BR Research Newsletter

Urbansiation & human

development
Pakistans human development rankings are slipping further down the abyss. The
Mahbub ul Haq Human Development Centre Pakistan launched its 17th annual
regional report titled Human Development in South Asia 2014 recently, and the
subject this time is the relationship between urbanisation and human development.
The briefing paper summarizes the report pretty well, dividing it into four distinct
sections: How South Asia is least urbanised region in the world, economic benefits of
urbanisation is South Asia, the growing urban divide in the region and the rise of
Karachi as a mega city.
A lot has been discussed and talked about the rapid urbanisation in Pakistan, which
has led to industrialisation and globalisation, but has it been inclusive, pro-poor and
environmentally sustainable?
The key points of concern for the region are the fastest growing rate of unplanned
urbanisation, the increasing rural-urban migration, and the disparities within urban
centres. And thus the emphasis in the inauguration ceremony held at Lahore
University of Management Sciences was on the focus towards governance and
decetralisation of power in Pakistan - the two lacking areas in other macro and
micro level decisions in the country.
It must be noted that it is not a myth that urbanisation leads to improvement in
human development outcomes. However, it is the different facets of well-planned,
equitable urbanisation that present the opportunities for policy makers to take
decisions that mend the social, economic and environmental factors.
Some key recommendations that the study offers include the focus on the growth of
medium and small sized cities, enhanced connectivity to ensure spatial distribution of

5 | BR Research Newsletter | Monday, September 22, 2014

urbanisation, increase incentives to reduce migration, and balanced rural an urban

budgetary allocations for the provision of public services.

BR Research Newsletter

Daraz.pk aims to be Pakistans tmall, Cofounder Daraz.pk

Muneeb Maayr is the co-founder of Daraz.pk at Rocket Internet. Muneeb Maayr is a
graduate from the University of Virginia and a successful entrepreneur in his own
right. Muneeb started his career as an investment banker in Bear Stearns but moved
back to Pakistan to establish SNL Pakistan. In a short span of six years he was able to
expand the company to over 600 people after which it was bought by SNL Financial
in a cash & equity deal while retaining management control. Muneeb remained
associated with the firm till August 2012 after which he joined Rocket Internet to help
build Daraz, Pakistans largest e-commerce venture. BR Research recently sat down
with Muneeb and discussed the e-commerce dynamics in Pakistan and Darazs
future plans. Following is an edited excerpt.

BR Research: what is Daraz.pk (Daraz) all about and what is the core
philosophy behind it?
Muneeb Maayr: Daraz is basically an e-commerce entity, where we do endto-end fulfilment. That means we are responsible to help fulfil the order from
the time of its placement. Almost two-third is our inventory, which is housed
in a warehouse in Karachi. Whereas, the remaining is what we call the
managed marketplace, where suppliers have the inventory with
themselves and we help fulfil it.
The idea is to try and become Alibabas Tmall for Pakistan. Alibaba is the
Google, the advertiser and also the last mile fulfilment company, hence
they are valued at what they are. There is a tremendous opportunity to do
all of that in Pakistan because there is very little competition. The
infrastructure does not really exist, which allows us to come in and be the
formative player.
In terms of platform, Daraz is one of the very few here that generates its own
content. We proudly have a self generated content, unlike most others.
Secondly, in terms of advertisement, there has been very little competition in
6 | BR Research Newsletter | Monday, September 22, 2014

terms of online advertising in Pakistan, which allows our teams to become

one of the finest in the country.
Our online marketing is perhaps the most
efficient in terms of spend to earning.
Unlike others, we are actually able to see
how many people have come in, seen a
certain product, bought it and how many
have we physically delivered to and
completed the transaction. No one else
can see that. For instance, someone like
OLX can see how many people came in,
but they would have no idea how many
actually
engaged
in
the
actual
transaction.
Our platform allows us to see end-to-end
fulfilment and that is the business we
want to get deep into. What you will see
play out in the near future is that a lot of
players such as Samsung, and other
mobile phone companies will advertise,
and then you will see our number. We
want to be able to fulfil orders for all
retailers brands in the country.
BRR: What is the geographic breakup of your business outside the three
major cities?
MM: The goal is to become the non-physical face of the brand and allow
any brand to work with us. If you look at the order spectrum right now, over
half the orders are from outside Karachi, Lahore and Islamabad, which is a
very exciting proposition. The reality is that people now have more access
and exposure in smaller cities, yet there is no retail infrastructure.

BR Research Newsletter
For instance, we get a lot of orders from Quetta because there are hardly
any malls or retail infrastructure. Retail infrastructure is an expensive
proposition and a time consuming one too, this is where we see the
opportunity.
BRR: How do you differentiate yourself with Kaymu? Do you not face a threat
of cannibalisation?

It enables anyone with the power to sell in Pakistan, without worrying about
payment and fulfilment. We will be there to take care of that.
BRR: How much volume does Daraz generate currently and at what pace is it
moving?

MM: Kaymu is meant to be a person-to-person platform, more like ebay and

OLX. But when you come to Daraz, we want to know if you are an
established retailer, will you be able to fulfil the orders and the readiness and
ability to be able to supply. It is a different ball game from Kaymu.

MM: It has been two years during which we had very little funding to grow.
We did not have the money to pile inventory. If you look at comparable
players in the region, e-commerce players essentially have ample
inventories. So we spent whatever money we had on brand building,
interface building and getting suppliers on board.

We care about fulfilment, for which we have set up a separate company

aside which takes care of logistics and warehousing. Right now we are
doing end-to-end retail, and that is about to change as well very soon.

Our topline is a direct relation to the amount of inventory that we have

relative to the amount of money that we spend. We are selling over a 1000
products per day, and we are the biggest in the country.

We are about to start a marketplace very shortly, which means that as long
as you can prove you have the original stuff to sell, willing to hold the
inventory at our warehouse or guarantee timely delivery, you do not have to
be the brand yourself.

BRR: Where do you see the e-commerce market in the near future?

BRR: The electronic retail market has very few authorised retailers. So will that
be an area you would be tapping?
MM: Yes, that is a huge market. We will be concerned about the originality
and legitimacy of a certain product and not concerned whether it is the
authorised dealer or not. Most brands in Pakistan do not have a website
presence, and they do not even know how to manage and maintain the
website, in case they do have one.
So this is a tremendous opportunity for us. We have actually gone in and
made stores for certain brands. Most brands have a Facebook page, but
their core purpose is engagement, whereas, we want to take care of the
fulfilment aspect. When the marketplace comes up, there is massive
opportunity for traders and small businessmen in Pakistan.
7 | BR Research Newsletter | Monday, September 22, 2014

MM: I think in 2015, the market will probably be around $35-40 million. It will
depend a great deal on the money spent on marketing. Still lots need to be
invested on customer acquisition, the cost of which will eventually go down.
The retail business in Pakistan does not have high margins, unlike west.
The goal right now is to grow market share, not profitability. Capturing the
market is the aim at the moment. The market share will only reap fruits in the
longer run.
BRR: What are Darazs marketing plans if the goal is to grow the market?
MM: Probably by the end of this year, we will start advertising on television as
well, in a bigger way than others have.
We always build in the customer lifetime value in our business model. The
basic acquisition cost is always high; we then work on assumptions on
repurchases over the lifetime that gives us profit. As long as we have the

BR Research Newsletter
information and we can keep drilling the potential customer, we can have
the business rolling.

Pakistans internet audience is predominantly male and electronics is a

good business to capture male audience.

On a lighter side, eventually we want you to become lazy, use your phone
and simply make the purchase at your convenience.

We are looking at the future which lot of people are not seeing. Once 3G
services spread and the costs get down, we will surely have a bigger
audience, especially the female segment sitting at home. Once mobile
banking becomes common and cheaper, we will not have to deal with
cash, just as it happens in Kenya.

BRR: Are there any plans to make the payment mode any advance than just
continuing with cash on delivery mode?
MM: We are one of the first companies in Pakistan in the retail sector to sign
up with 1-link as well. As long as you have a bank account in Pakistan, you
can transfer money to us through your mobile phone. We are also the only
retail website in Pakistan that allows rupee denominated credit card
transactions.
There are 20 million plastic cards in Pakistan, so now we are considering
deploying machines with our riders, for those who are apprehensive of using
online payment or paying cash. We are trying to crack the nut. We have a
lot of dedicated people working on these projects. It is a matter of a year,
and you will see an entirely different eco system. We are working day in day
out to make retail more efficient for these brands and established MNCs.
Surely, we will not become profitable very soon. We are right now investing
in intellectual capital. We want to have the leadership advantage of the
market. We are working with various players on the payment front.
BRR: Where do you see your revenue and volume of transactions three years
from now?
MM: I can guarantee you that it will be very close to three digit millions of
dollars. That is because the amount of money we are going to put into this
business in six months from now, will help us supersede anyone else. We are
setting up the infrastructure.
We are getting into electronic gadgets full scale, starting from mobile
phones to lap tops and whatever electronic gadget you can think of.
8 | BR Research Newsletter | Monday, September 22, 2014