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[KARACHI] Pakistan's Fauji Foods Ltd wants to significantly expand its dairy business, ratcheting up competition among fast-moving consumer goods firms chasing the country's growing middle class.
The firm, a subsidiary of the military-owned Fauji Foundation, one of the largest conglomerates in Pakistan, is looking to double its market share to 8 per cent of the country's packaged milk business this year, chief financial officer Syed Aamir Ahsan said in an interview in Islamabad. The Fauji group, which entered the dairy business by acquiring a majority stake in Noon Pakistan Ltd about two years ago, will be up against Engro Foods Ltd, whose share dropped to 48 per cent of the market in the 12 months ended November, according to the latest available data. In that time, Fauji Foods had already seized 19 per cent of the country's creamer segment, Mr Ahsan said.
The Fauji group's push is part of a wider effort by companies competing to tap a growing middle class in South Asia's second-largest economy. Dutch firm Royal FrieslandCampina NV entered the country's market by buying a 51 per cent stake in Engro Foods in December for US$450 million, one of the largest acquisitions in Pakistan's consumer sector. Nestle Pakistan Ltd is also a player.
"Processed dairy has become much more competitive," said Hasnain Malik, the Dubai-based head of equity research at Exotix Partners LLP. "There is no doubt that Fauji's marketing push behind its brands - Dostea and Nurpur Original - has put pressure on the incumbents to respond." Dairy sector growth has slowed, however, in a nation where only 10 per cent buy boxed milk, while most people buy raw milk and boil it before drinking.
"If you look at the dairy sector, again because of the poor policies of the government, it has actually shrunk and we are the only company in the dairy sector which is actually growing its market share," said Mr Ahsan. "Unfortunately in this government's time, both the industry and the agri sector both have been badly affected, both were ignored." Fauji Foods took over Noon Pakistan's facility in December 2015 and expanded it, investing about 7 billion rupees(S$148.6million). Capacity has gone from 100,000 litres per day to about 600,000 litres per day, he said. The company's shares have declined 3.6 per cent compared with a 4 per cent drop in the nation's benchmark KSE100 Index. Engro Foods Ltd. has declined 38 per cent this year.
Mr Ahsan said the fertilizer business was attempting to cut costs in part by providing its own power. A Fauji-owned coal project began producing power in May, reducing the firm's dependence on gas. Part of the power is also sold on to K-Electric Ltd, a power utility that provides power to more than 22 million people in Pakistan's commercial hub of Karachi.
"Our profitability last year was around 1 billion," Mr Ahsan said. In 2017, the "first half was a loss and going forward we probably break even or have a little bit of profit." However, the government was "destroying" the fertilizer industry with its policies, Mr Ahsan said, taxing farmers for fertilizer at 17 per cent and at the same time providing a subsidy to reduce the cost of fertilizer.
Mr Ahsan said government has yet to pay back as much as 3.8 billion rupees in subsidies to Fauji, which cost the industry billions of rupees, he said, part of an effort on behalf to gain revenues by taxing the industry up front and then choosing when to pay them back. "This is no way to govern." Pakistan's Ministry of National Food Security and Research secretary, Muhammad Abid Javed, said the government had paid the industry "around 50 per cent of total amount last year and some this year too." The rest will be paid when the prime minister approves the disbursement, he said by phone.