'Textile industry should be provided with level playing field,' CEO, Nishat Chunian Limited

Shahzad Saleem is the Chairman/Chief Executive Officer of Nishat Chunian Limited (NCL) and Chairman of Nishat Chunian Power Limited (NCPL). He has over 22 years of professional work experience. Since 1990, Shahzad Saleem has been instrumental in providing leadership and strategic direction to the group. He is also on the Board of Directors of MCB Limited.
He holds an MBA degree from Lahore University of Management Sciences (LUMS).
Last week, BR Research team met Shahzad in Lahore where NCL's organizational structure, challenges and its future plans came under discussion.
Below are edited transcripts.
BR Research: How did Nishat Chunian start?
Saleem Shahzad: My family has been in the textile business for decades and after graduating from LUMS, it was natural for me to work in the family business. Then everyone suggested that I start my own textile mill. My uncle, Mansha, gave half of the equity and the other half was provided by my father and so Nishat Chunian came into being as a single 14,400 spindles company. In a period of about 20 years we have become the 4th largest textile unit in terms of sales. And all this growth has been organic. Our profitability has been consistent throughout and our five-year return on equity is amongst the highest in the industry.
Then we started Nishat Chunian Power limited which has 51 percent ownership of NCL. That business has also done very well and we have provided very good dividends to the shareholders. My teams in both NCL and NCPL are very competent and well-motivated. So it has been a great journey so far.
BRR: What is the product line of NCL?
SS: NCL has a very small product line and we cater to a niche market. Apart from yarn and grey cloth, our product line is home textiles which is medium and high range products
BRR: Many textiles firms have gone into branding their companies outside Pakistan; do you wish to develop NCL as a brand?
SS: I am not interested in branding. It is a big misnomer. Brand is irrelevant as it makes no difference to the bottom line. At the end of the day, a large portion of your production will be sold in stores that either have their own brands or buy from brands. That is how the world works. Turkey, India, China all work that way. Marks and Spencer stocks products made in these countries. There is no advantage of having a brand outside Pakistan.
BRR: Is textile a lucrative business in Pakistan still?
SS: Textile business is a very tough and volatile business. The margins are very low, you have to be extremely vigilant as the dynamics keep changing- you cannot relax and enjoy the fruits of your success. Unless you have your finger on the pulse you cannot survive. Moreover, there is hardly any support given to the textile industry in Pakistan.
In India and China there is huge government support as the main driver there is not profit but employment generation. That's why mostly these governments give subsidy to increase employment.
In Pakistan no subsidy is given to textile industry and what is worse is that there is a lot of indirect taxation; like turnover tax is one percent whether you make profit or not. Then there is workers welfare fund on pre-tax profits. Then we don't get sales tax refund on time from the government-a number of companies have refund claims running into hundreds of millions that the government has yet to pay.
BRR: Is there any advantage of GSP+ status to the textiles?
SS: Yes there will be manifold advantages of the GSP+ status. If the government reduces all bottlenecks like energy crisis in Punjab, there can be phenomenal growth especially the value-added sector of apparels and home textiles.
BRR: What pressures is our textile industry facing?
SS: Textile business has done very well primarily due to the huge demand from China. But, now China has changed its cotton import policy and this has affected our margins. Also the recent sudden appreciation of rupee has hurt our profitability.
Last year our currency sharply depreciated, increasing turnover but huge increases in energy costs reduced the margins. Energy cost is a substantial component in our business and the situation in Punjab is worse than what is in other provinces especially Sindh. The power cost in Punjab is 60-70% higher than what is in Sindh and availability of power is extremely unpredictable. We have to rely on 3 systems-each a backup for another. We use WAPDA when available, gas powered plants when gas is available and furnace oil powered plants as a last resort. This plays havoc with our efficiency and drives up costs.
Solution in the long run is to set up power plants which the government is doing. But, we do not have the luxury of time at the moment-unless we do something drastic in the next year or so, our textile industry in Punjab will suffer tremendously. The only solution in the short run is for businesses to set up independent coal powered plants as we are planning to do-there is no other choice.
BRR: Many neighbouring governments have given subsidies to their textile sector, what do you take on that?
SS: Bangladesh industry is not that competitive and even though there is a lot of subsidy, the inefficiencies diminish the advantage. A lot of people have taken bank loans and are unable to repay.
Many Pakistanis, who went there to set up factories to benefit from cheaper tariffs and subsidies, have been unsuccessful.
In India, textile business is given a lot of subsidies accompanied with special provisions to provide energy to the industry. I don't agree with the subsidy model, instead, level-playing field should be provided by the government to the industry so that it can become more competitive.
BRR: Do you think there is a need for consolidation of big players in the textile industry.
SS: I am not of the view that consolidation always makes a company stronger. A company becomes stronger if you have high equity and low debt or you have a product that has a high profit margin. In the textile industry, the spinning business has different dynamics from the weaving division or home textile business. There is no correlation with each other hence consolidation of firms presents no extra advantage.
I believe that size in textile business will not bring economies of scale. You may argue-why did we make our business so large-actually our reasons are completely different.
We thought we could keep discovering interesting business ideas to make money; we never expanded with the view that by having a large capacity we could lower our costs.
BRR: Is there any need for bankruptcy law?
SS: There is a dire need for effective bankruptcy laws so that consolidation can take place. Being bankrupt is not a crime. If you make bankruptcy easy, recovery for banks will also be easy.
Similarly, if one person cannot run a business successfully, another capable person can take over and make it profitable. This way the assets will be utilized efficiently and will not be wasted.
The government must provide a better alternative to lengthy litigation that wastes resources and by the time the cases are decided the assets/machinery are not in any usable state. Court cases are not the answer-we must have speedy decisions under bankruptcy laws so the assets are not wasted.
BRR: Do you have any plans to set up power plant?
SS: We are planning to set up a coal-based 660MW power plant in Punjab. We have submitted a proposal to the government and if it is accepted, the next few years will be extremely busy for us.
BRR: Tell us about the corporate governance of your organization?
SS: As for corporate governance, it is a public limited company and the business is professionally run.
Each department has an efficient hierarchy and reporting system; the departments enjoy a high level of autonomy and decision making authority. My role as a leader involves policy and strategy making and providing direction to my businesses.