Treet Group has been busy recently with the launch of its maintenance-free and deep cycle battery manufacturing facility as well as the acquisition of a 58 percent stake in dialysis concentrate manufacturer, Renacon Pharma Limited. The group’s existing product portfolio includes razor manufacturing, corrugation, soaps and motorbikes.  BR Research recently caught up with Syed Sheharyar Ali, at the group’s razor manufacturing plant in the Kot Lakhpat industrial area of Lahore to discuss the group’s ambitious diversification plans and the performance of existing business divisions. After returning from Saint Louis University, USA in 2001, Syed Sheharyar Ali became one of the youngest directors of Treet Corporation Limited. Currently, he manages a wide-ranging portfolio consisting of manufacturing, healthcare, information technology, automobiles, sports and music.

Below are edited excerpts of the conversation:

BR Research: Treet Group’s diversification spree goes on. Your battery plant is one of the biggest investments the group has ever made. Please tell us the reasons you chose to go with this specific business idea.

Syed Sheharyar Ali: Diversification has been a key pillar of our corporate strategy over the years. After developing feasibility for a number of projects, which included a tertiary care hospital in Lahore, the group chose to go with the battery project.

We are the only company in Pakistan that manufactures blades in the country. You know China has copied nuclear technology but they haven’t been able to copy blades. It’s a much specialised 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 neighbours, Bangladesh and India whereas Pakistan is still behind.

After doing our due diligence, we found it to be a very lucrative business. Simultaneously we also decided to go for 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 a battery’s life starts when it’s produced rather than when usage starts. Most maintenance free batteries in Pakistan come through the grey channel and five to six months of battery life are lost during transportation.  The other thing is that our battery life is almost double that of the ones found in the market. Due to this, the market response has been phenomenal so far.

At the same time, we have also set up a university in Lahore recently as education takes a top priority in our social causes. 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 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 the cash flows.

BRR: What are your future plans for the company?

SSA: Renacon is already generating revenues and we’re 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 both the domestic and export market.  There are almost 3-4 million dialysis done in Pakistan in about 450 dialysis centres. It’s very unfortunate but dialysis is increasing in the country.

BRR: Currently, what’s the export to local sales ratio for Renacon?

SSA: Currently we have production restraints and are unable to even meet local demand so with this expansion we will be able to capture additional local market and export. We are aiming for a minimum 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 has 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 thru 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 years. 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 over the years. But you’re right about increasing competition. Treet has focused on targeting the mass market so our competition is not Gillette, which goes for Grade-A but rather 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, whereas our Indian counterparts use local steel, which means even though our costs us on the higher side, 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 attribute this to?

 SSA: One problem that we are facing in corrugation is that we have reached our capacities. Again, corrugation is also a 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 prices and economies 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’re having a difficult time passing it on to the customers. 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’ve 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 customers 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 the first year.

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

SSA: This segment constitutes 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 the overall market share. So the remaining 40 percent is divided amongst almost 80 manufacturers meaning there is intense competition. Then there is the 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 the bikes segment while also generating employment for almost 100 people. The plan is to therefore continue production in the future.

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

 SSA: As I mentioned earlier, our battery project is going to be the game-changer. We expect its revenues to surpass Treet’s revenues within the first three to four years.

Naturally, Treet has invested heavily in the 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 education sectors 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.