The Pakistan Aluminium Beverage Cans (PABC) is the first domestic aluminium can manufacturing company in the country supplying cans to carbonated drink bottlers such as Pepsi and Coca Cola in Pakistan as well as Afghanistan, and meeting almost the entirety of the current can demand. In an initial public offering at the PSX, the PABC is offering 26 percent of paid-up capital to individual and institutional investors that coincides with the exit of the company’s key sponsor UK-based Ashmore that currently holds 51 percent stake. Beside the public listing—according to the company’s prospectus placed at the PSX—Ashmore will also be divesting the rest of the shares among existing equity partners under a private placement agreement.

The IPO proceedings together with SBP’s generous long-term financing facility at 3 percent will fund the company’s plan to expand production capacity from 700 million cans to 950 million cans at a capex of $8 million. The company’s plant is located in a Special Economic Zone (SEZ) in Faisalabad close to its key customers which was set up in 2017 and presently enjoys a 10-year tax holiday.

In this interview, BR Research spoke to the CEO of the company, Azam Sakrani, to discuss future prospects of aluminium can manufacturing in Pakistan. Sakrani is carries over 25 years of diverse corporate management experience and has served as CEO of Liberty Power Tech Limited, Head of Islamic Banking at Habib Bank AG Zurich plc, UK and CEO of Al-Noor Modaraba. He holds a Bachelor and Master in Business Administration majoring in Finance from the United States.

BR Research: As the first aluminium can manufacturer in Pakistan, what major factors drove the investment decision of your sponsors?

Azam Sakrani: Before we started commercial operations in the last quarter of 2017, Pakistan was a net importer of beverage cans. Beverage and soft drink companies here used to rely entirely on imported cans. At the time, Ashmore which is a private equity fund with extensive experience working in emerging markets, specifically investing in aluminium can manufacturing plants in Africa and Asia conducted an assessment which identified Pakistan as an attractive market for investment in aluminium cans production. Beverage companies and bottlers foresaw tremendous growth in sales across Pakistan and Afghanistan with no domestic capability to supply aluminium cans. As estimated by Euromonitor International, the beverage market in Pakistan is growing by 7 percent—it currently stands at 3.8 billion litres and is expected to reach 5.8 billion litres by 2025.

Globally, this market is growing between 2 and 3 percent. By comparison, the growth in the Pakistani market is much higher. These prospects necessitated a domestic manufacturing capability for aluminium cans which is a major packaging component for soft drink companies. These factors created the right market dynamics required for Ashmore's investment. Ashmore together with Liberty group invested $80 million into a high-tech manufacturing plant.

Meanwhile, importing cans was a tiresome problem for beverage companies that faced numerous supply and logistic bottlenecks such as attaining bank LCs to place orders, high lead times (orders had to be made 3-4 months in advance), high freight costs, shortages during peak demand months such as summers, and having to maintain large inventory volumes (thus, incurring inventory costs) to combat supply fluctuations. These import conditions created significant challenges for bottlers to promote cans in the market.

BRR: What is the can market size and the share of cans in the soft drinks market in the country? What is the expected growth in this and why do you see these growth patterns emerging?

AS: The historical share of cans is around 3.6 percent which is expected to grow to 5-6 percent by 2025, according to an estimate made by Euromonitor. The market size is around 275 million cans to almost 600 million in the next four years. We can gauge the growing penetration by how fast our sales have grown. When we were starting operations, the market size was around 100-110 million cans. We sold 114 million cans in our first year during 2018. Next year, this grew to 214 million and in CY20, our sales were 235 million despite lockdowns and covid-related disruptions. The global can penetration is around 19 percent so just by global standards, we have tremendous space for growth.

PABC has long term contracts with Pepsi and Coca Cola in both Pakistan and Afghanistan which constituted about 83 percent of our sales volumes during CY20 and we are catering to almost the entirety of their existing can demand. These two companies also have a combined market share of 95 percent in Pakistan's soft drinks market which is a dominant position. These companies envision strong demand in Pakistan with population and urbanization expanding. They have continually made investments in the past and have been making pledges for fresh expansions in upcoming years—in 2018, the combined investment plans for the two companies was $1.5 billion. Pakistan is in the top 5 markets for them which makes its position very important for these bottlers.

As an observer and consumer as well, you might have noticed how dramatic the shift toward cans has been over the last decade. The transition from bottles to cans is most noticeable in restaurants and hotels in major urban centers today.

Also remember that we are substituting imports. In other emerging markets, we have observed phenomenal growth in the cans market due to indigenous manufacturing capability. Take Nigeria and Brazil where population size is big and middle-class incomes are rising—these countries have witnessed sizeable growth in the cans market when domestic manufacturing plants were set up. In Nigeria, for instance, the market for cans increased from 700 million to 2 billion in just a few years of the plant becoming operational.

BRR: Compared to other single-serve soft drinks and beverage packaging, what is driving the demand for aluminium cans in Pakistan. Globally, aluminium’s high recyclability—and the environmental shift away from PET products—is a major selling point and driver of growth. Do you consider aluminium recyclability as a demand driver in the Pakistani market?

AS: If the single-serve market is about 3 billion, the highest penetration in Pakistan is for glass bottles (about 1.6-1.8 billion), followed by PET (700-800 million) while the can market has been fairly small (roughly 100-150 million). This was prior to our entry. Can penetration was small because cans had to be imported which—as I mentioned earlier—posed several logistical problems for bottlers to increase can penetration or introduce can-based products. Only a year into our entry, we saw our can sales increase by 100 million cans.

There is also customer experience and changing preferences. The beverage quality in aluminum cans is substantially superior than the quality in PET. The shelf-life of PET bottles is around 2.5-3 months whereas aluminum cans can survive a year on the shelf while retaining its quality and taste. The second important aspect here is the higher chilling factor.

PET products globally pose a huge threat to the environment and the oceans. Many major soft drinks and beverage companies are moving away from PET packaging to preserve the environment. Some estimates suggest aluminum cans are 68 percent recyclable compared to PET which is only 3 percent recyclable. I think, in Pakistan, we are hopeful that the recyclable factor comes into play later on as environment becomes a more prominent issue. Currently, the demand we are foreseeing for cans—and the biggest selling point for aluminium cans in this market—is the superior consumer experience versus single-serve PET bottles (i.e., longer shelf life, high chilling factor and higher degree of carbonation preservation which results in better taste).

BRR: Your company is heavily protected from imports through custom and regulatory duties. What is the price differential between domestic can and imported can and do you think you will continue to sell as many cans if the government were to remove these protectionary tariffs?

AS: We are selling our cans at a 14-15 percent discount to the imported can which is more affordable for bottlers. In addition, domestic cans are more feasible for bottlers in terms of logistics and operational efficiency, as earlier highlighted. Even without the protectionary duties, our prices are 4-5 percent lower than imported cans. But I would also argue that even at dumped prices (without protectionary duties), with the way demand is picking up for cans, it would be extremely difficult for bottlers to arrange such a large supply from abroad and manage the operational challenges that come with it. Aside from everything else, let's not forget that these bottlers are constantly changing their designs and art work which are fairly easier to do when packaging materials are being produced locally.

BRR: PABC is the sole can supplier to Pepsi and Coca Cola in Afghanistan and the company is also planning to export to other countries including US. What is facilitating your market competitiveness?

AS: The most important aspect here is that our materials are already pre-qualified by Pepsi and Coca Cola which happen to be two of the biggest soft drinks manufacturers in the world. These quality approvals are not easy to attain—it can take years to attain this qualification. We are importing aluminium from Novelis which is a top exporter of quality raw material and with whom we have long term contracts in place. Our manufacturing plant uses high-end technology and machinery and we have acquired trained human resources that serve within the management and the Board. This level of expertise and linkages are not easy to develop and establish for new investors—both locally and abroad in many regional economies where we intend on exporting. In fact, locally these are huge barriers to entry in the market.