Masood Jaffery is the CEO of Shabbir Tiles having joined the company as head only last year. He has been working in the private sector with majority of his career spanning over three decades serving the pharmaceutical industry in Pakistan and overseas. He has held various positions in GSK in Pakistan, as well as been the Commercial Head for GSK Middle East Africa and the CEO of GSK Saudi Arabia. Masood has a Bachelor in Pharmacy and is a Masters of Business Administration (MBA) from IBA.
BR Research recently sat down with him and the company’s CFO, Waquas Ahmed, to walk us through Shabbir Tiles latest operations given its recent financial turnaround; as well as to discuss how the tile industry is faring in Pakistan particularly in connection with the regulatory environment and cost of business in the country. Here are edited excerpts from the conversation.
BR Research: You joined Shabbir Tiles exactly a year ago. What has changed in the past one year in relation to its history?
Masood Jaffery: Shabbir Tiles is a unique business within the House of Habib group. It is the first tile manufacturing unit in the country, initially established for ceramic tiles. However, over the years there has been considerable progress. In 2008, we established production unit-II; which also enabled the company to manufacture porcelain floor and today we have a capacity of a million sq. meters per month. However, we have not been operating at full capacity. Capacity utilization has been around 70-80 percent. We have also been reporting losses for many years before 2017. In December, we saw a turnaround where we have shown a nominal profit. That is the biggest change that has happened.
BRR: Why were you in losses- and how did the recent profit come about?
MJ: The government was not protecting this industry. We were seeing huge volumes of tiles coming from all over the world, especially the low-cost, low quality tiles from China. This gave us unfair competition. Tiles were considered a commodity; and we had to compete with these cheaper varieties at a higher cost base. We were also in competition with local players on price.
When I took over charge, we made interventions in a number of areas such as redefining company’s business strategy, talent acquisition and development; selling strategies of converting dealers to cash terms, penetration in new geographies, investment in front end marketing activities and more importantly focus on cost of manufacturing reduction.
Externally, we lobbied with the government to impose an anti-dumping duty (ranging between 9% and 36%) on Chinese tiles. We also lobbied for a regulatory duty (45%, up from 25%), after the 20 percent customs duty; given there are tiles coming from Europe and other countries that are impacting our market. Why do you have to import when the local manufacturers can make them? Both of these have helped. However, imports have still not come down.
BRR: What is the share of imports in total tile market across Pakistan; and how much is your market share?
MJ: At least 50 percent of tiles in the market are imported. Stile has about 10-12 percent share of the total market. Then we have Master, Karam, Sonex, Swat and Forte who are also manufacturing in the country and who compete with us.
BRR: Are there any SMEs within the tile manufacturing industry?
MJ: Tiles manufacturing is capital intensive and it is not something SMEs can invest in. You require long kilns and other expensive equipment to produce tiles which costs millions of rupees. So far, there are only six players within the industry that manufacture tiles.
BRR: What are the different types of tiles produced by you and other local manufacturers?
MJ: Tiles are sold based on different sizes, textures and designs. In sizes, we have tiles starting from 8x12 to 24x24 that are for floor and wall. And then there are two types of tiles—ceramic and porcelain that we produce.
BRR: What’s the difference between the two?
MJ: There are multiple elements but water absorption is the main differentiating factor. Porcelain doesn’t absorb water whereas ceramic might. Porcelain tiles are good for floors but people still use ceramic on bathroom floors. Most importantly, we are the only genuine manufacturer of porcelain tiles in Pakistan.
BRR: What makes you genuine; and is porcelain your niche?
MJ: There are certain elements that are needed to make porcelain tiles. Our quality standards are better than our competitors and we stringently monitor these standards. We have also attained a certification from an Italian lab Centro Ceramico, recently that verifies that we are producing genuine porcelain tiles. The water absorption for our porcelain tiles is less than 0.5 percent; in any case, most tile manufacturers are focusing on ceramics. Genuine porcelain tiles last longer; there are less number of stains with reduced wear and tear.
BRR: Which segments do you see higher sales in; and why?
MJ: We have higher sales in ceramic tiles whereas we have also launched Glazed Polished Floor tiles recently which give our customers the option to choose from a variety of latest designs which were traditionally not available. Stile ‘Signature’ collection is another range of high end floor tiles which the company has launched with surface finishes.
Traditionally, use of tiles was only in bathrooms. Gradually the usage has expanded to kitchen, lobbies and other living spaces in homes. Flooring market is now developing. In the past, use of carpets in rooms, and houses was common. Even in hotels, if you go back ten years, they were completely carpeted but they have now moved towards porcelain tile floors.
BRR: Tell us about the growth in the tile industry and which sectors are driving the demand?
Waquas Ahmed: We relate our growth to cement and construction demand which is currently around 8-10 percent per annum. Growth is seen in all the three markets mainly renovation, residential and projects based demand that includes malls and commercial construction. From a volume point of view, residential is much higher and it is because of the high rate of urbanization and housing schemes being launched in the country. Geographically, the rate of urbanization is higher in Punjab starting all the way from Rahimyar Khan, translating to higher housing needs. The last element in building a house is tiles and that’s where we come in.
MJ: You also see customer preferences evolving. People want bigger tiles, and better quality tiles. We have a specialized plant which can produce a specific size of tiles. What I have seen in the last one year is a very active end-consumer tile market where preferences and selections play a role.
BRR: Where do mostly project based builders and developers buy their tiles from?
MJ: Developers used to be dependent on imports because of cheaper availability but we are trying to convince them that local tiles are much better than imported tiles and though we haven’t achieved any huge success in that area, we are engaging with them. This engagement would also extend to architects and designers. For builders, there is always a cost element; that we have to work with them on.
BRR: What inputs are used to manufacture tiles and how do you source them; what are major cost components in the manufacturing process?
MJ: Clay is our primary input which comes from domestic suppliers as well as from abroad. Locally, we get clay from Mianwali and Mansehra while additional clays also come from Turkey, Spain, Italy etc. Volumetrically, local clay is much higher; though since imported content—including frits, glaze, and inks—is costlier and is not available locally, it is around 25-35 percent of the total cost.
WA: Other major costs are energy and transportation. Tariff rates for local gas have doubled from a few years ago while transportation costs have also grown because of growing diesel rates. Our inward and outward transport costs are all impacted due to that. So costs have been going up; while prices have had a slab on them due to the heavy competition. Labour is around 10-15 percent of the total cost of production, so we provide huge opportunities for employment.
BRR: What is the share of tiles in the construction cost of a house?
MJ: Tile as a component of total construction cost is not very high. For a house of 600 sq. yard that would cost Rs10-20 million; the cost of tiles would be merely Rs0.4-0.5 million. Another way of looking at it would be that the cost of tiles is equivalent to the cost you will incur on paint. Tiles also have more life compared to paint.
BRR: Do you export tiles; and do you plan to in the future?
MJ: We used to but the scope locally is so much, that we want to supply to the domestic markets first. At local level, our consumption for tile is high also given that 50 percent are covered by imports; and we aren’t even utilizing full capacity. Tile isn’t a very easily exportable product—the transportation costs are really high. We already have a huge domestic market available to us which is our focus.
BRR: What is the price differential between local tiles and imported tiles; and do you have a price point advantage amongst other local manufacturers?
MJ: Tiles is a very price competitive market and it is considered a commodity where competition is high. There hasn’t been scope for branding, so the pricing has to be more or less similar among manufacturers as we compete. Between local manufacturers, there is hardly a 10-15 percent difference.
There is also variation based on the location factor. If we go to Punjab, manufacturing units based in Punjab will be cheaper because their factory is located in that area and the cost of transportation will be lower than us. In Karachi, we will be a little bit cheaper than tiles coming from the North.
Before the anti-dumping duty, China was hitting us badly on prices. We went to their price which is why we were in losses. We were competing at a price level which our production cost could not support.But lately, prices have stabilized.
BRR: You currently have a custom duty, a regulatory duty and an anti-dumping duty for the protection of the local industry and you are still not cheaper than imported tiles- how?
WA: When we import tiles, the government sets an Import Trade Price (ITP) on which custom and regulatory duties are calculated. This ITP is considerably lower than the cost we incur on production. There is also an element of under-invoicing and mis-declaration where products may come under an incorrect Harmonized System (HS) code on which tariffs may be different. This all makes imported prices lower than ours—how can we compete? There is also the fact about sales taxes. We pay 21 percent of sales tax which adds to our product price.
MJ: We feel the government can make more money by increasing the ITP; and also provide us protection. Look, the Chinese are sending products for which they don’t have any market. They are very low cost and they have over 800 factories making tiles; we only have six. There are three listed tile companies who all have been showing losses for this very reason. One of the tile manufacturers shut down operations a few years ago.
The industry is very competitive. We need to create an environment where more investments come into manufacturing and there are more players to compete; instead of just six. The government needs to incentivize these investments and expansions.
BRR: How long should the protections be? Anti-dumping duties usually last five years; and RDs are supposed to be temporary solutions. When do you see the industry opening up to imports?
MJ: We are already open. Chinese imports are still coming. But I look at it from a different angle. Tile is a product we can produce locally. We use local clay utilizing our local resources. In a population of 200 million, if we can’t even make tiles, what will we make then? The utility of tiles is very high and they are an essential item for any development in the country. It is important to have local level expertise.
Secondly, we provide opportunities for employment. Currently we have around 1400 employees of which 1200 are labourers. For our plant in Landhi, we source laborers from local communities and townships nearby. What will they do if there is no plant? We put in industries where employment can be provided.
So unless there is 100 percent capacity utilization in Pakistan, I don’t think there is any need to encourage importers.
BRR: Currently there is a housing demand-supply gap of 12 million houses. There is a huge ‘kacchi abadi’ that needs to be transformed into low cost housing. Can a poor guy afford the tiles you sell in his new home?
MJ: Most certainly. Remember that we have multiple rates and there are different products. In fact, mostly our products are for the lower end of the market which people can afford. In low cost housing as well, you can easily put in tiles. There are other companies who are also supplying small and cheaper tiles.
We have a very clear cut strategy. From the lower end of the market, we are not making huge profits. We are making sure that we meet our cost element with a little bit of the margin, so we can bring affordable tiles to the lower end of the market. Volumetrically, 60-70 percent of our sales go into this segment.
BRR: What are your future growth strategies?
MJ: Housing and development is already happening and cities are growing. Small industrial states are being established; and CPEC is a whole new chapter from our demand point of view. We see a growth in demand of 10-12 percent over the next 3-4 years. Our strategy is to be a partner in this progress.
We have invested in our machinery up-gradation, and BMR worth Rs1.25 billion which is already 80 percent done. Capacity has been enhanced a little but more importantly, quality has been enhanced. We are focused on maximizing capacity with the highest possible standards. We are not going to compete with low cost manufacturers, either imported or smuggled. We now want to work on brand equity, bring tiles out of the commodity frame to a branding one.
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