Shan Masala Makers Mull IPO, Acquisition as Pakistan Spices Market Hits $1.93B

*** Shan Foods also has manufacturing units in UAE, Saudi Arabia and UK; sells rice and frozen food internationally only
*** Pakistan’s spices and condiments market was in 2017 estimated to be worth $1.933 billion

JUN 11, 2018 — After nearly four decades of successful operations as a family-run business, Shan Foods is now considering an initial public offering (IPO) to execute its expansion plans – including a possible acquisition, and new product launches.

“We are definitely considering an IPO,” Sikandar Nawaz Tiwana, Chief Executive Officer, Shan Foods told Profit during an interview at the company’s headquarter at Korangi Industrial Area, Karachi.

Tiwana is part of the new Shan management that came about as a consequence of a major policy shift in 2015 turning the family business into a corporate with professional managers conducting the business.

Until recently, the company had been almost single-handedly managed by the family patriarch, Sikandar Sultan – the majority owner, and present chairman.

“We are evaluating the advantage of an IPO. Do we need the funds, is the question”, said the CEO. Shan has previously shied away from conventional banking as a financing source owing to Sultan’s conservative interpretation of Islam, that prohibits interest-based borrowing.

“I think Shan will go for it [IPO] now. They will do it by 2020, if not before,” said a source in the stock exchange. The company’s expansion plans prima facie back that view.

Also backing Shan Foods’ possible move are two macroeconomic facts:

  1. As one of the fastest growing retail markets in the world, the country is expected to top annual growth rate with 8.2pct during 2016-2021.
  2. Annual disposable income in Pakistan grew by 8% between 2015 and 2016, fetching the country 23rd position in the world in terms of growth of annual disposable income, the London-based market research firm Euromonitor International mentioned in its report last year.
  3. On the average Pakistanis spend almost 45% (highest in the Asia and MENA region) of the monthly household income on food.
  4. Its middle class population is projected to surpass Italy and UK, report Euromonitor.

All these have led to exponential growth in off the shelf readymade spices, prepared foods and condiments market in Pakistan.

Pakistan’s spices and condiments market was in 2017 estimated to be worth $1.933 billion, according to Pakistan Bureau of Statistics database.

Shan Foods, insiders share, is also in the process of launching a few new products, including wheat flour. “It could be wheat or pasta,” the CEO said.

Starting in 1981 with a single-room business from his house, Sultan, the chairman, turned Shan Foods into a global spices giant with his Shan Masala, to the extent of raking in Rs10 billion in revenues in the latest financial year. With cash flows strong and consistent, Shan funded its expansion by reinvesting its own profits.

The company launched with basic spices (plain spices) and recipe spice mixes and later expanded its portfolio to include Oriental and Arabic recipe ranges, instant noodles, salt, cooking paste, ginger garlic paste, pickles, chutneys (sauces), desserts, rice, lentils as well as ready-to-cook and ready-to-eat range –some of these being available abroad only. Today, it has customers in 65 countries and manufacturing units and offices in Pakistan, the UAE, Saudi Arabia and the United Kingdom.

In recipe mix and plain spices, Shan is amongst the top two, neck-to-neck with arch-rival National Foods Limited (NFL) – a bigger brand based on revenues and number of categories, but industry sources say that in overseas markets, the Shan has a larger share.

At home, the unbranded portion of the industry cornering an estimated 70% of the total market is still a challenge for Shan.

This is certainly a challenge, concedes Tiwana, linking it with affordability and consumer awareness. “As disposable income and awareness levels rise, Pakistani consumers shift to the branded segment.”

Hence, the question: with the statistics reflecting a rise in disposable incomes, did Shan reap the windfall? “Yes, there has been a major change in the last three years,” said the CEO, adding, “Our size has doubled [during the period].”

Shan Foods’ management estimates that the share of the informal market as a proportion of the total market has gone down by 10 percentage points in the last three years. Shan’s compound annual growth rate (CAGR) for the same period witnessed “a strong double-digit growth”, Tiwana said – thanks to our middle class’ growing income levels and changing consumption trends.

“Dollar appreciation benefits the export-oriented, so it will definitely help Shan,” Tiwana added. The extent of its benefit would reveal itself in the coming months, he said.

Since exports constitute over 40% revenue and more than half of its profit, Shan is most likely to make a decent yield in profits that, market sources claim, saw a dip in 2013 and 2014 because of almost constant dollar-rupee parity.

Shan sells rice and frozen food internationally only, despite the categories being in high demand in the country– as evident from a large number of players dealing in these commodities.

“The quality and price of rice Shan exports is not feasible for Pakistan, plus our expertise is in recipe mix, not rice. Therefore, we are not selling it locally,” said Tiwana. As for fully-cooked frozen food Shan offers in Manchester, Tiwana said, the market was not ripe for it at home.

“The existing players are offering finger food, while we want to tap into the main course, like Nihari, Qorma, Biryani, and Haleem,” said Tiwana.

Elaborating his point further, Tiwana said: “When the opportunity is there, we will take advantage of that. The purpose is to stay one step ahead of the competition.”

Tiwana didn’t disclose details of their expansion plans and the products or categories it will be adding to the business nor did he mention whether Shan will launch them from its own platform. He, however, confirmed Shan is looking to acquire another company.

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