Capital Markets

True Believer

Pakistan is not for the timid. But First Capital and Worldcall's CFO argues that its economy is built to thrive.
Tom Leander and Karen YapFebruary 29, 2008

Sardar Ali Wattoo, CFO of First Capital and Worldcall Group, a Pakistani
conglomerate, has no difficulty remembering what he was doing on the
afternoon of December 27. When Benazir Bhutto was assassinated in
Rawalpindi, Wattoo was in Lahore watching as investors piled into a
US$25 million Islamic bond floated by Pace Pakistan Ltd., one of First
Capital’s fastest growing businesses. The subscription period for the bond
was due to close the following day. Within hours of the murder, nervous
U.S. investors — funds that targeted South Asian growth companies
— were calling him. “Would the flotation collapse?” they wanted to know.

Riots tore through Pakistan’s cities, and angry crowds burned
stores and smashed bank windows. The Lahore and Karachi
stock exchanges dived the following day, and Wattoo began to
get the uneasy feeling that support for his businesses was evaporating.
Omantel, the Omani state telecom carrier, planned to
buy a US$200 million stake in WorldCall, First Capital’s fixedline
telecom business that specializes in everything from payphones
to broadband service. They put the investment on hold,
fearful of travel to Pakistan. From Dubai, where Wattoo had been
in the final stages of listing Pace Pakistan, the company’s real
estate unit, on the Dubai stock exchange, an official from the
National Bank of Dubai warned that he was withholding the
authorization necessary for the listing until stability returned.

Wattoo met with his boss, First Capital’s founder Salmaan
Taseer, an influential businessman with a political background.
Taseer is currently on leave from the business, seconded to Pakistan’s
interim government as caretaker minister of industries.
Surely, they could build a case for the company’s stakeholders to
hang fire. Taseer agreed to put his business hat back on and work
the phones. Pakistan had been here before, they argued; the economic
situation will stabilize and the market will rebound.

And that’s what happened. The exchanges recovered their
lost ground. Investors regained enthusiasm for the
bond, which was oversubscribed by US$13 million.
Omantel bought its stake and pledged an additional
US$25 million in direct investment. The National
Bank of Dubai overcame its jitters and authorized
the listing. Pace is due to list in Dubai as of CFO
s press-time.

It wasn’t the first time that Wattoo had taken his
case for Pakistan to the world and won willing partners.
“Pakistan is resilient,” says Wattoo. “I understand
[investors’] reservations, but the economic story is
still robust.” He adds, “It’s a relief that many of our
foreign partners can see this, too.”

A World of Trouble

Pakistan is not for the faint of heart. Yet it has proven
to be one of the world’s most counterintuitive of success
stories in recent years. Even as CNN broadcasts
images of burning embassies, lawless tribal enclaves,
and broken bank windows, another Pakistan has
warily gained confidence and emerged economically
robust. Economic stability has graced the country
as the controversial Pervez Musharraf, who took
power in a military coup in 1999, buffered his
longevity by turning the economy over to pro-market
reformers. In this, his regime has been successful. Pakistan’s
economy has grown an average of 7 percent in the past four
years and its booming stock exchanges in Lahore and Karachi
have enriched local and foreign investors alike.

To understand how Wattoo and CFOs like him operate in Pakistan
is to grasp how finance professionals can survive in a world of
both peril and opportunity. They must operate in two Pakistans —
one in which day-to-day business goes on normally, and another in
which political risk upsets the delicate balance of business.

Pakistan’s politics have been molded by divisive and incendiary
international conflicts (See “A Torn
Nation” at the end of this article). During Benazir Bhutto’s
first term in office in the 1990s, Muslim
extremists gained a foothold in Kashmir
and along Pakistan’s porous, mountainous
border with Afghanistan, where
anti-Soviet Afghan rebels became
jihadists. In an arms race with India, Pakistan successfully tested
an atom bomb in 1998 under Prime Minister Nawaz Sharif,
triggering punitive trade embargos that crippled its economy.

But sometimes turbulence has its uses. The attacks against
the United States on September 11, 2001 brought big changes to
Pakistan. One, ironically, was the start of better economic times.
The embargoes disappeared as the United States settled on a
policy of engagement and collaboration with Musharraf, who
proved very friendly to business. Shaukat Aziz, the finance minister
for the early part of Musharraf’s term who eventually
became prime minister, launched a series of pro-market
reforms — including allowing 100 percent foreign ownership of
banks — and privatization programs.

“In the Musharraf era, there has been more upward cycle of
money getting into the hands of the poor people, allowing them to
buy more goods than before,” says H. Reza-ur-Rahim, JPMorgan
Pakistan’s senior country officer and head of investment banking.
“Deals started to grow too.” JPMorgan advised on the biggest privatization
to date, the 2006 sale of a 26 percent stake in Pakistan Telecom
to Emirates Telecommunications Corp. for US$2.6 billion.

The ascent of Aziz and a long period of relative stability under
Musharraf sparked an economic renaissance. Pakistan became one
of the fastest growing economies in Asia. Its stock markets were
among the biggest gainers. Since 1999, sales of cars have climbed
20 percent annually, televisions 29 percent, and air conditioners 206
percent. The number of mobile phone subscribers has nearly doubled
since 1999.

The economic boom created a middle class — one that trusted
business and mistrusted the extremism that is so often the foreign
image of Pakistan and its politicians. Young people began to meet
in coffee shops, chat on mobile phones, and use the Internet. Many
felt that Musharraf was a stabilizer and perhaps only just as corrupt
as everyone else that has run the country. Among those who could
have pursued opportunities outside the country — like Wattoo —
many chose to stay in Pakistan to make their living, spurred by hope
and opportunity.

Embracing the Risks

Sardar Ali Wattoo hails from a town not far from Lahore, and qualified
as a chartered accountant in 1991, when he went to work for
accounting firm PricewaterhouseCoopers. Prior to joining Worldcall,
he worked with Nishat Group, an industrial conglomerate, for
four years focusing on the finance side of its textile business. He also
worked as the financial controller of Kohinoor Energy and Southern
Electric Power Company. When Pakistan became part of the
nuclear club and nations including the United States and Japan
imposed punitive trade restrictions and froze foreign banking
accounts, Wattoo contemplated leaving Pakistan. He was working
to raise funds for power projects, and thought of parlaying his
international experience into a job overseas.

“This was the only time I thought of leaving Pakistan,” says Wattoo.
“Given the international climate and the sanctions, it was difficult
to see how I could grow my career here.”

Instead, he decided to join Taseer at Worldcall and First Capital.
Taseer had an earlier career as the information minister of Benazir
Bhutto’s opposition Pakistan People’s Party. (His secondment as
minister of industries was a concession to Bhutto’s party.) The
Worldcall and First Capital Group began life in 1994, when Taseer
established First Capital Securities, a full services brokerage house,
with equity participation from Smith Barney. In 1996, the success of
the brokerage allowed Taseer to obtain capital funding to start a
payphone business called Worldcall Payphones Limited. That business
began to grow rapidly, as the popularity of payphones grew.

Worldcall was on its way to being the multibusiness telecommunications
sector operator that it is today when the Pakistan
nuclear tests threw the business environment into doubt. Smith
Barney pulled out of First Capital, and the brokerage, which had
concentrated on servicing a limited number of wealthy clients,
began to lose customers.

Into this situation stepped Wattoo. Why did he join Worldcall
and First Capital, a troubled entrepreneurial venture, after an already
substantial and distinguished career in accounting and finance? “I
was encouraged by economic reforms, and convinced that the
chairman had the right instincts and that Pakistan was ready for a
new phase of growth,” he says. The market’s turnaround in 2000
may have had something to do with it. The Karachi Stock Exchange
index, which hovers at around 14,000 points today, bottomed out at
1,300 in 2000, and then began gaining steadily, fueled, analysts agree,
by the gradual success of the Aziz reforms.

Wattoo’s job initially began in a very un-CFO fashion. Acting
like experts in institutional sales, Taseer and Wattoo began wooing
local and foreign funds for the brokerage business. “We had been
focused on high-net-worth individual clients. We changed, and
decided to mix our business with 50 percent institutional traders,”
he explains. In this, he says, he was aided by the market’s climb, and
the desire among both local and overseas investors to grasp the
opportunity. “I could see that the pie was getting bigger and bigger,”
he says, “and that a new type of client was gaining ground.”

A partnership with Auerbach Grayson, a New York–based brokerage
firm specializing in emerging markets securities, helped
secure foreign business. First Capital began expanding around Pakistan,
opening 20 shops around the country. The brokerage went
from having 20 — albeit extremely rich — customers to a customer
base of 900. The new clients were not so rich, but represented a
growing middle class market of investors. It diversified First Capital’s

The budding conglomerate had also made a foray into real
estate. Property values were tracking the rise in the stock market as
new residential and commercial developments came into demand.
Taseer bought an indebted company called Pace Pakistan in early
1998. In doing so, he inherited US$5 million in debt. Cost-cutting
measures and lower-cost financing helped clear debts to
US$600,000 — just in time for a brush with disaster.

On September 13, 2001, a fire completely destroyed Pace’s
flagship shopping mall in Lahore. Wattoo recalls his sense of disbelief.
“Our work of more than three years came to nil,” he says.
It later emerged that most merchants who had bought space in
the mall lacked adequate insurance coverage. Pace’s insurance
allowed it to rebuild the mall, but the destitute merchants lacked
the means to open their shops again.

Taseer and Wattoo weighed whether to exit the business or
make another start. They opted to make an offer to the merchants.
Pace would rebuild and stock the shops if the owners
returned to business as soon as the mall was open. The revamping
took one year. The economic upswing had continued
through 2002, and when the merchants opened up shop, the
stores met eager consumers. Many of the same merchants followed
Pace into two subsequent shopping malls in Lahore and
a fourth in Gujranwala. By 2007, multiple projects were underway
across Pakistan, including five-star hotels and residential
and managed properties.

During this period, Pakistan was undergoing a liquidity
boom. The robust economy encouraged
many overseas Pakistanis to repatriate
their funds. The reform in the
banking sector, allowing full foreign
ownership of banks, spurred a string of
cross-border acquisitions. Standard
Chartered, the UK banking group,
bought Pakistan’s Union Bank for
US$413 million in 2006, and has since
expanded Union’s branches throughout
the country. Both ABN-AMRO
and Temasek, the Singapore government
investment arm, now own banks
in Pakistan.

As their wealth grew, Pakistanis —
said to be wary of ostentatious shows
of wealth that might make them a target
of both jihadists and tax collectors — tended to invest excess
funds in property, the stock market, and businesses across the
country. Some Pakistanis felt it was safer to own property and
investments in Pakistan rather than the United States following
9/11. “They started snapping up properties,” says Wattoo. “My
Pakistani friends who were living in the U.S. came back to shop
for houses.” Others simply wanted to take advantage of the boom
in their own country.

Worldcall and First Capital held an enviable position in the
key areas where these investors were driving growth — financial
services, communications, and real estate. Wattoo denies that the
conglomerate diversified with this in mind. “It was the chairman’s
vision,” he says, “to see an opportunity and seize it.” Whether by
strategy or instinct, the company has been rewarded with substantial
investments from international investors, including
Omani businessman Sheikh Sulaiman Ahmad Said Al-Hoqani,
Sheikh Khaled Juffali from Saudi Arabia, UK-based Millennium
Global High Yield Fund, and American Hedge Fund.

Another Lucky Call

Taseer and Wattoo can point to Worldcall’s investment in fiber
optic cable, starting in 2000, as their luckiest call. When the
group started laying fiber optic cables in Lahore and Karachi, it
met criticism. “Initially people were laughing at us. They said we
were laying gold,” Wattoo recalls. Over time, cheap phones
flooded the market and call rates became more affordable.
Telecom companies scrambled to add more bandwidth to their
networks to handle the surge in traffic. Suddenly, all mobile
phone service providers needed fiber optic networks. Rather
than opt for the investment and long
gestation period to build their own, the
service providers opted to lease from
WorldCall. The group is now raising
US$50 million for its network expansion
of broadband Internet.

First Capital also has a lively and growing
media unit. The group owns Pakistan’s
largest daily English-language newspaper,
the Daily Times, business and kids television
channels, and a printing company.
The group is adding an Urdu-language
newspaper titled AajKal (translated as
“Today, Yesterday”). Nationwide growth in
advertising dollars is driving profits in the
media group. “Advertisements have
expanded like no other businesses in Pakistan,”
Wattoo says. In 2006, ad revenues
more than doubled to Rs23 billion
(US$378 million), compared with Rs10
billion in 2004. Part of the surge was due
to TV advertising, as TV ownership has
leapt in the past four years.

In fact, the only one of First Capital
and Worldcall’s businesses to suffer a
major setback since 2001 was in Sri Lanka — another deeply troubled
South Asian nation where the group has bought a bank and
started a payphone business along the lines of the one in Pakistan.
The bank has been doing well, but the payphone business
reeled when the December 26, 2004 tsunami destroyed beach
property on the eastern coast of Sri Lanka, where many of
Worldcall Sri Lanka’s payphones were installed.

Just Wait

In the tense days following Bhutto’s assassination in early January,
when the success of Pace’s bond issuance was in question,
Wattoo wheeled out the classic arguments to overseas
investors, which included the Shakti Masters Fund, Sandstone
Capital, and the Apollo Asia Opportunities Fund. The argument was not that Pakistan would be safe for business anytime
soon, but that it would be
able to weather any coming
squalls. “I told them that in two
or three months, the political
mess would be sorted out,” he
says. “And whatever party wins,
all, at least, have no manifesto
against business.” None, he
says, are likely to nationalize,
slap new labor restrictions on
businesses, or introduce protectionist measures.

He also has a persuasive argument about Pakistan’s future
in the presence of a booming India. “We’re about ten years
behind India in the development of our economy,” he says. “But
remember that Pakistan has nowhere near the level of poverty as
India.” The implication is that as the economy develops, a class
of ready, middle class consumers will emerge more quickly than
it has in India.

As for Pakistan’s reputation for danger — to some, the nation’s
name is synonymous with terrorism — he’s dismissive. Islamic
extremists have a political presence in two provinces out of four, and
those provinces, such as the rugged northwest territories where
Osama bin Laden is said to be hiding, are not major commercial
centers. “In the main Pakistani areas, no one is seeing the fundamentalists
winning any seats,” he says. He reminds investors of the
disparity between the imagined Pakistan and the one that he knows.
“Remember, the radicals are 5 percent of the population, but 5 percent
can make an outsized impression,” he says. “It only takes one
person to throw a bomb.”

So is Pakistan’s economy insulated from the nation’s troubles?
JPMorgan’s H. Reza-ur-Rahim argues that its stock market, at
least, is. “On the market cap of US$70 billion,” he says, “there’s
about US$4.5 billion of institutional money from overseas. That’s
about 7 percent. There would be a downturn, of course, if that
money fled.” But, he argues, there would be an automatic floor,
because local investors would be likely to remain in the market.
“The bad news would be tempered.” Reza-ur-Rahim predicts the
first half of 2008 will be volatile, but that deals will begin to flow
later this year. The deals will follow the path that’s already been
cleared. Foreign buyers have made their mark in banking.
Another opened sector, telecoms, has benefited from investments
from companies like Norwegian Telecom, China Mobile,
and Omantel. Reza-ur-Rahim sees investment into the power
sector as the next big thing.

For his part, Wattoo is looking forward to expanding Worldcall’s
fiber optic network with funding from Omantel and to the upcoming
listing of Pace in Dubai (Pace listed in Karachi in early 2007 and
was oversubscribed). In the meantime, there were no signs of
despair at the launch party for AajKal, the Urdu newspaper. “There’s
a feeling that opportunity’s in the air,” says Wattoo, “for those brave
enough to seize it.”

Karen Yap is a contributor to CFO Asia. Tom Leander is editor-in-chief of CFO Asia and CFO China.

A Torn Nation

Pakistan’s history has see-sawed between democracy and military dictatorship. Neither mode of government — or its leaders — has
given the nation cause to rejoice. Pakistan gained independence on August
14, 1947, as the combination of two states — East and West Pakistan — with
Muslim majorities. Following two wars with India, East Pakistan declared
independence in 1971 and became Bangladesh. West Pakistan simply
became Pakistan and Zulfikar Ali Bhutto emerged as the first elected
president in many years. He was deposed and eventually hanged by General
Zia-ul-Haq, the country’s third military president. General Zia died
mysteriously in a plane crash in 1988.

A return to democracy followed, and throughout the late 1980s and
1990s, Bhutto’s daughter Benazir and rival politician Nawaz Sharif took
turns as prime minister. Corruption hobbled the administrations of both.
The economy fell into steep decline and a military coup brought General
Pervez Musharraf to power in 1999. The current crisis coincided with
Bhutto’s and Sharif’s return from exile and the decision by Musharraf
— under pressure from the United States — to retire from the military and
throw himself into newly declared elections as a civilian candidate. Pakistan has
been under an interim, caretaker government since November. Following
Bhutto’s assassination, Musharraf — amid protests — postponed
the elections until February 18. — T.L.

Confident in the Future

Since 2001, many Pakistanis, fearful of their futures in the
West or simply fed up with Europe or the United States, have
returned to Pakistan, considering it a better place to invest
their savings.

So it was that seven years ago, Parvez Abbasi decided to leave
the UK to return to Pakistan and went on to found Mobile Zone, a
company that sells mobile handsets. Today he’s the company’s CFO.
The company started with US$500,000 in seed money from seven
investors, including Abbasi. Today, Mobile Zone is a company that
has, he says, netted US$200 million in profits over those seven years
(Mobile Zone is privately owned and doesn’t release its financials).

The company grew rapidly, driven by increased consumer
spending power and mobile phone ownership, better connectivity
and voice quality. There are over 60 Mobile Zone outlets and
approximately 300 franchises across Pakistan’s urban and suburban
centers, including its 15,000 independent retailers.

“We were lucky, as we came into the business at the right
time,” he says. “The demand for value-addition on phones is on
the rise and people are changing their phones frequently. We have
people who change their phones every three months.”

Abbasi is optimistic about Pakistan’s economic future. “We
expect Pakistan will continue to grow around 10 to 12 million handsets
each year for the next three to four years,” he says. The company
has expanded into Afghanistan, the United Arab Emirates,
and Bangladesh.

As for his attitude toward Musharraf and his legacy, “Musharraf
is Pakistan’s best bet,” he says. Adding, “Both Benazir (Bhutto)
and Nawaz (Sharif) had two terms as prime minister, but we
didn’t see much social and economic development. What’s happening
today [referring to the political stalemate) is nothing
new — we have experienced this many times.” — K.Y. and T.L.

Pakistan’s Turbulent Success Story
Key economic indicators since 1999.
’99-’00 ’00-’01 ’01-’02 ’02-’03 ’03-’04 ’04-’05 ’05-’06 ’06-’07
Total Liquid
Forex Reserves*
1,968 3,220 6,432 10,719 12,328 12,623 13,137 15,611
CPI (General) 3.6% 4.4% 3.5% 3.1% 4.6% 9.3% 7.9% 7.9%
GDP Growth Rate 3.9% 2.0% 3.1% 4.7% 7.5% 8.6% 6.6% 7.0%
GDP per Capita* 526 501 503 582 669 742 847 925
FDI* 470 322 485 798 949 1,524 3,521 5,125
KSE-100 Index 1,521 1,366 1,770 3,402 5,279 7,450 9,989 13,772
Average Market Capitalization* 6.5 5.6 6.7 12.3 23.2 33.7 45.7 65.8
*in US$ mil; Source: State Bank of Pakistan & Ministry of Finance

First Capital and Worldcall Group profits, 2003 to 2007