April 2006
CORPORATE FOCUS

Saakha Group Back to Trading

Entering into the luxury vehicles trading sector recently, the Saakha Group has indicated that the business future in Nepal is in trading and not in manufacturing.

Though Ganesh Bhakta Saakha, the 77-year-old patriarch of the Saakha family who is still active in business and leads his five sons, says the country still has prospects for growth through manufacturing once peace returns, for the time being only trading can prosper.

Ganesh Bhakta Saakha, Chairman Saakha Group

Until three years ago, the Group was thinking otherwise and had expanded into pharmaceuticals by acquiring Chemi Drug Industries, one of the oldest pharmaceutical units in the country.

The Group entered into manufacturing towards the end of the 1980s by starting the manufacture of industrial adhesives. That was followed by units in paints, metal products, readymade garments, instant noodles and steel mill. But in January 2006, the Group started selling premium category cars (San Storm convertible, priced over Rs. 10 million per car). And senior Saakha says it is not simply a business opportunity grabbed in a fast growing sector, but a step towards further diversification into trading as per the Group’s strategy, though he does not disclose other forthcoming ventures in trading from the group field. The group is a major player already in the business of imported dyes.

“Our strategy now is to sustain whatever manufacturing units we have and to go on expanding in trading,” he states.

A glimpse into the history of the Group explains the logic behind Saakha’s business philosophy.

When the Group started producing industrial adhesives in 1979, no one else had any idea about how this business was done. Though it was a small business, it was growing. But that monopoly was broken soon when other adhesives units started to proliferate and imports from India flooded the market. Then the Group stopped paying much attention to this business though the unit is still operating and selling a small volume. The paints unit, started about two years after the adhesive unit, is however doing well.

The Group then turned to the metal industry. And that was easy for them as they were already importing and selling the raw material (metal scrap). Turning that trade into manufacturing was relatively simple for the Saakhas. But now, this business too is not doing well as the raw material prices have gone through the roof and the material are also difficult to find due to the huge Chinese appetite for such materials. Though some other Nepali units have been set up in the meanwhile and doing good business exporting to India, Saakha could not do that as it has no Indian partner who would be the buyer.

In the readymade garments sector the Group started around the late 1980s and was doing well for about two decades. But it closed the factory about two years ago due the imminent expiry of the quota system in garment trade. “Though it was known to everyone by the year 2000 that the quota system was going to be phased out and there was an urgent need for changing the product line, it was not so easy to effect such a change. So, we waited for the government to come up with some solution for which the Garment Association Nepal was lobbying. But as the government showed no sign of paying heed to the industry suggestions, we shut down our factory well before the expiry of the quota regime,” says Saakha. The step did not hurt the Group much as there was no bank loan involved. However, the factory is still there and the Group is exploring prospects for producing high fashion items. “Some prospects are noticed in South Korea for exporting such products and we are working on it,” he adds.

In mid-1990s (about 12 years ago), the Group started manufacturing instant noodles (Min Min brand) and the business was doing well in the initial years though now the sales are concentrated mainly in the mid and farwestern regions. The Kathmandu business was hampered as there was a dispute between the partners of the Kathmandu dealer. The company tried but could not find another good dealer. Rather in this process, the company experienced further rise in the overdues from each new dealer due to cut-throat competition among the manufacturers. “The situation is such that the manufacturers are not in a position to dare ask for deposits from the dealer,” says Saakha. “More importantly, the dealers too complain of the same problem in realising the dues from the retailers. Perhaps, this is the problem being faced by every other manufacturer in those difficult days.”

The market in noodles is too competitive, forcing the producers to not increase the price while the cost of raw material has been going up steadily. “For example, the flour price has gone up to Rs. 1,000 for the same quantity that was available for Rs. 700 two years ago while a packet of noodles is still sold for the same price as prevalent 10 years ago. Now the flour prices are expected to go even further up,” he informs. According to him, though there is some profit in the premium grade brands, a heavy loss is being suffered by everybody in the lower grade brands.

Around 1996, the Group entered the steel mill business. However, it was an unintended development. “We were looking for some land and were happy to get a plot with a steel mill on it,” recalls Saakha. But as the Group was not familiar with the business it suffered a lot during the initial years. “It was only after we acquired the mill and started running it that we came to know that there were 33 such mills in the country already and they were not doing much business,” he says. Though the unit was doing satisfactory business for the last couple of years, for about six months now it is again in trouble, he adds.

According to him, only 13 steel mills are now in operation and the production exceeds the demand (300,000 mt against the demand of 250,000 mt) leading to severe price undercutting. While big government construction projects are now being stopped, whatever little significant business there is, is in the housing construction in Kathmandu. Therefore, everybody is approaching these housing companies with fantastic offers.

Though the Saakha steel mill was exporting to Tibet as well, this market too is not there anymore as the Tibetans are now importing from mainland China.

Now the only expansion the Group is carrying out in manufacturing is in the pharmaceuticals field. A new factory is being constructed at Thankot for Chemi Drug to meet the GMP standard. “The prospects are good in this field as the barriers are very high for new players to enter this field. Nepal too has adopted the policy of allowing the setting up of new drug companies only when they are meet the GMP standard and that requires Rs. 50 million or more as the minimum investment. Moreover, it takes about six months to get the first drugs to be registered,” he says.

Another piece of news is that the Group is also pursuing its application together with other investors to set up a financial services company while it is already holding about 10 per cent of shares in Goodwill Finance. “Today, the only really profitable sector is financial services. And due to the higher level of professionalism and transparency, this is the field to be in,” says senior Saakha revealing the wisdom gained from over five decades of experience in Nepal’s business sector. n

Plantec Nepal Pioneering in coffee

Though coffee growing in Nepal came much later than tea growing, this 13-year-old company with its 600 ropanis plantation in Nuwakot has already carved a niche for itself in the global coffee market.

Plantec is the only single plantation coffee producer in the entire Himalayan region. Other coffee plantations do not exceed 15-20 ropanis. Thus the final product from them is a collection from several plantations, whereas the entire final production of Plantec is from its own plantation.

The company has been producing and selling about 8-10 tons of organic premium coffee (Caturra/Arabica) per year under the brands Mount Everest Supreme and Jalpa Gold. While the former is mainly for export, the latter is for local sale. Mount Everest Supreme sells at premium prices in the gourmet/specialty international market. Though the company does not want to reveal the exact price, it says it is well above the very low price that the other coffee exporters of Nepal get due to inconsistency in their quality.

It all started in 1993 when Ujjal Rana, after leaving the hotel industry job overseas, decided to go in for coffee production as he was sure that coffee connoisseurs would be ready to pay for good coffee. The site selected was Nuwakot as the place has been famous for the special taste in all sorts of agricultural products grown there. “For example, in rice, Trishuli’s Mansuli variety tastes better than even the Basmati variety from some other places. It is the same in the case of fruit and vegetables,” points out Rana. “I hoped that a unique tasting coffee could be grown here and the expectation has been met.” The reason for the unique taste of the crops, according to Rana is the non-volcanic soil of Himalayan mountains and the climate. The altitude of Plantec farms is 2,200-2,400 ft. That altitude may not match the Blue Mountain region of Jamaica where the farming is done as high up as 7,000 ft. (and the coffee from there sells at US$ 100 or more per kilo), it is still higher compared to coastal regions where most of the mass consumption coffee is grown. Coffee growing in Nepal at higher altitudes than Plantec farm is felt unfeasible due to the possibility of frost that damages the plant.

It was not so easy in the beginning. Hoping that it would not be a problem to find land for the plantation as he had seen vast area of land lying barren in the district, Rana quickly set up a nursery for the coffee plants on a small plot he rented from a primary school. With the rent amount, the school was able to expand physical facilities and started running higher classes than just the primary level (it is now a high school). But alas! The land for plantation was simply not available.

After going through a lot of problems, he got 1,100 ropanis of degraded land from Trishuli hydroelectricity project which had bought it during the project’s construction period for quarrying the construction material. That land was no more in use for the project and locals were encroaching upon it. However, as the company was desperate to get the land, it offered a high rent for that plot and got it. “I think, this is the highest rate in the world for agricultural land,” he says.

As rest of the land in the rented area is not suitable for plantation, Rana is looking for other land, about 500-600 ropanis, for expansion.

The plantation was ready in 1995 and the harvesting started in 2000. The first year production was about 350 kg. That increased to two tons in the second year and four tons in the third year. Two years from now, the farm is expected to start yielding the optimum quantity–15 tons per year.

Rana is selling the product as organic, single plantation and shade grown coffee. Animal dung purchased from the local farmers who have borrowed a lot from the banks for livestock farming, is being used as manure, thus ensuring organic production and at the same time providing additional income to the local people. Besides this about 30 people are directly employed throughout the year and another 20 during the harvesting season. Trees grown for providing shade to the coffee plants and crop are helping in preserving the soil in the area. “And we use the latest wet process technology to process the coffee,” he says.

Though many farmers are growing coffee in a number of other locations in Nepal, Rana says these farmers suffer from the lack of technology. For example, they grind the coffee seeds in traditional grinders. But in Rana’s farm, the outer cover is peeled off and the seeds are washed several times and stored in drums before sun drying and grinding in modern grinders. Foreign buyers who come to watch the plantation are satisfied with the process and find that the coffee has a rare taste. The total exports from Plantec are going to UK, Germany, Japan, Italy and Switzerland to esteemed specialty coffee importers who are re-order every year since 2001.

The problem with other coffee growers could also be because of the advice they get from NGOs who do not have sufficient technological competency in the field. Whatever they are selling is because of the NGO’s connection and the buyers buy from them because they feel that in this way they are helping some poor farmers in Nepal. But the Plantec coffee is selling because of its own strength in terms of the unique taste, he claims.

Though the original seeds used in Plantec are from Papua New Guinea which produces mass market coffee (cheaper and normal taste), the Plantec coffee is unique tasting because of the environmental reason, says Rana.

Now other small farmers too have started growing coffee in the area and Plantec is providing the support including the buyback guarantee.

Rana is not trying to sell his product in the domestic market. One reason is that the premium outlets such as five star hotels were not interested to buy coffee from him as the foreigner purchase managers preferred to buy from the suppliers of their own countries. The second is a bit ironic. Rana distributed some samples to the diplomatic community in Kathmandu and asked them for their feedback. And reply was: “Oh, that was fantastic tasting coffee. Why don’t you send another packet?” Therefore, though he has arranged to stock some of the product in select outlets, he is not trying anything specific as local market promotion so as not to compete with the small growers and existing distributors hence the price is higher.

However, as any other businessman, Rana too says the government needs to be more supportive of the coffee sector. In this regard, he gives the example of Myanmar which had emerged as one of the major coffee exporters of the world after World War II. “But now after the military junta took over the country, the coffee business is completely wiped out due to excessive interference from the government while providing no support in exchange.”

The major support demanded by Rana is the provision of land at an affordable rent as the investor has to invest a lot in land development and infrastructure, such as irrigation. More importantly, coffee farming helps in environmental preservation as the coffee plants as well as the shade plants provide forest cover to the land, thus this business deserves special treatment. “Yes, there has to be a mechanism to identify the genuine entrepreneurs who will not misuse the land or squat on the lease,” he says.

Another problem is related with bank loan and insurance. While there is no system of crop insurance as yet, the loan is available only from the Agricultural Development Bank (ADB/N) which is charging a very high interest rate (12 per cent against 7 per cent charged by commercial banks on consumer loans). Moreover, the collateral demanded is sometimes about 400 per cent of the loan. But now other commercial banks too are becoming interested to lend for agriculture and Rana says that he too would borrow from the commercial banks once the existing loan is paid back to ADB/N.

The lack of plant insurance in Nepal is a vital issue for coffee as hail/high winds in April/May (flowering season) can wipe out upto 80 per cent of the crop.

Another problem is the climate and weather data. “We need data for rainfall and temperature, not only for the farm’s own purpose but also for the buyers who want to know about the environment of the area where the coffee grown as this information helps to fix the price of the product for the end consumers. Though we have now ourselves started keeping data, we need the data from the previous years too. But that is not available or not reliable. I have seen that these data are prepared by peons of the weather office who don’t know the difference between inches and centimetres,” he says.

Rana also demands similar facilities to coffee farming as being enjoyed by the tourism enterprises. “We earn dollars as they do. While they get customs duty rebate while importing four wheel drive vehicles, we do not. We also have to get our buyers to the plantation for inspection visit and for that we too need appropriate vehicles,” he says.

Four Years of Laxmi Bank long-term view

The management believes that a strong promoter profile, high standard of corporate governance, versatile IT credentials and a pool of committed people are the pillars of Laxmi Bank—built and strengthened over last four years.

Laxmi Bank has come a long way since its quiet start on 1 st April 2002 as a regional bank based in Birgunj. The Bank’s efforts to upgrade into a full-fledged national bank finally bore fruit in October 2005. During its four-year journey, Laxmi Bank has created history in a number of ways.

For one, its Initial Public Offering of the equity shares in August 2003 has been the largest so far in the country’s capital market. Second, it has become the first bank in South Asia to implement SWIFTNet. Equally important is the fact that it provides the only case of corporate merger within the financial service sector after Hisef Finance Company was merged into it last year. And this is the first 100 per cent locally-owned bank to win the prestigious Best Presented Accounts Award presented by the Institute of Chartered Accountants of Nepal (ICAN), the national accounting body.

“We believe that banking is a long term proposition and must be viewed as such. We are not prepared to compromise on our quality for short term benefits,” says Suman Joshi, CEO, of Laxmi Bank. The bank’s emphasis on quality shows in the form of an NPA level of below 1.5 per cent of the total loan portfolio even after accounting for business inherited from Hisef Finance following the merger. All credit officers at Laxmi Bank undergo an international standard credit skills accreditation programme on commercial lending skills—also adopted by a number of global banks. A highly proactive credit culture has evolved within Laxmi Bank around a dynamic credit policy and a pool of experienced managers bringing in best practices from leading joint venture banks. The majority of the top-tier business houses in cities where Laxmi Bank is present use its services, many of them as a major banker.

Laxmi Bank operates on Flexcube—the largest selling banking software in the world. Large investment on IT resources has enabled the Bank to take the lead in a number of technology driven services like internet banking, debit cards and SMS banking. Laxmi iBank is the most versatile internet banking service currently available in Nepal. SMS banking developed in-house by Laxmi Bank, alerts the account holder on every debit or credit transaction that occurs in his account—a feature not yet offered by other banks in Nepal.

At the recently concluded Management Conference, the Bank management has pledged to take Nepal’s electronic banking to the next level primarily on the strength of the Bank’s IT capability.

The Retail Financial Service team at the Bank has a number of pioneering initiatives to its credit as well. Laxmi was the first bank to offer a seven-year auto loan, which opened up more competition and called for greater innovation within the consumer finance landscape in Nepal—eventually benefiting the consumers. The team has also developed a number of credit scoring models to facilitate quicker turnaround on consumer and small business loan requests. The Bank is currently working on exciting variations on plastic cards, and also on self-service outlets. Ajaya Shah, head of RFS is confident that Laxmi Bank has the capability and the attitude to sustain its position as a leader in Nepal’s retail banking revolution.

The management believes that a strong promoter profile, high standard of corporate governance, versatile IT credentials and a pool of committed people are the pillars of Laxmi Bank—built and strengthened over last four years. Having fared generally better than its peers at a similar age, the Bank is perceived as a key emerging bank with a sound footing by the regulator and the market.

Laxmi Bank CSR

For a young bank, Laxmi Bank's commitment to Corporate Social Responsibility is quite pronounced. The Bank's CSR is three pronged as explained by Richa Adhikari, Manager Corporate Communications:

1. High levels of disclosure, so that the stakeholders know precisely what we are. It is a huge challenge in Nepal as transparency calls for self-regulation and the business will to do so.

2. Giving back to the community. It goes beyond charity and sponsorship. Creating awareness (e.g., Laxmi iBank-the complete internet banking experience), raising standards (eg., BPA award 2003/04), developing a robust and ethical workforce, etc., are all very powerful instances of our CSR initiatives albeit, prima facie, we appear to be doing these to enhance our own brand equity.

3. Being a good corporate citizen. Paying government taxes, vendor invoices etc on time. Abiding by the laws of the land, compliance with applicable regulations. Running the company in the best possible manner as we know it in order to achieve our mission.

"We do CSR as an investment in the community for our own greater (long term) benefit and not only because we are morally obliged to. We invest in businesses, individuals, markets and now the community," says Richa.

Some of the key CSR projects undertaken by the Laxmi Bank include financial assistance to the Tsunami victims of Sri Lanka, major sponsorship of national league football tournament, construction of a health post at Man Bhawan, recognition of woman entrepreneurs and production of a documentary capturing Nepal's ethnic rituals facing extinction. The employees of Laxmi Bank also undertake regular social activities under the banner "Laxmi Cares". A blood donation camp was organised to coincide with the Bank's 4th anniversary.