THE Service Industries Limited, the producer of one of the country’s oldest footwear brands — Servis Shoes — is now planning investment in hydropower generation in Punjab.

If approved by shareholders at the annual general meeting later this month, SIL will make an equity investment of up to Rs50m in the recently incorporated associated company, S2 Hydro, for developing a 20 megawatt hydro power plant located near Mandi Bahauddin.

The cost of the proposed project is estimated at $60m, with an equity investment of 20pc or $12 million. The balance project cost of $48 million will be funded by debt.

The company directors, according to the SIL annual report for 2015, are of the view that the growing unmet demand of energy in Punjab offers an opportunity for investments in power generation projects based on coal, hydro, biomass and solar. There are chances that the company may also invest in 220 megawatt coal power generation.

The tax incentives like zero per cent duty on import of plants and equipment with exemption from sales tax, income tax exemption to power generation companies for life, full repatriation of profit plus investment, and minimum guaranteed, (US) dollar-based 17pc return on equity make such investments risk-free and quite lucrative for investors.

“The company is continuously investing in product and sales channel development, capacity expansion and modernisation of machinery”

The guaranteed return on equity will be in addition to reimbursement of debt servicing costs, operations and maintenance costs and insurance cost, etc.

SIL was one of those early local manufacturers who saw the potential of domestic market and kept investing in manufacturing and retail network. At present, the company is involved in the manufacturing of footwear, tyres and tubes and technical rubber products.

In the last six years, it has created tremendous wealth for its shareholders with the firm’s net sales almost doubling from Rs9.42bn in 2010 to Rs17.54bn in 2015. The company’s profit before tax has also jumped from Rs488m to Rs1.27bn. The shareholders’ equity has a little more than doubled from Rs1.7bn to Rs3.6bn. Total assets of the company are now valued at Rs10.24bn compared with Rs4.54bn six years ago with market value jumping to Rs850 from Rs240.

According to the company’s annual report for the year ended on Dec 31, 2015, the sales revenues of the company went up by 6.36pc, profit by more than a fifth, equity by 21.56pc and earning per share (EPS) rose to Rs78.63 from Rs64.28 a year ago.

More than half of its revenues — Rs9.33bn — came from the sale of footwear and the rest — Rs8.21bn — from tyres and tubes. Technical rubber products sales of Rs101m contributed only a negligible part to its overall turnover.

The company’s overseas shipments chipped in a significant 29pc or Rs5.04bn to the total SIL sales. The footwear sales formed 90pc of its export revenues.

Although the firm’s exports showed a slight dip of eight per cent over the last year, it’s local sales were up by 15pc from Rs10.96bn to Rs12.50bn.

The directors’ review of the firm’s performance in 2015 says the footwear division’s revenue increased from Rs9.2bn to Rs9.3bn during the year, representing a marginal growth of 1.3pc.. “Growth in footwear was hampered mainly in export business, which was adversely impacted due to the unprecedented weakness of the euro. Gross margins in footwear business decreased from 14.4pc to 12.5pc, mainly due to euro decline while part of downward pressure was offset by decrease in input material costs.”

On tyre and tube sales, it says the tyre division continued to grow during the year at a reasonable rate. “Sales grew from Rs7.3bn to Rs8.2bn, depicting an increase of 13.3pc year on year. Considerable emphasis was placed on product quality and marketing efforts, areas that continue to contribute towards much improved perception of our brands in the market.”

The directors appear quite optimistic about the future growth of business, saying the management has increased its efforts to expand both footwear and tyre businesses in the coming years “Your company is continuously investing in product and sales channel development, capacity expansion and modernisation of machinery. Additionally, the management is pursuing a diversification plan in the current year.”

Published in Dawn, Business & Finance weekly, April 11th, 2016