Air Link Communication Ltd, importer and distributer of mobile phones, has begun the process for its listing on the Pakistan Stock Exchange (PSX).

The company says it is the importer-cum-distributor of Huawei and Samsung mobile phones and accessories in Pakistan, commanding a 20-25 per cent market share.

The company says it has recently enhanced its brand portfolio by signing a smartphone distribution agreement with additional vendors, including TCL, Techno and Itel besides entering into an agreement with MP — Apple’s authorised distributor for Pakistan — for the distribution of products procured from MP in Pakistan.

Air Link intends to sell 90 million shares of which 60m will be new shares and 30m offer-for-sale shares at the floor price of Rs56 per share to raise Rs5 billion. The new issue will raise Rs3.4bn of the total offer of Rs5bn while the offer for sale for the balance shares will raise Rs1.7bn.

The strike price will be Rs78.40 per share, 40pc higher than the offer price of Rs56. Bidders will be allowed to place bids for 100pc of the issue size in book building. However, successful bidders will be provisionally allotted only 75pc of the issue size i.e. 67.5m shares and the remaining 25pc i.e. 22.5m shares will be offered to retail investors.

‘Distribution companies often fall short of working capital. They should tap the stock market for it’

PSX Chairman Sulaiman Mehdi commented that the listing of Air Link will open up a whole new sector of distribution companies. “It is a positive development and the exchange will encourage other distribution companies to seek listings and mobilise capital from the stock market,” he affirmed.

Mr Mehdi observed that distribution companies often fall short of working capital for which they can tap the stock market. That statement is corroborated by the Air Link prospectus, which states: “The proceeds (from the share issue) will be utilised to establish additional retail outlets and inject working capital for further expansion of distribution and retail network in more cities of the country.”

The Air Link prospectus maintains that the company has a countrywide distribution network consisting 16 regional hubs linked to 1,000-plus wholesalers and 4,000-plus retailers for the sale of mobile phones across 300-plus cities and towns.

The company currently operates three flagship retail outlets — two in Karachi and one in Lahore — and has 400 employees on payroll. In 2018-19, its revenue was Rs30bn, net profit Rs1.5bn and net profit margin 5pc. With as little as Rs2.3bn revenue in 2013-14, the five-year cumulative annual growth rate works out at 66pc.

Air link is comparatively small fish in a big pond in which companies in the distribution business of all sectors exist. Muller & Phipps, a giant in the business, employs over 5,000 professionals and covers 950 towns. It recorded sales of Rs100bn in 2018. Besides Muller & Phipps, nine other top trade distribution companies identified by the Sales Professional Forum — an organisation engaged in the development of the sales fraternity in the country — includes Premier Group, Burque Corp, UDL Distribution, Vikor Group, IBL Distribution, Ali Gohar & Co, Parazelsus Pakistan, Allied Marketing and Abu Dawood Pakistan.

This writer is witness to the rise and fall of Spencer & Co — a distributor of pharmaceutical products of major multinationals. It did flourishing business under the stewardship of famed Syed Hashim Raza until it caught the eye of a corporate raider. The new owner, who had acquired the company for the property it owned in the form of hundreds of sales depots spread across the country, ditched the business and the listed company soon vanished into thin air.

In its SWOT analysis, the company concedes its three weaknesses: a lack of sufficient working capital financing, margins that are set by principal/manufacturer/regional distributor and smartphones that cater to the medium-to-high-end consumers only.

On the flip side, Air Link mentions its strengths include: official partnership with leading mobile phone manufacturers and the skill set to run competing brands under one umbrella, a countrywide distribution network and warehouses, consistent margins owing to the adjustment to the pricing of products provided by vendors and the establishment of a cloud computing and data centre in collaboration with Huawei.

Air Link expects to increase sales of mobile phones from 10.2m units in 2018-19 to 14.9m units in 2019-20. The company mentions potential risk factors, which include: substantial financial leverage, termination of the distribution agreement, imposition of import duties and taxes, new product launches by vendors, slow-moving models, negative cash flow from operations, physical damage, default risk, human resource risk, increase in the markup rate by the central bank, sanctions on imports, threat of new entrants, capital market risks and under-subscription to the public issue.

On the positive side, demand drivers are mentioned as: one-third of the country’s population is aged between 20 and 40 whose income levels are gradually rising, increasing 3G/4G subscriber base, implementation of DIRBS continues to reduce the grey market and increased demand by registered devices, uptick in the dependency on smartphones is shifting customer preferences away from feature phones, and replacement demand for existing smartphones, which is expected to sustain the industry’s growth in the long term.

Published in Dawn, The Business and Finance Weekly, February 24th, 2020