From small family business to major cement company
ARM Cement boss says families do not have to own 100% of their businesses to achieve growth.
Cement consumption in Africa is poised for growth as construction of new housing and infrastructure projects continue.
The 2013 CW Group Kenya market update report predicted that Kenya’s cement per capita consumption will for the first time surpass 100kgs per person in 2014. This makes Kenya one of the leading cement consumers in East Africa, but it is still relatively low compared to Egypt which, according to Global Cement Report, consumed 554kg/capita in 2012.
Pradeep Paunrana, managing director of ARM Cement, one of the largest cement manufacturers in East Africa, says the company is planning to double its more than 2m ton annual capacity to meet growing demand in the region.
Formerly known as Athi River Mining, the firm was established in 1974 by Paunrana’s father, HJ Paunrana. Initially, the company focused on mining limestone for use as agricultural lime and eventually expanded its product range to animal feeds, industrial mineral supplements, paint, glass, rubber, ceramics and many other industrial products. Value added processing became the firm’s key business as it manufactured and supplied products to almost all sectors.
“He located the company very close to East Africa Portland Cement Company (EAPCC),” says Paunrana of his father. “I remember him telling me: ‘You see that line of trucks waiting to carry cement at EAPCC, waiting for two to three days at a time? This is a business that we should go into because there is a huge demand and we have got to fulfill that demand.’ So right from the outset, the ethos of the company was how to ease the pain of the consumer and make it easier for them to access products.”
Getting into the cement business
In 1994, ARM ventured into cement manufacturing.
“If you look at our history, we started with mining of industrial limestone and limestone is really the base raw material for manufacture of cement. You need nearly two tons of limestone to make a ton of cement. We were always looking at value added processing. What is it that we can do with our raw materials to grow the company? So, cement was a natural extension of our growth.”
Paunrana explains that an even more compelling reason for the firm’s entry into cement manufacturing was the fact that “cement is a very basic raw material for development”.
“In Kenya and East Africa generally, our cement consumption per capita has been very low. As our economies are improving, as our aspirations of development are changing with more educated young people, we want more housing, more roads, more infrastructure… all these ultimately require a lot more cement.”
ARM set up a cement plant in Kaloleni at the Kenyan coast and started production in 1996.
“It was a very small operation at the time producing less than 200 tons of cement per day. Over the years the company has grown in the cement line of business.”
ARM has subsidiaries with manufacturing plants in South Africa, Tanzania and Rwanda. Its products are distributed in Uganda, Tanzania, Rwanda, Ethiopia, Malawi, Madagascar and South Africa.
“[African] economies, although we are confident are growing, are subject to ups and downs for many reasons and being geographically spread across a number of political and economic zones allows us to absorb shocks,” says Paunrana.
Expansion
ARM Cement is currently building a US$150m clinker plant in Tanga, Tanzania. The plant is expected to be fully operational by the end of July and will have an annual production of 1.2m tons of clinker, which is used in making cement.
In Kenya, ARM Cement is seeking $300m to finance another project in Kitui town (about 180km east of Nairobi) which will produce 8,000 tons of cement per day, making it the single largest cement factory in the country.
Over the next six years, the firm’s plan is to double its annual production capacity to about 5m tons.
Going public
Paunrana notes that ARM has had “significant growth” over the years.
“Part of that growth is attributed to… being listed on the Nairobi Securities Exchange (NSE) [and] being able to access capital through the capital markets. We have issued many different instruments for raising money such as a listed bond, an equity bond [and] convertible bond from African Finance Corporation out of Lagos, [Nigeria].”
ARM started with a private placement in 1994 and listed on the NSE in 1997. Today it is one of the top 10 largest companies in Kenya by market capitalisation with institutional shareholders from New York, London, Singapore, Johannesburg and other major financial centres.
“I think this is a good demonstration for other family businesses that you don’t have to own 100% of what you do. My father, when he started, was only a 25% shareholder of ARM in the 1970s. He had borrowed money from friends and relatives and given them shares in the company,” says Paunrana.
“When I joined the company we carried on in the same principle that we wanted to grow the company and in order to [do that] we needed continued investments. In the cement business, the scale of investment was so much more that we had to bring in more outside shareholders.”
Typically, Paunrana says, commercial banks in the region are not geared towards lending for long term growth and the few existing development financing institutions are not able to cater for small businesses.
“Access to capital is one of the main stumbling blocks or barriers to growth in Africa. Our people have great ideas, good businesses but they lack the capital to grow and they lack sometimes the know-how on capital raising. We have a lot of handicaps and the one way we can overcome that is by use of capital markets.”
Good corporate governance
While some families might opt to fully own their businesses and therefore stifle growth for fear of getting kicked out of management by outside shareholders, Paunrana says business owners should separate management from ownership and control. The emphasis, he says, should be on good corporate governance.
“It does not have to be family driven,” he offers. “If you are going to resort to other people’s money for your growth, whether it is as shares or loans, you have a responsibility to those people. You have to change your perspective… growing the wealth for everybody means you are growing the wealth for yourself also.”
Paunrana is one of Kenya’s billionaire CEOs alongside Equity Bank’s James Mwangi and Scangroup’s Bharat Thakrar who have also been instrumental in the transformation, growth and expansion of their listed companies.
Paunrana, who joined the company in 1984 after graduating with an MBA from New York University Stern School of Business, is largely credited for ARM Cement’s success. During his tenure he has transformed a small, family-run producer of agricultural lime into a major, publicly-listed cement company with regional operations.
In 2010 Paunrana was awarded the Africa Business Leader of Innovation by the Africa Investor Group. He is the current vice chairman of the Kenya Association of Manufacturers and is set to take over as chairman in June this year.
Paunrana notes that while a company can do everything “right” by serving market needs with the right quality service and price, the most important factor in a company’s success is its people. He adds that engaging with society such as through ARM’s Rhino Cement Foundation, which makes social investments in health, education and the environment, is key to developing African economies and empowering future consumers.
“Our people are truly part of the company. They have a mission… not just to make profits and produce cement but to help build Africa. It’s not just about cement; it’s the people of Africa that we need to build. We need to empower [people and] make sure that we are instruments turning African countries into middle developed economies. Just imagine 40m people in Kenya all having a daily disposable income of $10.”