Diversification is the name of the game

Executives at El Sewedy Cables, a listed Egyptian industrial conglomerate, eye developments in the Gulf with caution as they plan their next expansion. Started as a family-owned electric appliances shop, El Sewedy Cables has diversified into an integrated energy solution provider with 12 plants worldwide. The largest listed Arab cable maker, El Sewedy manufactures transformers, copper and aluminium terminators and wind energy turbines.

Cables still account for 60 per cent of the company’s output, but in view of its other products and recent acquisitions, the company is considering changing its name to El Sewedy Electric. “Our clients’ needs drive our strategy, and we believe wind energy is the future,” says Ahmed El-Sewedy, chief executive officer. “With high oil prices, everyone is concerned about finding cheap alternative sources of energy. We plan to capture at least 10 per cent of the Egyptian wind energy market.”

The downturn, particularly in the Gulf, has taken its toll on El Sewedy’s profit, but it could have been worse had it not been for the company’s geographical and product diversification. It reported a 29 per cent decline in nine-month profits to E£549.8m ($100.1m), and a 24 per cent decline in revenues to E£6.86bn. Revenue from exports dropped 43 per cent. However, revenue from Egypt itself grew by 9 per cent.

Mr El Sewedy projects growth of about 15 per cent a year as recent expansions bear fruit. He is particularly pleased with prospects for the wind power turbine production facilities, in view of the government’s plans to generate 7,000 megawatts from wind power by 2020.

El Sewedy has been branching out of Egypt since 2000 to capitalise on anticipated infrastructure investments in the Gulf and Africa, building or acquiring plants in Syria, Sudan, Algeria, Saudi Arabia and Qatar.

Last year, the company took a 30 per cent stake in Spanish wind energy equipment manufacturer M Torres Olvega for €40m ($59m), and Iskraemeco-Slovenia, a maker of metering, registration, and billing devices. “We bought Iskraemeco to export meters to Europe, Africa and the Gulf,” he says. “We adjusted our portfolio to spread our risks, but will defer further expansion until our new venture is profitable and until we see an end to the financial crisis.”

Economic turmoil has hampered demand, particularly slowing construction in Dubai and Kuwait, he says. The company has cut prices on cables by 17 per cent and extended more generous payment terms to its customers. “We have done better than we expected, but our prices are still under pressure,’’ he says. “Along with our competitors, we’ve increased supply during the Gulf boom, then the crisis hit and we had to act to mitigate the effect.”

Analysts believe geographical and product diversification helped the company avoid the worst effects of the downturn, but competition from the region is a whole new variable.

Cable gross profit per ton in the two years through to the end of next year is expected to drop by more than 30 per cent from its 2008 peak because of tougher local competition, according to Wafaa Baddour, equity analyst at EFG-Hermes, a regional investment bank. But she expects El Sewedy to be able to compete in the tougher environment. “High volume will offset declining profitability,” says Ms Baddour.

Mr El Sewedy admits the company is under pressure but he remains optimistic. “The crisis is an opportunity because governments focus more on infrastructure projects,” he says. “We are in the right segment and the right region.”

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