Gadoon Textile Mills Limited has survived through some tough times before. It ran into trouble no sooner it had become operational towards the end of the 1980’s when the government withdrew tax incentives it had allowed to attract investments for creating alternate jobs to eliminate poppy growing in Gadoon Amazai, Khyber Pakhtunkhwa.
The withdrawal of incentives forced 400 out of 440 units to uproot their plants and machinery and relocate to other parts as manufacturing in the area became unfeasible due to freight costs on movement of raw materials and finished goods from and to the port in Karachi and elsewhere in the country. GTML decided to stay and grow to become one of the country’s largest producers of cotton and manmade fibres with production capacity of 322,000 spindles.
Set up by Yunus Brothers Group, one of the largest and most diversified business groups in Pakistan, the company again found itself in deep water in 2007/2008 because of heavy exchange rate losses when the country’s economy tanked on domestic political instability, sharp spike in terrorism and global recession.
Every time it ran into trouble the company, it was able to successfully pull through the tough times because it was willing to invest in research and development (R&D) and add value to even its yarns. It is often called a ‘supermarket’ of yarns with technological capability of making coarsest to finest cotton and man made fibres. It is also one of the first few textile companies that introduced new technologies and also pioneered compact spinning in 1999.
Like most spinning and weaving factories, GTML’s profitability again began sliding from mid 2013 because of massive increase in conversion costs of producers on rising energy prices and shortages.
Consequently, the company had to suffer a pretax loss of just above Rs90m (after-tax loss amounted to Rs392m) in the financial year ending in June 2015. But the unaudited accounts of the firm for the first half of the ongoing year to December 2015 show it may be getting back on its feet.
The company, employing 5,500-6,000 people in its two facilities in Gadoon and Karachi, succeeded in grossing a modest profit of Rs591.50m in the first six months in spite of 25pc decrease in overseas shipments of its yarns. But its pretax profit for the period was reduced to Rs55m – almost a third of over Rs150m earned a year before – after adjusting distribution and finance costs, and expense on administration.
Indeed, even this meagre profit could not have been possible without slashing administrative cost on procurement of raw materials and managing reduction in inventories by about 18pc to Rs96.10m from Rs116.82m and finance costs by a third to Rs261m (2.51pc of sales) from Rs393.24m (3.36pc of sales) a year ago because the local sales had grown only marginally by 0.06pc to Rs6.371b from Rs6367m. Overall, the company’s sales decreased by 11.37pc in terms of value and 1.65pc in terms of volume, leading to a reduced gross profit margin of 5.69pc.
“The revenues from export sales in proportion to total sales were 38.6pc, down from 45.61pc a year ago, owing to declining global demand for Pakistan’s textile products and rising competition. Factors such as contracting growth rate of the Chinese economy and sluggishness in the European and American markets have majorly contributed to the curtailed international demand. Moreover, a lack of policy support from the government has made local textile industry uncompetitive in international markets,” says the directors’ report for the first six months.
Furthermore, nearly a quarter of the local raw cotton was destroyed by heavy rains and pest attack in parts of Punjab. Resultantly, the report said, the company shifted towards procurement of imported cotton to meet its requirements.
The country’s large-scale, basic textile producers, especially in Punjab, have faced several challenges since mid 2013: energy (electricity and gas) crunch, higher-than-regional energy prices (energy costs of spinners have now gone up to 20pc of the manufacturing costs from 13pc before the government raised power and gas prices September 2013 onwards), and influx of cheap, subsidised yarn and fabric from India. Consequently, majority of the factories have seen their profitability eroded over the last two and a half years with many suffering massive losses and partial or complete closures. Many are also facing liquidity crunch because of the delays in release of their tax refunds. GTML alone, for example, has Rs664m stuck in income tax refunds with the government in addition to Rs150-200m unpaid sales tax refunds.
“These factors have not only made Pakistani textiles uncompetitive in the international markets, but also affected their domestic sales,” argued Abdul Sattar Abdullah, executive director (finance) at GTML. Since the difficult operating conditions continue to hold, GTML has decided to pursue a strategy to cut costs, wherever possible, as a visible from the unaudited half yearly results.
“Though we have managed to break even in the first six months, the way to profitability still remains strewn with the same old challenges because we remain uncompetitive in the world and our local market continues to receive cheaper Indian yarn despite imposition of 10pc regulatory duty (on top of existing 5pc import duty,” he said.
“You cannot revive the industry’s competitiveness without bringing down energy prices to regional level, imposing anti-dumping duty on Indian yarn, releasing the tax refunds of the manufacturers and providing (cash) incentives to the exporters. The future outlook remains challenging.”
Published in Dawn, Business & Finance weekly, March 21st, 2016