Ashroff Omar, CEO of Brandix Lanka Limited and Chairman of Textured Jersey Lanka Limited shares his thoughts on Textured Jersey and the broader industry ahead of the much awaited IPO of Textured Jersey Lanka Limited opening on 7th July 2011. The company will be offering 80 million ordinary shares at Rs. 15/- per share. Could you give a background of Textured Jersey for us, its operations and history?
Textured Jersey Lanka Limited is one of Sri Lanka’s largest and most profitable textile mills which produce weft knit fabric for use primarily in the local apparel industry. It is located in the Seethawaka Industrial Zone and has a production facility that encompasses over 650,000 square feet. TJ’s main customers comprise, of M&S, Intimissimi, Victoria’s Secret, Decathalon and Tezenis. The company was established in August 2001 as a Joint Venture between Textured Jersey UK and Linea Clothing (Private) Limited. Linea Clothing was a joint venture between MAS Holdings and Brandix Lanka. Subsequently in 2004 Textured Jersey UK exited with Pacific Textile Holdings of Hong Kong taking over TJUK’s shareholding and later the shareholding of the company was further restructured with Brandix Lanka Limited taking ownership of the entire stake held by Linea Clothing. TJ currently produces over 30 tonnes of fabric daily and over 10,000 tonnesof fabric per annum.
How has TJ performed financially and operationallyover the years? What role has its shareholders played in helping TJ become what it is today, almost a decade since its inception?
As I mentioned earlier TJ now manufactures over 10,000 tonnes of fabric per annum which is a doubling of production since 2007.This has been assisted by a capacity expansion which took place during 2007/08. It has been successful in growing its customer portfolio to successfully cater to renowned customers such as M&S, Victoria’s Secret and Intimissimi, which has been a result of its concentration and zealous focus on quality and on time production. In this sense I must mention that Pacific has been an extremely strong partner in TJs growth story, effectively engaging the company to continuously grow its quality and delivery by successfully passing on best practices they have developed in manufacturing within China. In addition Pacific has in the past had a presence of its personnel in TJ to assist the Sri Lankan staff in achieving world class standards, however the local staff have been quick learners, which has enabled Pacific to reduce the presence of Chinese staff within TJ. This development that TJ has achieved in its production techniques and capabilities has naturally transferred towards financial stability and growth. On a topline basis the company has grown from USD 65.3mn in FY 2009 to USD 83.2mn in FY 2011. However the most significant improvement achieved by the company has been in its profitability which grew from USD 1.3mn in FY 2009to USD 6.1mn in FY 2011. This is a growth of almost five times in a period of three years, which I believe is an achievement any company can be proud of. During the same period the company has grown its net assets from USD 16.1mn to USD 27.1mn. A point worth mentioning here is the clear focus by the shareholders of the company towards its growth which is evidenced by the fact that since its inception the shareholders of the company have not taken any dividends and have ploughed back all profits towards the company. However I must assure the IPO investors that going forward the company has implemented a policy of distributing a third of its profits as dividends to the shareholders.
As you mentioned TJ caters to a small number of customers. Is this the correct strategy? Do you not feel that this is a risky strategy to follow?
Yes you are correct in mentioning that TJ is focused towards servicing a few customers. If I am to elaborate further Intimissimi accounts for approximately 31% of the turnover of the company whilst M&S and Victoria’s Secret account for 29% and 23% of turnover respectively. Effectively these three customers together account for 83% of the turnover of TJ. This is very similar to the profile of Sri Lanka as an exporter of apparels. The profile of customers of the Sri Lankan apparel industry is concentrated mainly amongst 5 to 6 customers. I don’t believe this is a risky strategy due to many reasons, with the foremost being that the relationships that we as a country and TJ as an organization have built with these customers are longstanding and extremely strong. These customers understand the structure and mechanisms of our industry locally and are committed to partnering with us in the longer term. Additionally for them as customers, switching to different suppliers is also a costly affair, due to the level of quality we offer as well as our ethical and environmentally friendly standards of manufacturing. Sri Lanka for a fact has more LEED (Leadership in Energy and Environmental Design) certified factories than any other country exporting apparels currently.
What impacts do you feel that factors such as the volatility in cotton prices, exchange rate appreciation and the loss of GSP + will have on Textured Jersey?
Cotton price volatility is an industry wide phenomenon; it is not one that impacts TJ alone or Sri Lanka alone as a nation. Cotton prices saw a steep rise during last year, due to a number of natural factors as well as some heavy speculation in trading of cotton futures. However prices have seen a dip from about April this year. For TJ raw material costs account for approximately 60% - 70% of its cost structure of which 80% - 85% is accounted for by yarn. This is definitely a sizeable portion of the company’s cost structure and can have an impact on its profitability. However TJ has been able to pass on a greater portion of this raw material cost increase to its customers thereby effectively negating the impact on profitability. I don’t believe that going forward any adverse changes in cotton prices will impact TJ negatively due to the fact that this is an industry phenomenon and one that is very well understood and acknowledged by its customers.
We as a company are not too concerned about the appreciation in exchange rate. Whilst it is an issue that does have a negative financial impact on the company, TJ has been able to naturally hedge itself against this risk. This has been due to the fact that most costs incurred by TJ, except for costs such as labour and utilities, are incurred in US Dollars which is the same currency that it invoices its customers in. Additionally most companies that we compete with are also located in economies which are experiencing an appreciation in its respective currencies. The Chinese Renminbi is a case in point.
The loss of GSP+ has been proven statistically to not have had anegative impact on the Sri Lankan apparel industry. As evident by the figures released since the removal of GSP+, exports of textiles and garments from Sri Lanka have seen a growth rather than a decline and the figures for the first quarter of the year are more than impressive. This also leads us to believe that Sri Lanka’s target of hitting USD 5bn in textile and garment exports by 2015 may even be achieved much earlier.
Where do you feel the market for the products of TJ are heading? Does TJ have room to expand?
We can break up the market for apparels as wovens and knits. The market for knit apparels is one that is continuously witnessing growth. In Sri Lanka alone the exports of apparels manufactured using knit fabric has grown 119% from 2002 to 2010, whereas the growth in apparels manufactured using woven fabric has only grown 10% during the same period. TJ manufactures fabric for use in this fast growing segment of knit apparel, hence being able to tap into this growth as well. In 2010 alone Sri Lanka imported knit fabric worth USD 270mn. The revenue of TJ selling the same fabric is USD 83mn, these two numbers alone speak for the room that TJ has to expand.
TJ has declared an Initial Public Offering to raise Rs 1.2bn, what does TJ intend to do with these funds?
These funds will be used in a much needed capacity expansion for the company, one which can enable the company to move to a new level of growth. The financial requirement for the expansion is Rs. 1.4bn of which Rs. 1.2bn will be raised from the market whilst the balance funds will be through internal generation of cash.
Of this Rs. 1.4bn, Rs 1bn will be used to purchase state of the art machinery for a modern, production facility. Rs. 344mn will be used for the construction of the facility whilst Rs. 82mn will be used for the construction of a water treatment plant which will service the new facility. The expansion will take place on a land which has been leased from the Board of Investment of Sri Lanka and will be completed by 2014. A similar expansion of capacity of the company in 2007 enabled it to generate greater returns for its shareholders. The proposed expansion should also enable the company to generate better returns.
source - www.island.lk
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