Ashroff details plans for Textured Jersey

Textured Jersey Lanka Limited is one of Sri Lanka’s largest and most profitable weft knit fabric manufacturers, operating a modern, state-of-the-art manufacturing facility in the Seethawaka Industrial Zone.

The company’s customer portfolio includes several prestigious retail brand houses such as Marks & Spencer, Intimissimi, Victoria’s Secret, Decathalon and Tezenis. It was originally incorporated 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.

In 2004, Pacific Textile Holdings of Hong Kong, one of the largest listed textile manufacturers in the world, acquired 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 tonnes of fabric per annum.

Textured Jersey recently announced the launch of its Initial Public Offer to list 80,000,000 ordinary voting shares on the Main Board of the Colombo Stock Exchange at a price of Rs. 15 per share which will open on 7 July 2011.

The proceeds from the shares issue are to be utilised to expand its manufacturing facility from its current capacity of 11,000 tonnes per annum to approximately 15,000 tonnes per annum. The expansion follows a period of extraordinary growth for the firm where revenues and net profits recorded five year CAGRS of 25% and 21% respectively.  

Brandix Lanka Chief Executive Officer and Textured Jersey Director Ashroff Omar elaborated on the company’s past performance, some industry headwinds that the company has overcome as well as the longer term prospects of the business:

Q: How has TJ performed financially and operationally over the years? What role has its shareholders played in helping TJ become what it is today, almost a decade since its inception?

A: 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 TJ’s 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 top line basis the company has grown from US$ 65.3 m in FY 2009 to US$ 83.2 m in FY 2011. However, the most significant improvement achieved by the company has been in its profitability which grew from US$ 1.3 m in FY 2009 to US$ 6.1 m 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 US$ 16.1 m to US$ 27.1 m.

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.

Q: 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?

A:  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 five to six 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 organisation 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.

Q: 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?

A:  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 in which it invoices its customers. 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 a negative 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 US$ 5 b in textile and garment exports by 2015 may even be achieved much earlier.

Q: Where do you feel the market for the products of TJ are heading? Does TJ have room to expand?

A:  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 US$ 270 m. The revenue of TJ selling the same fabric is US$ 83 m, these two numbers alone speak for the room that TJ has to expand.

Q: TJ has declared an Initial Public Offering to raise Rs. 1.2 b, what does TJ intend to do with these funds?

A:  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. 1.4 b, of which Rs. 1.2 b will be raised from the market whilst the balance funds will be through internal generation of cash.

Of this Rs. 1.4 b, Rs. 1 b will be used to purchase state-of-the-art machinery for a modern production facility. Rs. 344 m will be used for the construction of the facility, whilst Rs. 82 m 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.