On October 8, 2020, Gatron Industries disclosed material information to the Pakistan Stock Exchange, regarding its proposed merger with Novatex Industries. The High Court of Balochistan in Quetta had approved the merger between the two companies on September 21, 2020.
The transaction is an all-share swap: under the terms of the merger agreement, all 56.7 million ordinary shares of Novatex held by Gatron would be cancelled, and new shares would be issued.
Gatron Industries’ logo is a Gatron topped with a five point molecular symbol. Novatex has the same logo, with the molecular symbol topping the ‘A’ of Novatex. And already, if one clicks on some links on Gatron Industries own website, or on links for Novatex’s website, one is redirected to the somewhat clunky website for ‘Gatronova’, with the same symbol now above an emphasized ‘V’ of Gatronova. These are companies which are two sides of the same coin.
So, what are these two companies? The clue is in the symbol: both companies are involved in polyester in some form, which is a synthetic fiber, and other polyester products. Both companies are associated companies of a larger group of companies under the Gani and Tayub (G&T) umbrella. That group has been in operation since 1948, and includes Gatron Industries, Novatex Limited, Novatex Power Private Limited, Gatron Foundation, and Bounti Garments Industries.
The company was incorporated in 1980 as a public listed company, and its shares were quoted on the stock exchange in 1992. Its registered office is in Quetta, while its manufacturing facilit is located in Lasbela District in Balochistan. It wholly owns three subsidiary companies: Gastro Power, Global Synthetics, and G-Pac Energy. Gastro Power, as the name suggests, generates power, while the other two have yet to comment operations.
Now, for Profit’s quick chemistry refresher: polyester is a class of polymers that chiefly contains Polyethylene Terephthalate, also known as PET. Polyester is a synthetic polymer produced using PTA and MEG. Around 40% of the world creation of polyester is specifically used to make polyester yarn. Which, incidentally, is the main business of Gatron Industries. Polyester Filament Yarn comprised 71% of all sales in 2020, and 75% of sales in 2019. The remainder 29% and 25% respectively was taken up by Polyester PET Preforms, which is when PET is injection molded into a ‘mini bottle’, in the first step of creating a plastic bottle. The company is very much focused on Pakistan, as around 99.4% of all sales are to customers in Pakistan (in 2019, this stood at 99.3%). Interestingly, the company does not have any transaction with any external customers which amounts to 10% or more of the company’s revenue.
The company has done well: between 2014 and 2020, it only made a loss in 2016. But its profit after taxation climbed from there, from Rs57 million in 2017, to Rs982 million in 2018, to Rs1,795 million in 2019. Revenue in those six years has hovered between Rs8.8 billion (the lowest, in 2016) to Rs17.7 billion (the highest, in 2019).
In 2020, the company fumbled somewhat. Net sales stood at Rs12.9 billion, while profit after taxation stoof at Rs1,061 million. What happened?
Well, quite a lot, according to the director’s report from the annual report of 2020. First, the company faced a 17% sales tax, which it did not have to face in 2019. Most of the sales loss also happened between March and June 2020, when the Covid-19 pandemic hit. The Yarn plant was shut down for 66 days, and restarted on 15 June, 2020. Demand for beverages (and therefore plastic bottles) remained dampened, and therefore volumes for preforms fell by 22% when compared to the same summer quarter last year.
The company has been struggling with what to do with its preforms in general. Some of the preform machines are over 15 years old, and updating them costs around 45% of new machines, and equal to the existing value of the old machine. The Director’s report noted that the company will have to make a strategic decision to either spend capital expenditure on yarn expansion, which already makes the bulk of sales, or on preforms. The inclination, according to the report, was to go ahead for the yarn expansion.
Enter Novatex, also based in Balochistan. The company was incorporated in 1991 and began to manufacture polyester chips in 1997, which is used to make polyester yarn. In 2002, the company diversified and began to manufacture PET resin – bottle grade chips. Then in 2007, two new plants were installed to produce polyester chips and PET resins. Producing PET Resins meant that the company was also able to start producing PET preforms. In 2012, Novatex Limited produced BoPET films, under the brand name of Krystofilms, which is the biggest plant of PET films in Pakistan. BoPET is stretch polymer used for food packaging, solar panels, and medical applications. (Krystofilms, in case you are wondering, also features the five point molecule above the ‘o’ of Krystofilm). Today, the company employs over 6000 employees.
Unlike Granton, Novatex is very export oriented. For instance, its PET resin (which has a production capacity of 345,000mt per annum) is divided almost equally between the local and export Market.
The company says it exports 70% of all its products to Europe, Middle East, North Africa, East Africa, New Zealand, South and North America.
Hence, the new scheme arrangement makes a lot of sense. Essentially, you have two companies, within the same umbrella group, making different variations of the same general product. The difference is that one is export oriented, and the other is not. One wants to focus on yarn, the other is expanding general chip, preform and film products.