Things were just not going the way Habibullah Khan Khattak had planned. Born in 1913 in Wana, British India, he had spent his entire life grooming for the top position of the Pakistan Army, the Commander-in-Chief (this position is now known as the Chief of the Army Staff or COAS). Attended the Indian Military Academy in Dehradun? Check. Fought in World War II in Burma? Check. And yet in 1958, when Ayub Khan made himself Field Marshal and President of Pakistan in the country’s first coup, he picked Muhammad Musa Khan for the top position. Khattak, the brighter of the two (at least according to his son), was forcibly retired at the age of 46.
So much for the military career. But while Musa Khan went on to bungle the 1965 war with India, Khattak set his sights on becoming an industrialist. Known as ‘Bibo’ to his friends and family, he literally named his conglomerate the Bibojee Group, with interest in textiles, insurance and automobiles (Gandhara Industries, joint venture partners with Nissan, falls in this group).
Khattak made almost two identical spinning mills in the space of ten years. In 1960, Khattak set up the Janana De Malucho Textile Mills in Kohat, 53 kilometres south of Peshawar. It had the capacity of 12,500 spindles, and 250 weaving looms and a processing unit. Production started in 1963, and in 1968, another 12,500 spindles were added, along with 250 looms.
This was apparently not enough. So in 1970, Khattak set up another textile spinning unit, the Babri Cotton Mills, in Kohat 55 kilometres south of Peshawar. Production started in 1973, with a capacity of 25,056 spindles.
None of it mattered anyway: nationalisation – and the disastrous period of government ownership and management that followed – forced both mills to shut down in the period between 1977 and 1983. In 1986, the family regained control of the mills. The Khattaks are still very much in charge of the two mills, with Ali Kuli Khan Khattak serving as the CEO of Janana de Malucho, and Raza Kuli Khan Khattak as the CEO of Babri Cotton Mills.
As of 2019, Janana’s total capacity is 64,704 spindles with 600 rotors and it employs 1,149 workers. Meanwhile, the total capacity of Babri is 53,256 spindles and 400 rotors, and it employs 1,072 people.
Two mills with practically identical numbers, run by the same family, set up by the same man: is it any wonder that the two mills announced a merger on August 12, 2020, to the Pakistan Stock Exchange? And yet, while on the surface the two may seem to have a lot in common, the mills actually significantly differ.
Take a look at the mills’ financials. In the last six years, Janana De Malucho has posted a loss in only 2017 and 2018. Otherwise, it posted a profit after tax of Rs6.2 million in 2019, Rs12.8 million in 2016, and even Rs180.5 million in the unusually good year of 2014.
Meanwhile, Babri has floundered in the same period. The company posted a consistent loss for the last five years, with a loss of Rs84 million in 2018, and Rs39 million in 2019. For its part, the company said that the loss was due to a rise in its finance costs. In particular, it was to fund its capital expenditure program, which led to Rs200 million worth of additional machinery.
Still, the loss per share at the end of fiscal year 2019 was Rs10.68. At the end of the nine month period of fiscal year 2020, the loss per share stood at Rs61.99.
According to Arslan Hanif, research analyst at Arif Habib Ltd, the management of Babri Cotton Mills benefits from this proposed merger. “Janana De Malucha will provide liquidity to meet working capital requirements. This merger will further increase installed spindles and rotors capacity from 64,704 and 600 rotors to 117,960 and 1,000 rotors.” he said.
Liquidity, by the way, is a major problem to be tackled. As Shahrukh Saleem, analyst at AKD Securities explains, bigger players, such as large textile composites, procure cotton in bulk. But smaller players (such as these mills) often resort to spot buying, which results in fluctuating and higher costs. “This makes liquidity an essential factor to compete with bigger players,” he said.
Besides, it makes sense to consider a merger at this juncture. The truth is, it is not a great time to be in the textile industry. Janana De Malucho pointed to a few factors in its director’s report: for instance, the devaluation of the rupee has led to a sharp rise in the cost of imported raw materials. Then, there has been a flooding in the market of yarn imported from India. The company also noted that the government imposed a sales tax of 10% on local cotton, and 17% on manmade fibers.
Babri pointed out the same: “Our spinning segment operating in fine counts range has to rely considerably on imported raw materials, which are subject to additional import/custom duties, thus increasing the input costs by more than 5%. Due to a decline in yarn exports, abundant supply of locally manufactured yarn is available in the local market, also augmented by Indian low-cost yarn imports and illegal smuggling through Afghan transit trade route, thus leading to a drastic fall in yarn prices.”
The company ominously added: “We are facing serious competition from India, China, Bangladesh and Vietnam in foreign as well as local markets.”
It is a view that Saleem agrees with: “I believe the tough business dynamics are again at play here. China is a big player in determining yarn prices, and lately due to oversupply and low demand, prices have declined while local cotton prices have increased.”
It seems like the merger of Khattak’s two mills might be the safest bet to make in these turbulent times for the textile industry.
