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Increase in sales costs leads to operating loss at Kuruwita Textiles

22
Nov '08

Excerpts from the Chairman's speech:

These have been testing times for the global apparel industry as well as our company. The world economy faces a slowdown. Our main customer base in the US is confronting a financial crisis and it is apparent this trend might continue at least in the next 6 – 12 months.

Additionally the domestic inflation is around 24% adding to high costs and squeezing the margins of our company. Despite these issues our company has reduced losses by 7.5% this quarter in comparison to first quarter in year 2008/09.

The Group Posted a turnover of Rs. 1.43 billion which is an increase of 7.3% compared to the corresponding quarter of the previous financial year. This improvement was possible mainly due to increased sales volumes. However the Increase in cost of sales by 10.5% resulted in an operating loss for the second quarter.

The increase in cost of sales was due to a 55% increase in utility costs, 6% increase in material costs and a 27% increase in the labour costs. Globally the Oil prices have reduced, however locally the prices were adjusted only during the 3rd quarter, thus our utility costs remained high during the quarter under review.

Keeping costs low and managing the cash-flow remains a critical success factor in our industry. The company has reduced its gearing by 4.47% in comparison to the previous financial year. The management has taken steps to reduce its long term borrowings by 35% thus reducing its finance cost by 27%. Our company remains relatively liquid having a current ratio of 1.16 times. This enables us to weather the negative effects of high interest rates prevailing in the country.

The management has identified and established a liaison office in Pakistan and are considering similar ones in India and China to source cheaper raw material. We believe this will improve material management across the supply chain as material contributes to around 72% of the cost of sales, these will have a significant impact on our operating profits.

The management wishes to close the operations of our joint venture company Vibrant Tex in the next quarter and all new purchase will be channeled through our liaison office. This decision has been taken as a step to improve our profitability.

The management has taken steps to revise its pricing with the customers as well as negotiating better prices with the suppliers. In addition we have recently won business from a new customer Tema and Increased penetration to GAP and Old Navy.

Also, the management is looking into ways of improving efficiency and reducing waste. These proactive steps are likely to offer much better returns in the last two quarters of the FY2008/09, compared to the 1st two quarters.

Kuruwita Textiles