SMEDA Cotton Towels Manufacturing Unit

Pre-Feasibility Study

COTTON TOWELS MANUFACTURING UNIT

Small and Medium Enterprise Development AuthorityGovernment of Pakistan

www.smeda.org.pk

HEAD OFFICE

6th Floor LDA Plaza Egerton Road, LahoreTel 111 111 456, Fax: 6304926-7 Website www.smeda.org.pk

[email protected] OFFICE

PUNJABREGIONAL OFFICE

SINDHREGIONAL OFFICE

NWFPREGIONAL OFFICE

BALOCHISTAN

8th Floor LDA Plaza Egerton Road, Lahore

Tel 111 111 456, Fax: 6304926-7 Website www.smeda.org.pk

[email protected]

5TH Floor, BahriaComplex II, M.T. Khan Road,

Karachi.Tel: (021) 111-111-456

Fax: (021) [email protected]

Ground FloorState Life Building

The Mall, Peshawar.Tel: (091) 9213046-47


Bungalow No. 15-AChaman Housing Scheme

Airport Road, Quetta.Tel: (081) 831623, 831702


January 2007

Pre-Feasibility Study Cotton Towels Manufacturing Unit

PREF-63/January2007/ Rev 2 2

DISCLAIMER

The purpose and scope of this information memorandum is to introduce the subject

matter and provide a general idea and information on the said area. All the material

included in this document is based on data/information gathered from various sources and

is based on certain assumptions. Although, due care and diligence has been taken to

compile this document, the contained information may vary due to any change in any of

the concerned factors, and the actual results may differ substantially from the presented

information. SMEDA does not assume any liability for any financial or other loss

resulting from this memorandum in consequence of undertaking this activity. Therefore,

the content of this memorandum should not be relied upon for making any decision,

investment or otherwise. The prospective user of this memorandum is encouraged to

carry out his/her own due diligence and gather any information he/she considers

necessary for making an informed decision.

The content of the information memorandum does not bind SMEDA in any legal or other

form.

DOCUMENT CONTROL

Document No. PREF-63

Revision 2

Prepared by SMEDA-Punjab

Issue Date 2003

Revision Date January , 2007

Issued by Library Officer



11 IINNTTRROODDUUCCTTIIOONN TTOO SSMMEEDDAA 4

22 PPUURRPPOOSSEE OOFF TTHHEE DDOOCCUUMMEENNTT 4

33 PPRROOJJEECCTT BBRRIIEEFF 433..11 OOppppoorrttuunniittyy RRaattiioonnaallee 533..22 PPrrooppoosseedd CCaappaacciittyy 533..33 TToottaall PPrroojjeecctt CCoosstt 533..44 PPrroodduuccttiioonn PPrroocceessss FFllooww 6

44 CCUURRRREENNTT IINNDDUUSSTTRRYY SSTTRRUUCCTTUURREE 7

55 MMAARRKKEETTIINNGG 855..11 GGuuiiddeelliinneess ffoorr TToowweellss EExxppoorrtt BBuussiinneessss-- KKeeyy SSuucccceessss FFaaccttoorrss 855..22 TToottaall MMaarrkkeett SSiizzee aanndd GGrroowwtthh 955..33 MMaajjoorr EExxppoorrtteerrss 955..44 MMaajjoorr IImmppoorrtteerrss 10

66 RRAAWW MMAATTEERRIIAALLSS 10

77 MMAACCHHIINNEERRYY DDEETTAAIILLSS 11

88 HHUUMMAANN RREESSOOUURRCCEE RREEQQUUIIRREEMMEENNTT 12

99 LLAANNDD && BBUUIILLDDIINNGG 1399..11 TToottaall LLaanndd RReeqquuiirreemmeenntt 1399..22 CCoovveerreedd AArreeaa RReeqquuiirreemmeenntt 1399..33 RReeccoommmmeennddeedd MMooddee 1499..44 SSuuiittaabbllee LLooccaattiioonnss 1499..55 UUttiilliittiieess RReeqquuiirreemmeenntt 14

10 PPRROOJJEECCTT CCOOSSTT 151100..11 IInniittiiaall PPrroojjeecctt CCoosstt 1510.2 EEssttiimmaatteedd TTiimmee ffoorr PPrroojjeecctt CCoommpplleettiioonn 16

1111 KKEEYY SSUUCCCCEESSSS FFAACCTTOORRSS 16

12 TTHHRREEAATTSS FFOORR TTHHEE BBUUSSIINNEESSSS 17

1133 RREEGGUULLAATTIIOONNSS 17

1144 KKEEYY AASSSSUUMMPPTTIIOONNSS 17

1155 FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS 181155..11 PPrroojjeecctteedd IInnccoommee SSttaatteemmeenntt 181155..22 PPrroojjeecctteedd CCaasshh ffllooww SSttaatteemmeenntt 191155..33 PPrroojjeecctteedd BBaallaannccee SShheeeett 20



11 IINNTTRROODDUUCCTTIIOONN TTOO SSMMEEDDAA

The Small and Medium Enterprise Development Authority (SMEDA) was established with the objective to provide fresh impetus to the economy through the launch of an aggressive SME support program.

Since its inception in October 1998, SMEDA adopted a sectoral SME development approach where key sectors were selected on the criterion of SME presence. In depth research was conducted and comprehensive development plans were formulated after identification of impediments and retardants. The all-encompassing sectoral development strategy involved overhauling of the regulatory environment by taking into consideration other important aspects including finance, marketing, technology and human resource development.

SMEDA has so far successfully formulated strategies for key sectors including, Fruits & Vegetables, Marble & Granite, Gems & Jewelry, Marine Fisheries, Leather & Footwear, Textiles, Surgical Instruments, Transport and Dairy. Whereas the task of SME development at a broader scale still requires more coverage and enhanced reach in terms of SMEDA’s areas of operation.

Along with the sectoral focus a broad spectrum of Business Development Services is also being offered to the SMEs by SMEDA. These services include identification of viable business opportunities for potential SME investors. In order to facilitate these investors, SMEDA provides Help Desk Services as well as development of project specific documents. These documents consist of information required to make well researched investment decisions. Pre-feasibility Studies and Business Plan Development are some of the services provided to enhance the capacity of individual SMEs to capitalize on viable business opportunities.

22 PPUURRPPOOSSEE OOFF TTHHEE DDOOCCUUMMEENNTT

Pre-feasibility studies are developed primarily to facilitate potential entrepreneurs in project identification for investment. Pre-feasibility Studies may form the basis on which an important investment decision maybe made. The document covers various aspects of the business venture from project concept development to, financing and business management

33 PPRROOJJEECCTT BBRRIIEEFF

Towel is an important product used in every day life. Towels and its allied products constitute an important sector of textile industry. In made ups, towels sub-sector is the second largest after bedwear in terms of production and exports. Towels are manufactured in various sizes, shapes and qualities depending upon customers’ requirements.

The proposed project is for setting up a Towels Manufacturing Unit. This will be a vertically integrated unit including the facility of weaving, dyeing, finishing and stitching. Most of its production will be for export purpose as this is an export-oriented order based industry, hence contributing towards the earnings of foreign exchange for the country. There is a vast range of towel products like towels, terry towels, warp pile



fabric, dish cloth, wash cloth, floor cloth, bar mops, bathrobes, bath mats, dusters, kitchen towels etc. All the calculations and financial workings have been done while treating this as an export based project.

The yarn used in the production of towels is 10/s, 16/s and 20/s cotton, polyester/cotton yarn is also used to increase the strength of the product. Pakistan Towel Industry produces a complete range of towels which include hand towels, bath towels, face towels, kitchen towels, wash cloths, etc., available in rich assortment of patterns and designs in eye-catching colors. The towel manufacturers in Pakistan also produce a large range of allied products of towels including, terry bar mops, terry bathrobes, terry face towels, terry wash cloths, shop towels, terry gloves, terry pillow covers, terry coverlets and all other terry made-ups as desired by the buyers.

33..11 OOppppoorrttuunniittyy RRaattiioonnaallee

Exports of towel products from Pakistan constitute a major share of the world market. Pakistan has approximately 8% share in the world market of towel products1. The annual average growth rate in the value of exports from Pakistan in the recent five years has been 8% for towels2.

The international demand for towels is increasing at a fast rate due to the reasons that European Union has recently withdrawn duties from Pakistan and also due to thepopulation trends resulting into increase in consumption of related products.

Pakistan’s largest market is USA, about two third of Pakistani exporters provide towels to USA3. More than 50% of world exports of towels come from Asia. The market share of Asia in world exports is increasing due to lower labor costs. Pakistan has a good share in exports from Asia. The availability of suitable raw material and development of certain skill levels are the favoring factors for further establishment of Towel industry in the country. Towels of Pakistan have won the appreciation of customers all over the world. Jacquard towels, woven with double yarn in floral patterns and rich colors, speak volumes for their excellent craftsmanship. Beautiful, absorbent, smooth, white and dyed Pakistani towels are exported to Europe, United States, Canada and to all other countries earning substantial foreign exchange for the country.

33..22 PPrrooppoosseedd CCaappaacciittyy

The proposed capacity of this unit is 20 looms producing 150 tons of towels per annum based on daily two shifts of 8 hours for 300 days. This unit has the capability for horizontal as well as vertical integration.

33..33 TToottaall PPrroojjeecctt CCoosstt

The total project cost of this Cotton Towel Manufacturing unit is Rs. 38.9 million.

1 Textile Vision 20052 TMAP Special Report No. 14 – The News3 Textile Vision 2005



33..44 PPrroodduuccttiioonn PPrroocceessss FFllooww

Production ofGrey Fabricon Looms

Heating ofFabric in Kier

Dyeing ofFabric inWinch

FabricDrying

Purchase ofYarn

QualityInspection

Warpingof Yarn

Sizing ofYarn

Alignmentof Fabric in

Stenter

Tumbling andFinishing in

Tumble

Cutting ofFabric

Stitching andLabeling of

Towels

Packing ofTowels

Most of the towel industry is classified as constituted of small and medium sized units having smaller productions, and mostly manufacturers do not have complete processing facilities. The woven towel is sent to independent processing units. This reduces the capital cost of the manufacturers, but at the same time, increases the quality cost. Quality control becomes very difficult when processing is sub-contracted. The decision to establish an in-house processing facility is supported by the fact that orders that a manufacturer gets from buyers are in line with the manufacturing capabilities, so there is a need to invest in modern processing facilities. Since this is an export-oriented industry, so quality is the most important tool that a manufacturer can use to achieve good price and market share of its product through the modern processing facilities. For a new entrant, it may be difficult to fetch orders without any proper production facility.

Another important processing step is drying. Since the weight per unit area is higher for a towel as compared to other woven fabrics, so drying time is relatively higher. Majority of the manufacturers uses atmospheric drying in the sunlight. Large manufacturers have their own hydroextractors that improve the quality of their final product. Due to the quality issues, a hydroextractor has been recommended for this project.

Final operation is cutting and stitching. This is fairly a simple operation and does not require much expertise. There are no major technology issues in this operation of towel manufacturing.

A complete towels unit with looms and dyeing section has been recommended instead of outsourcing some of the processing functions. According to industry sources, it is difficult to get the production processed on regular basis from other units because the unit, which is giving good quality, usually remains busy. Outsourcing results into increased costs of production hence reducing profits. Most of the export-oriented units in the country have their own processing facilities.



44 CCUURRRREENNTT IINNDDUUSSTTRRYY SSTTRRUUCCTTUURREE

The Towel Industry of Pakistan comprises of approximately 300 manufacturers and exporters with a diverse range of towel products. The towel industry relies largely on locally manufactured machines to produce products that have a good demand in the international market. Pakistani exporters have been able to sell towel products on competitive prices and have made considerable progress in terms of value addition and quality issues over the last 10 years. The exports of towel and allied products have increased substantially despite the stagnation in country’s exports. Following is the geographical split of manufacturers and exporters in Pakistan:

TTaabbllee 44--11:: GGeeooggrraapphhiiccaall SSpplliitt ooff TToowweellss MMaannuuffaaccttuurreerrss aanndd EExxppoorrtteerrss iinn PPaakkiissttaann44

Northern Region Number of unitsLahore 14

Kasur 3

Faisalabad 4Gujranwala 17Multan 1Others 6Total for Northern Region 45Southern Region Number of unitsKarachi 255Total for Southern Region 255

TTaabbllee 44--22:: TToowweellss MMaannuuffaaccttuurreerrss iinn NNoorrtthheerrnn RReeggiioonn –– EExxppoorrtteerrss aanndd LLooccaallSSeelllleerrss55

Northern Region Number of unitsLocal Sellers 29

Local Sellers and Exporters 7

Medium Exporters 6Large exporters 3Total 45

TTaabbllee 44--33:: TToowweellss MMaannuuffaaccttuurreerrss iinn SSoouutthheerrnn RReeggiioonn –– EExxppoorrtteerrss aanndd LLooccaall SSeelllleerrss

Southern Region Number of unitsLocal Sellers 27

Local Sellers and Exporters 22

Medium Exporters 200Large exporters 6 4 Source: Towels Manufacturers Association of Pakistan - TMAP5 Source: Towels Manufacturers Association of Pakistan - TMAP



Southern Region Number of unitsTotal 255

It is obvious from the above table that major concentration of this industry is in the southern region of the country. This is due to the initial development of industry in Karachi and the fact that manufacturers can avoid transportation costs from manufacturing units to ports. In addition, many imported chemicals used in dyeing process are available at lower prices in Karachi. This industry is characterized by majority of the manufacturers and exporters located in few major cities.

The above manufacturers and exporters of towels products have diverse production facilities ranging from complete vertically integrated units, to stitching units, from weaving units to dyeing units, etc. A few are also working as commercial exporters without any production facility.

According to the estimates given by industry sources, approximately 90% of the revenues generated by this industry are from exports while 5% of the rejected exports are sold in the local market, and remaining 5% comes from local requirements.

55 MMAARRKKEETTIINNGG

In view of the fact that main raw material and skilled manpower is available in Pakistan, the scope for towel exports from Pakistan is unlimited. However, marketing is a very vital aspect of this industry as this is an export oriented order based industry.

Export orders can be obtained through direct marketing in the international markets either by initiating contacts with potential customers through formal communications or visiting those countries especially USA, Europe and Gulf countries. The Towel Manufacturers Association of Pakistan (TMAP) is well organized and has an impeccable record in its conduct and administration of textile quota and trade fairs. It participates in “Heim Textile” Fair regularly and organizes space for its members. However, in the absence of export orders, other factories that have excess export orders can also provide subcontract work on CMT (cut, make and trim) basis.

TMAP is also involved in getting latest trade inquiries raised from various countries; the members can also obtain this information to focus their marketing efforts on target countries.

55..11 GGuuiiddeelliinneess ffoorr TToowweellss EExxppoorrtt BBuussiinneessss-- KKeeyy SSuucccceessss FFaaccttoorrss

To enter in the export business of towels, following basic guidelines can provide help to any new entrant in this business:

1. Ensure good quality at all costs. This is a basic key for a successful exporter. Therefore, quality issues should be the primary focus. In this respect, a quality certification can be very helpful in marketing the quality issues related to towels products. Although, the stress on quality in this industry is not as important as in any other textile based industry, like, polo shirts, bed sheets, curtains etc. However, a



certification like ISO 9000 can be helpful in obtaining orders and building an impression in the eyes of buyers.

2. Commitments with buyers regarding quality, price and shipment are the basic essentials to enter and grow in the export business.

3. Many towel-manufacturing companies are considering it worthwhile setting up their overseas offices and warehouses. Overseas office can not only assist in sales, but also keep the exporter continuously informed about the latest buyer's requirements and market demands. Warehouses of supplier(s) in the customer's countries make it convenient for the customer to make the purchase decisions effectively, as in this case customer gets the required products on LDP (Landed Duty Paid) basis and without any hassle of being involved in shipment and import procedures.

4. It is very important in successful marketing to be active and quickly responsive to the customer demands. Being flexible with buyers regarding their requests and requirements can help to develop mutual understandings with them.

5. Participation in trade fairs is very helpful in knowing customers’ requirements and obtaining orders. International Trade Fairs provide an excellent opportunity to introduce a new entrant in the international markets.

55..22 TToottaall MMaarrkkeett SSiizzee aanndd GGrroowwtthh

Total global trade value of Towel products is more than US$ 4.0 billion. Cotton Towels have a substantial share in the total exports of Towel and related products.6

TTaabbllee 55--11:: TTrraaddee ooff TToowweell PPrroodduuccttss iinn WWoorrlldd77

Towels Products Percentage ShareTowels 56%

Woven Cotton Pile 30%

Cleaning Clothes 11%

Terry Towel 3%

Total 100%

55..33 MMaajjoorr EExxppoorrtteerrss

China is the major exporter of towel products and Pakistan holds second position in the global exports of towels, with 8 % market share. Total exports in 1997 were $305 million. In Europe, Portugal, Germany and Belgium are the major exporters. Following are the percentage shares of these countries:

TTaabbllee 55--22:: PPeerrcceennttaaggee SShhaarree iinn WWoorrlldd EExxppoorrttss88

Countries Percentage ShareChina 28%

Pakistan 8%

6 Source: Textile Vision 20057 Source: Textile Vision 20058 Source: Textile Vision 2005



Countries Percentage SharePortugal 7%

Germany 7%

Belgium 6%

Others 44%

Total 100%

55..44 MMaajjoorr IImmppoorrtteerrss

Regional distribution of towel imports is quite balanced. Of the six major importers, three countries belong to Europe, two to Asia and one to American Continent. USA is the top importer and also has the highest average import growth rate. It is interesting to note that the average growth rates of all the major importers of towel products have been positive. Following are the percentage shares of the major countries importing towel products:

TTaabbllee 55--33:: PPeerrcceennttaaggee SShhaarree iinn WWoorrlldd IImmppoorrttss99

Countries Percentage ShareUSA 19%

Hong Kong 11%

Japan 10%

Germany 8%

UK 8%

France 7%

Others 36%

Total 100%

66 RRAAWW MMAATTEERRIIAALLSS

Following is the list of raw materials, which are used in the manufacturing of towels:

1. Towels fabric is made from 10/s, 14/s, 16/s and 20/s yarn or a mix of cotton-polyester depending upon requirements of customers.

2. Dyeing chemicals (reactive colors, caustic soda, soda ash, hydrogen per oxide, common salt, detergent and wetting).

3. Stitching threads.4. Poly Bags (packing material).

9 Source: Textile Vision 2005



77 MMAACCHHIINNEERRYY DDEETTAAIILLSS

Following combination of machines is required for manufacturing of approximately150,000 Kgs of towel per annum based on daily two shifts of 8 hours for 300 days in a year

TTaabbllee 77--11 MMaacchhiinneerryy DDeettaaiillss

Machines unit Cost per machine (Rs)

Total Cost (Rs)

Looms 20 226,000 4,520,000 Hanks to Cone and Cone to Hanks Winder 1 57,000 57,000 Weft Pirn Winder 1 42,000 42,000 Kier 1 650,000 650,000 Winch 2 350,000 700,000 Hydro-extractor 1 250,000 250,000 Sizing 9 drum with double dip system 1 4,950,000 4,950,000 Warping 1 370,000 370,000 Tumble 1 375,000 375,000 Stenter 1 375,000 375,000 Inspection Rolling Machine 2 375,000 750,000 Boiler 1 3,500,000 3,500,000 Stitching machines 5 40,000 200,000 Cutter 1 100,000 100,000 Other Equipments-Furnace Oil Tank,

Frames, Trollies and Water Pump 499,125

Sales tax 2,600,719 Installation costs for machines Including Transformer, Cable and Control Panel

1,000,000

Total Cost of installed machinery 39 20,938,844



88 HHUUMMAANN RREESSOOUURRCCEE RREEQQUUIIRREEMMEENNTT

For a unit of 20 looms, following manpower is required:TTaabbllee 88--11:: PPeerrmmaanneenntt EEmmppllooyyeeeess

Employee No ofSalary per

Employee per month

Salary per month

Salary per

annumOPERATING FIXED COSTSChief Executive 1 62,000 62,000 744,000 Export & MarketingManager

1 45,000 45,000 540,000

Accountant 1 17,000 17,000 204,000Accounts Clerk 1 8,000 8,000 96,000 Store Clerk 1 8,000 8,000 96,000 Technician/Electrician 1 6,000 6,000 72,000 Security Guard 4 4,500 18,000 216,000 Peons 2 4,000 8,000 96,000 TOTAL 12 92,500 110,000 2,064,000 PRODUCTION FIXED COSTSProduction Supervisor 1 22,000 22,000 264,000 Weaving Manager 1 35,000 35,000 420,000 Dying Master 1 20,000 20,000 240,000 Boiler Engineer 1 25,000 25,000 300,000 Asstt. Dying Master 1 18,000 18,000 216,000 Asstt. Weaving Manager 1 18,000 18,000 216,000 Total Production Fixed Costs

6

138,000

138,000

1,656,000

TOTAL FIXED PAYROLL

18

230,500

248,000

3,720,000

TTaabbllee 88--22 CCoonnttrraaccttuuaall eemmppllooyyeeeess 1100

Employee No ofSalary per

monthSalary per

monthSalary per

annumWarping labor 3 4,000 12,000 144,000Sizing labor 3 4,000 12,000 144,000 Weavers 4 5,500 22,000 264,000 Fabric handlers- Dying Department 20 4,000 80,000 960,000

10 The costs of contractual employees are calculated on 100% capacity of the unit



Cutting Master 1 8,500 8,500 102,000 Cutting Helper 3 4,000 12,000 144,000 Stitching machine operators 5 6,000 30,000 360,000 Packing staff 5 4,000 20,000 240,000 Total 44 40,000 196,500 2,358,000

99 LLAANNDD && BBUUIILLDDIINNGG

99..11 TToottaall LLaanndd RReeqquuiirreemmeenntt

For above mentioned recommended size of towels manufacturing unit, approximately one-acre (8-kanal) area of land is required.

99..22 CCoovveerreedd AArreeaa RReeqquuiirreemmeenntt

Following is the covered area requirement split into various departments and sections:

TTaabbllee 99--11:: CCoovveerreedd AArreeaa RReeqquuiirreemmeenntt

Sections/DepartmentsArea (sq. ft.) per

section Total Area (sq. ft.)Yarn & Dyeing Materials Store 800Sizing Section 1,000Warping Section 1,000Weaving Section11 125 per machine 5,000Dyeing & Finishing Hall12 6,000Cutting, Stitching & Packing section:

Cutting Room 150 per table 750Stitching Section 100 per machine 1,000Packing Section 150 per employee 750

Towels Store 700Total Factory Area 17,000Office Building 1,500Total Area 18,500

TTaabbllee 99--22:: CCoonnssttrruuccttiioonn CCoosstt

Cost Required Area(Sq.ft) Cost per Sq. Ft.(Rs)

Land 18,500 180 Factory Building 17,000 550

11 This area can accommodate 40 looms as part of the expansion plan in future years.12 This includes the space for boiler hall, inspection hall and control room.



99..33 RReeccoommmmeennddeedd MMooddee

It is recommended that this project should be started in an owned building because this set-up will involve installation of heavy machinery, underground cabling and other fixtures with considerable cash outlay.

99..44 SSuuiittaabbllee LLooccaattiioonnss

The clusters of towels industry exist predominantly in Karachi, Gujranwala, Faisalabad and Lahore. As most of the manufactures are based in these major cities, it is recommended that such unit should be located in any of these areas. However, the basic criteria for the selection of location within these clusters should be the accessibility of raw material and skilled manpower. Also, basic utilities like electricity, gas, waters and public transport is must for the establishment of such sort of unit.

99..55 UUttiilliittiieess RReeqquuiirreemmeenntt

Electricity Gas Furnace Oil Telephone Fax Internet



10 PPRROOJJEECCTT CCOOSSTT

1100..11 IInniittiiaall PPrroojjeecctt CCoosstt

Following are the initial project cost:

TTaabbllee 1100--11:: PPrroojjeecctt CCoosstt

Fixed Assets CostLand and Building 13,430,000 Plant & Machinery 20,938,844 Civil Works 100,000 Furniture Fixture 421,500 Vehicles 1,200,000

36,090,344 Current Assets Pre operating expenses 1,000,000 Raw Material Inventory 1,332,000 Cash and Banks balances 500,000

2,832,000 Total 38,922,344

TTaabbllee 1100--22:: PPrroojjeecctt FFiinnaanncciinngg

FinancingEquity financing – 61% 23,742,630 Debt financing – 39% 15,179,714 Total 38,922,344

TTaabbllee 1100--33:: PPrroojjeecctt EEccoonnoommiiccss

Project’s Economies Equity ProjectNet Present Value (in Rs) 31,442,293 31,077,815

Internal Rate of return 33.98% 30.88%

Payback Period (in Years) 7.08 5.57



10.2 EEssttiimmaatteedd TTiimmee ffoorr PPrroojjeecctt CCoommpplleettiioonn

1 months for completion of initial formalities i.e. formation, registration of the company etc.

10 months for purchase of land and construction of building. 3 months for sanction of loan (In case, if financing has to be arranged through bank). 4 month for purchase of machinery, its installation and trial run. 1 month for furnishing and staff / labor appointments. The projects can take-off within one year, as some of the activities will be in progress

simultaneously. In case if the project is self financed, if the building is rented and if machinery is also

locally procured then this set-up will not take more then 6 months.

1111 KKEEYY SSUUCCCCEESSSS FFAACCTTOORRSS

The total commercial viability of this proposed towels unit depends on the regular supply of export orders. This requires aggressive marketing efforts at the entrepreneur's end and the concerned management team. A detailed discussion on the marketing aspect has already been done in the marketing section of this study.

Comparing Pakistan’s major importers with the world’s major importers, Pakistan is completely out of sync with the world market mix. The countries of Middle East are not included in list of major importers. USA is the largest importer but only 1-2 % of Pakistan’s total exports is going to USA. Pakistan does not have any major exports to markets like Japan, Hong Kong, Germany and France. There is an opportunity for the Pakistani towels products’ manufacturers and exporters that they should target these markets and get Pakistan its due share.

Following are other key points that can be taken as key success factors for any export based towels unit. Outlets in Gulf countries Assurance of consistent good quality Surety of on time delivery Competitive rates Cost efficiency Better services to the customer i.e. claim settlement etc. Better communication development with customers



12 TTHHRREEAATTSS FFOORR TTHHEE BBUUSSIINNEESSSS

Close competition among local exporters causes reduction in prices of the orders in process.

The labor force at the lowest level i.e. skilled / semi-skilled manpower, machine operators are quite unorganized. Their job behaviors and seriousness about the completion of any assigned job are always unpredictable; however, a motivated Production Supervisor can overcome this.

Non-availability of technical personnel especially for dyeing, processing and finishing.

In case of CMT based unit, the requirement of credit and/or delay of payments from customers might cause disturbance in the cash cycles.

1133 RREEGGUULLAATTIIOONNSS

As such no special regulation is applicable on this industry except the normal industrial rules and regulations. It does not require any prior sanction/approval from the government to establish a Towels industry as a whole except for installation of boiler.

Being the export-based unit, government offers incentives in terms of treating exportsas zero-rated for sales tax, tax rebates at the rate of 3% and re-finance facilities.

Towels Manufacturers Association of Pakistan (TMAP) is the administrative body in Pakistan with the primary objective to safeguard the interests of exporters and manufacturers in Pakistan. Moreover, every export shipment is verified by TMAP in order to enable the exporter to claim tax rebate from the Government.

The advantages of being registered with TMAP are:1. The first hand knowledge of international trade inquiries, 2. Prompt awareness of any changes in Government policies, and3. A platform for manufacturers and exporters to share knowledge and experience. 4. A platform for manufacturers and exporters to discuss any unwanted change in

the Government policies and to solve individual problem of any manufacturers.

1144 KKEEYY AASSSSUUMMPPTTIIOONNSS

Percentage Increase in Raw material cost 1% Percentage Increase in Labor cost 5% Electricity price growth rate 10%Gas price growth rate 10% Percentage Increase in Other Costs 5% Selling Price Per Unit in US $ 5.00 Conversion Rate US $/Pak Rupees 60.00


1155 FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS

1155..11 PPrroojjeecctteedd IInnccoommee SSttaatteemmeenntt

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10Sale Value 27,000,000 31,833,296 37,531,805 44,250,409 52,171,717 61,511,026 72,522,173 85,504,437 100,810,668 118,856,882 CostsTotal Material 13,320,000 15,550,461 18,154,417 21,194,411 24,743,458 28,886,800 33,723,954 39,371,098 45,963,868 53,660,611 Labour 1,414,800 1,717,125 1,984,813 2,655,860 3,069,891 2,495,917 3,029,264 3,676,580 4,462,221 5,415,742 Gas & Furnace oil 180,000 228,867 264,546 407,002 470,450 598,170 760,562 967,041 1,229,576 1,563,384 Electricty 1,440,000 1,830,935 2,328,001 2,960,013 3,421,458 4,785,356 6,084,496 7,736,330 9,836,607 12,507,073 Total Variable Cost of Production 16,354,800 19,327,388 22,731,777 27,217,286 31,705,257 36,766,243 43,598,275 51,751,049 61,492,271 73,146,810 Fixed Overheads - ProductionPayroll 1,656,000 1,738,800 1,825,740 1,917,027 2,012,878 3,767,583 3,955,962 4,153,760 4,361,448 4,579,521 Depreciation 3,038,884 3,038,884 3,038,884 3,038,884 3,038,884 4,075,662 4,075,662 4,075,662 4,075,662 4,075,662 Maintenance 75,000 78,750 82,688 86,822 91,163 95,721 100,507 105,533 110,809 116,350

4,769,884 4,856,434 4,947,312 5,042,733 5,142,926 7,938,967 8,132,132 8,334,955 8,547,920 8,771,533 Total Production Cost 21,124,684 24,183,822 27,679,089 32,260,019 36,848,183 44,705,210 51,730,407 60,086,005 70,040,192 81,918,343 Contribution Margin 10,645,200 12,505,908 14,800,027 17,033,123 20,466,459 24,744,783 28,923,898 33,753,388 39,318,396 45,710,072

Gross Profit 5,875,316 7,649,474 9,852,715 11,990,390 15,323,534 16,805,816 20,791,766 25,418,432 30,770,476 36,938,539

Operating OverheadsPayroll 2,064,000 2,167,200 2,275,560 2,389,338 2,508,805 2,634,245 2,765,957 2,904,255 3,049,468 3,201,941 Depreciation 237,150 237,150 237,150 237,150 237,150 237,150 237,150 237,150 237,150 237,150 Other operating costs 100,000 105,000 110,250 115,763 121,551 127,628 134,010 140,710 147,746 155,133 Legal and professional charges 50,000 52,500 55,125 57,881 60,775 63,814 67,005 70,355 73,873 77,566 Amortization of pre-operating expenses 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Total 2,551,150 2,661,850 2,778,085 2,900,132 3,028,281 3,162,837 3,304,122 3,452,470 3,608,236 3,771,791 Operating Profit 3,324,166 4,987,624 7,074,630 9,090,258 12,295,253 13,642,979 17,487,644 21,965,962 27,162,240 33,166,748

Financial ChargesLong Term Loan 2,125,160 2,125,160 1,700,128 1,275,096 850,064 425,032 - - - - Profit Before Tax 1,199,006 2,862,464 5,374,502 7,815,162 11,445,189 13,217,947 17,487,644 21,965,962 27,162,240 33,166,748 Losses Carried Forward - - - - - - - - - - Tax @20% 239,801 572,493 1,074,900 1,563,032 2,289,038 2,643,589 3,497,529 4,393,192 5,432,448 6,633,350 Profit after tax 959,205 2,289,971 4,299,602 6,252,130 9,156,151 10,574,357 13,990,115 17,572,769 21,729,792 26,533,398 Retained earnings at the beginning - 959,205 3,249,175 7,548,777 13,800,907 22,957,058 33,531,415 47,521,530 65,094,300 86,824,092 Avaiable for distribution 959,205 3,249,175 7,548,777 13,800,907 22,957,058 33,531,415 47,521,530 65,094,300 86,824,092 113,357,490 Retained earnings at the end 959,205 3,249,175 7,548,777 13,800,907 22,957,058 33,531,415 47,521,530 65,094,300 86,824,092 113,357,490



1155..22 PPrroojjeecctteedd CCaasshh ffllooww SSttaatteemmeenntt

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Profit after tax - 959,205 2,289,971 4,299,602 6,252,130 9,156,151 10,574,357 13,990,115 17,572,769 21,729,792 26,533,398 Adjustment of non-cash changes and other items: Depreciation - 3,276,034 3,276,034 3,276,034 3,276,034 3,276,034 4,312,812 4,312,812 4,312,812 4,312,812 4,312,812 Amortization of preoperating expenses - 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Working Capital Changes (Increase)/decrease in trade debtors - (2,700,000) (483,330) (569,851) (671,860) (792,131) (933,931) (1,101,115) (1,298,226) (1,530,623) (1,804,621) (Increase)/decrease in stocks (1,332,000) (223,046) (260,396) (303,999) (354,905) (414,334) (483,715) (564,714) (659,277) (769,674) 5,366,061 Increase/(Decrease) in payables - 2,197,800 407,085 436,193 509,235 594,507 694,059 810,280 945,963 1,104,367 349,602

(1,332,000) (725,246) (336,640) (437,657) (517,530) (611,958) (723,588) (855,549) (1,011,540) (1,195,931) 3,911,042 Net Cash Flow from operating activities (1,332,000) 3,609,993 5,329,365 7,237,979 9,110,634 11,920,228 14,263,582 17,547,379 20,974,042 24,946,674 34,857,253 Pre-operating expenses (1,000,000) - - - - - - - - - - Fixed Capital expenditure (36,090,344) - - - - - (7,037,781) - - - - Net Cash Flow from investing activities (37,090,344) - - - - - (7,037,781) - - - -

Capital issued 23,742,630 - - - - - - - - - - Receipt of long term Loan 15,179,714 - - - - - - - - - - Repayment of long term loan - (3,035,943) (3,035,943) (3,035,943) (3,035,943) (3,035,943) - - - - - Net Cash Flow from financing activities 38,922,344 (3,035,943) (3,035,943) (3,035,943) (3,035,943) (3,035,943) - - - - - Cash generated (injected) during the year 500,000 574,050 2,293,423 4,202,036 6,074,691 8,884,285 7,225,801 17,547,379 20,974,042 24,946,674 34,857,253 Opening balance of cash and cash equivalent - 500,000 1,074,050 3,367,473 7,569,509 13,644,200 22,528,485 29,754,286 47,301,664 68,275,706 93,222,380 Closing balance of cash and cash equivalent 500,000 1,074,050 3,367,473 7,569,509 13,644,200 22,528,485 29,754,286 47,301,664 68,275,706 93,222,380 128,079,632



1155..33 PPrroojjeecctteedd BBaallaannccee SShheeeett

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10CAPITAL AND RESERVESIssued, subscribed and paid up capital 23,742,630 23,742,630 23,742,630 23,742,630 23,742,630 23,742,630 23,742,630 23,742,630 23,742,630 23,742,630 23,742,630 Retained Earnings - 959,205 3,249,175 7,548,777 13,800,907 22,957,058 33,531,415 47,521,530 65,094,300 86,824,092 113,357,490

23,742,630 24,701,834 26,991,805 31,291,407 37,543,536 46,699,687 57,274,045 71,264,160 88,836,929 110,566,721 137,100,120 LONG TERM LOANLong Term Loan @16% 15,179,714 12,143,771 9,107,828 6,071,886 3,035,943 - - - - - -

CURRENT LIABILITIESCreditors accrued and other liabilities - 2,197,800 2,604,885 3,041,079 3,550,314 4,144,821 4,838,879 5,649,159 6,595,123 7,699,489 8,049,092

38,922,344 39,043,405 38,704,519 40,404,371 44,129,793 50,844,508 62,112,924 76,913,319 95,432,052 118,266,211 145,149,211

FIXED CAPITAL EXPENDITURE-

Operating fixed assets - at cost 36,090,344 36,090,344 36,090,344 36,090,344 36,090,344 36,090,344 43,128,125 43,128,125 43,128,125 43,128,125 43,128,125 Accumulated derpreciation - (3,276,034) (6,552,069) (9,828,103) (13,104,138) (16,380,172) (20,692,984) (25,005,797) (29,318,609) (33,631,422) (37,944,234)

36,090,344 32,814,309 29,538,275 26,262,241 22,986,206 19,710,172 22,435,141 18,122,328 13,809,516 9,496,703 5,183,891

Preoperating expenses 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 -

CURRENT ASSETSRaw Material Inventory 1,332,000 1,555,046 1,815,442 2,119,441 2,474,346 2,888,680 3,372,395 3,937,110 4,596,387 5,366,061 - Trade debts - 2,700,000 3,183,330 3,753,180 4,425,041 5,217,172 6,151,103 7,252,217 8,550,444 10,081,067 11,885,688 Cash and Banks balances 500,000 1,074,050 3,367,473 7,569,509 13,644,200 22,528,485 29,754,286 47,301,664 68,275,706 93,222,380 128,079,632

1,832,000 5,329,096 8,366,244 13,442,131 20,543,587 30,634,336 39,277,784 58,490,991 81,422,536 108,669,507 139,965,321

38,922,344 39,043,405 38,704,519 40,404,371 44,129,793 50,844,508 62,112,924 76,913,319 95,432,052 118,266,211 145,149,211

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SMEDA Cotton Towels Manufacturing Unit