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January 2007
Pre-Feasibility Study Cotton Towels Manufacturing Unit
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
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
1 INTRODUCTION TO SMEDA 4
2 PURPOSE OF THE DOCUMENT 4
3 PROJECT BRIEF 4
3. 1 Opportunity Rationale 5
3. 2 Proposed Capacity 5
3. 3 Total Project Cost 5
3. 4 Production Process Flow 6
4 CURRENT INDUSTRY STRUCTURE 7
5 MARKETING 8
5. 1 Guidelines for Towels Export Business- Key Success Factors 8
5. 2 Total Market Size and Growth 9
5. 3 Major Exporters 9
5. 4 Major Importers 10
6 RAW MATERIALS 10
7 MACHINERY DETAILS 11
8 HUMAN RESOURCE REQUIREMENT 12
9 LAND & BUILDING 13
9. 1 Total Land Requirement 13
9. 2 Covered Area Requirement 13
9. 3 Recommended Mode 14
9. 4 Suitable Locations 14
9. 5 Utilities Requirement 14
10 PROJECT COST 15
10. 1 Initial Project Cost 15
10.2 Estimated Time for Project Completion 16
11 KEY SUCCESS FACTORS 16
12 THREATS FOR THE BUSINESS 17
13 REGULATIONS 17
14 KEY ASSUMPTIONS 17
15 FINANCIAL STATEMENTS 18
15. 1 Projected Income Statement 18
15. 2 Projected Cash flow Statement 19
15. 3 Projected Balance Sheet 20
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
1 INTRODUCTION TO SMEDA
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.
3 PROJECT BRIEF
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
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
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.
3. 1 Opportunity Rationale
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 the
population 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.
3. 2 Proposed Capacity
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.
1
Textile Vision 2005
2
TMAP Special Report No. 14 – The News
3
Textile Vision 2005
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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.
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Table 4-3: Towels Manufacturers in Southern Region – Exporters and Local Sellers
Southern Region Number of units
Local Sellers 27
Local Sellers and Exporters 22
Medium Exporters 200
Large exporters 6
4
Source: Towels Manufacturers Association of Pakistan - TMAP
5
Source: Towels Manufacturers Association of Pakistan - TMAP
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
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.
5 MARKETING
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.
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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.
5. 3 Major Exporters
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:
6
Source: Textile Vision 2005
7
Source: Textile Vision 2005
8
Source: Textile Vision 2005
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5. 4 Major Importers
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:
6 RAW MATERIALS
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
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7 MACHINERY DETAILS
Following combination of machines is required for manufacturing of approximately
150,000 Kgs of towel per annum based on daily two shifts of 8 hours for 300 days in a
year
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
10
The costs of contractual employees are calculated on 100% capacity of the unit
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
9 L AND & B UI L DI NG
9. 1 Total Land Requirement
For above mentioned recommended size of towels manufacturing unit, approximately
one-acre (8-kanal) area of land is required.
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.
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9. 3 Recommended Mode
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.
9. 4 Suitable Locations
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.
9. 5 Utilities Requirement
Electricity
Gas
Furnace Oil
Telephone
Fax
Internet
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
10 PROJECT COST
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13 REGULATIONS
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 exports
as 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, and
3. 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.
14 KEY ASSUMPTIONS
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15 FINANCIAL STATEMENTS
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) - - - -
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Pre-Feasibility Study Cotton Towels Manufacturing Unit
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
CAPITAL AND RESERVES
Issued, 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 LOAN
Long Term Loan @16% 15,179,714 12,143,771 9,107,828 6,071,886 3,035,943 - - - - - -
CURRENT LIABILITIES
Creditors 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 ASSETS
Raw 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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