The hike in international cotton prices and in local utility costs in the face of unchanged selling prices have pushed up production costs.
Shasha Denims Ltd, a three times gold trophy winning company in export, has been experiencing an uphill struggle with production costs.
Though sales of the denim manufacturer went up 4 percent in the 2018-19 fiscal year, its net profit sank 57 percent. The fact that the company lost 77 percent in net profit in the first quarter alone of the current fiscal year shows that the downtrend is continuing.
Shams Mahmud, the managing director of the company, told The Business Standard, "In terms of business volume, the company has been tactical through harmonising a sustainable business momentum during the reporting period. But it failed to maximize the profit."
He said, "Although the company has managed to increase its export earnings compared to that of last year, maladjustment in growing selling prices with production costs dragged down the profit margin."
How production costs went up
Most textile companies in Bangladesh depend on imported cotton. The prices of the raw material for textiles edged up by 65 percent from 2016 to 2018 in the international market.
The price of cotton reached 93.30 cents per pound in May 2018, but then it started to drop gradually and reached to 64.44 cents per pound on December 4, 2019.
In the meantime, production costs including gas, power, water, transportation and bank interest soared up by 30 percent in Bangladesh.
This price hike pulled up the production costs of Shasha Denims by 9 percent in the 2018-19 fiscal year. The cost went to Tk463 crore, up from Tk426 crore in the 2017-18 fiscal year.
The managing director of the company said that they did not revise the selling prices despite the increased production costs during the period because the international market was not in favourable momentum.
"Rather, we adopted a policy to continue with a minimum profit margin to hold up buyers' confidence in such an unfavourable situation. We expect our endeavour and commitment to buyers will bring a good result in the future," said Shams Mahmud.
Current financial condition of Shasha Denims
The company has been witnessing gradual growth in sales in the last six years — from the 2013-14 to the 2018-19 financial years. Sales went up to Tk533 crore from Tk338 crore in these six years, a growth of 58 percent.
The denim manufacturer also posted a gradual growth in its net profit in the 3 years from the 2013-14 to the 2015-16 financial years. In the three financial years from 2016-17 to 2018-19, the net profit fell gradually. Net profit dropped by 57 percent in the 2018-19 fiscal year.
The net profit shrunk by 77 percent in the first quarter alone of the current fiscal year and reached Tk5 crore. The year-on-year net profit was Tk22 crore.
Managing Director Shams Mahmud held their power subsidiary responsible for the fall in net profit.
He said, "The power generation contract between Shasha Denims' subsidiary Energis Power Corporation and the Bangladesh Power Development Board expired last July."
"Shasha Denims received a net profit of Tk9 crore from the subsidiary in the last fiscal year. After the contract expired, Shasha pumped Tk1.5 crore into Energis Power, which dragged the net profit down," added Shams.
Modernization, the future plan
The denim manufacturer has taken up several initiatives to ease the existing issues. They modernised their factories in the last two years to slash production costs.
The company has also bought 80 percent shares of Italian export-oriented company EOS Textile Mills Ltd at a cost of Tk121 crore.
EOS Textile posted a sale of Tk150 crore in the last fiscal year.
Shasha Denims' Company Secretary Aslam Ahmed Khan told The Business Standard that they are planning a handsome investment in the production unit of EOS Textile, which is in the Dhaka Export Processing Zone.
"The factory has a huge area of land which can be used. We will carry out a major overhaul at the EOS production facility," he added.
Shasha Denims Ltd was listed in the share market in 2015. The closing price of the Shasha share at the Dhaka Stock Exchange was Tk27.40 on Wednesday.
The highest price of the Shasha share rose to Tk66 in the last one year.
The company gave 5 percent cash and 5 percent stock dividend to its stockholders in the last fiscal year.
They gave 15 percent cash and 7 percent stock dividend in the 2017-18 fiscal year. Before that they gave 25 percent cash and 6 percent stock dividend in FY 2016-17; and prior to that, they gave 25 percent cash but no stock dividend in the 2015-16 fiscal year.
International denim markets
According to the Zion Market Research Company, the global denim jeans market was valued at around $66.02 billion in 2018, and it is expected to reach approximately $85.4 billion by 2025 at a compound annual growth rate of around 3.7 percent between 2019 and 2025.
Cotton Inc. says consumers in the US buy approximately 450 million pairs of jeans every year, meaning that on average, each US consumer has seven pairs of jeans in the wardrobe.
Cotton Inc. also says that 71 percent of people in Europe and Latin America wear denim, followed by 70 percent in the US, 58 percent in China, and 57 percent in Japan.
Bangladesh's denim production capacity
Data from the Bangladesh Textile Mills Association (BTMA) reveals that there are 32 denim mills with a capacity of producing 450 million metres of denim fabrics per annum in the country. This means that Bangladesh can meet over 50 percent of the demand for denim fabrics in the US market with this production capacity.
Shasha manufactures 2.1 million metres of denim fabrics annually.
Bangladeshi denim makers produce various types of denim products that have a variable market, but the value-added products area is developing gradually.
Bangladesh at international denim market
Bangladesh is the number one exporter of denim goods to the European Union, and the third largest to the United States driven by its large-scale manufacturing capacity and lower production cost.
The country has established a strong presence in the US market after China and Mexico, with a gradual rise in market share, and occupied 14.68 percent of it in 2018.
Eurostat, the directorate-general of the European Commission based in Luxembourg, says that in 2018, Bangladesh exported denim products worth $1.65 billion, which is an increase of 11.46 percent from $1.47 billion in 2017.
On the other hand, Bangladesh's closest competitor Turkey posted an 8.18 percent negative growth, down from $1.26 billion in 2017 to $1.16 billion 2018.