by Ardian Wibisono & Elisa Valenta
Iwan Lukminto, president director of PT Sri Rejeki Isman (Sritex), had weathered through several crises and coming out to grow his company even bigger. Iwan joined the company that his father, the late Haji Mohammad Lukminto, founded 54 years ago, in 1997 when the Asian financial crisis unraveled. At the time, the demand for goods slumped, forcing companies including textile-garment to layoff workers and even close down businesses.
Together with his father, Iwan, who had just returned from Boston University with a degree in business administration and started as an assistant director at the firm, managed to convince clients to stick with them despite the turmoil. The company got out well, Sritex tried their best not to lay of its 10,000 workers and even hired more when sales grew 50% from 2000 to 2001.
Sritex was in far better condition when dealing with the crisis in 2014, thanks to Iwan who has been leading the company as president director since 2006. Iwan was able to list the company on the stock market with excellent timing in mid2013, just before global markets started to wobble. In 2014, the rupiah plunged to nearly Rp 13,000 per US dollar, which was the lowest level since the Asian financial crisis.
The IPO was three times oversubscribed. Sritex used the IPO proceeds for the company expansion, added its spinning capacity from 320,000 spindles annually to 530,000 and doubled annual garments output from 8 million pieces to 16 million. The capacity increase led to significant improvement in financial performance. Sales in 2014 rose 7.4% to $589 million, but profit before tax jumped 45% to $67 million.
That year, Iwan was named Forbes Indonesia’s Businessman of the Year and EY’s Entrepreneur of the Year. The IPO was one of the primary growth factors in the company’s history as one of Asia’s largest integrated textile players. Now, Iwan and his company are faced with another crisis: the COVID-19 pandemic that brings catastrophe to the global economy. The COVID-19 has also wreaked havoc on the textile and fashion industry worldwide. Forbes reported that Bangladesh, the second-largest apparel exporter after China, got 864.17 million pieces of garments worth $2.81 billion export cancelled.
In Indonesia, where its textile exports contributed roughly 2% of the global figure, things are looking pretty similar. At the end of April, chairman of Indonesia Textile Association Jemmy Sastraatmaja was quoted saying 80% of the workforce in the sector lost their jobs and domestic garment production is now at 5% utility. Some analysts are also pessimistic towards Sritex’s performance this year.
Christopher Andre Benas, VP Equity Research at RHB Sekuritas, sees that the pandemic will likely hit the company sales. In April, Moody’s downgrades Sritex’s Ba3 ratings outlook from stable to negative. The company’s stock price has also dropped over 45% since the end of last year.
“The negative outlook reflects our expectation that diminished consumer spending on apparel and footwear globally as a result of the Coronavirus outbreak will reduce Sritex’s earnings and increase its working capital needs through 2020,” said Stephanie Cheong, a Moody’s Analyst, in a statement.
However, so far, Iwan says the company is running at near full capacity. The garment division even adds extra working hours to meet the demands of facemasks and personal protective equipment (PPE) that the company began to produce since March.
Sritex’s first-quarter result was relatively flat compared to the same period last year, with $316.8 million in revenue and $28.2 million in net profit. Iwan says the company is putting a conservative target for this year. Sritex also hasn’t changed its 6% to 8% growth target stated early this year. While being among the largest integrated textile companies brings an advantage in the situation, the optimism is also driven by the company’s value of agility and innovation.
“We had begun implementing safety protocols since February (even before the government announced the first COVID-19 infection in the country). Facemask is compulsory to our 50,000 employees, and we started coordinating health measures with the surrounding community,” says Iwan on how fast the company is responding to the situation.
Iwan says many local garment companies were lacking raw materials when China imposed lockdown. As an integrated textile company, Sritex can mitigate the issue. The company manages four divisions that produce yarns to finished apparels sold to international brands like H&M, Wal-Mart, and Jones Apparel. Sritex has also begun efforts to reduce raw material imports to produce yarn. In 2012, the Lukminto family invested $300 million to build rayon factory PT Rayon Utama Makmur with an installed capacity of 80,000 tonnes of rayon fiber annually.
The company is not part of the listed Sritex. From the four divisions, last year, Sritex’s spinning division produced over a million balls of sewing threads and generated more than $480 million of revenue. It accounted for 40.7% of the company’s total revenue of $1.18 billion in 2019, the most significant contributor among the four.
The weaving and the finished fabric each contributed 6% and 27.1% to total revenue. Meanwhile, the garment business contributed 26.2% to sales but generated the highest profit margin compared to other divisions. In 2019, 86.7% of garments produced by the company were exported.
The company divides its garment output into fashion and uniform. One main innovation that has helped Sritex to thrive is becoming a specialized maker of military uniforms. It is now producing uniforms for more than 30 countries, including Germany, which has high technical standards for its outfits.
Sritex can make uniforms to fit various requirements, such as anti-chemical, anti-radiation, or anti-infrared. One great advantage of military orders is that the customers—armies and governments—are reasonably good credit risks and tend to be longterm customers with a constant demand for the product. And even though uniform only consists of less than 30% of the garments sales, Iwan believes that fashion customers will keep their order with Sritex because it can deliver fast.
“Our clients don’t cancel the order because we have the raw materials and we can deliver the orders quickly. Our delivery speed is two weeks, so buyers will keep us to anticipate when things get back to normal,” Iwan says.
While Iwan expects sales from the spinning division to go down, he sees sales from garments in the following quarters will buffer the impact towards the total year-end revenue. The company has also quickly taken advantage of its capability to produce specialty fabrics to make facemasks and medical jumpsuit.
Both had contributed 32% of the total garment sales in the first quarter despite the company just started selling the masks in the third week of March. The disposable coverall produced by Sritex met with the American National Standard ANSI/AAMI PB70: 2012 Level 3 – just below the highest Level 4 standard. The masks and PPE are available at the company’s ecommerce website.
“It is easy to produce medical apparels because of our experience in making specialty military uniforms. We have a strong R&D and the experience in making anti-chemical, biological, radiation, and nuclear uniform that we adopt when making the medical outfit,” says Iwan.
Despite the negative outlook, Moody’s admits Sritex will have adequate liquidity to absorb negative operating cash flow over the next two to three quarters. The company’s large cash balance of $168 million at the end of 2019, along with around $102 million of availability under committed credit facilities, will be more than sufficient to cover its upcoming $116 million of debt maturities in 2020. These include the $30 million and $10 million of medium term notes due in November and December 2020; the $8 million of scheduled debt repayments; and the $68 million of short-term working capital loans, which Sritex plans to rollover.
Going forward, Iwan believes demand for clothing will improve when the new normal takes place. Even now, he says, there is already a growing demand for sleepwear and house clothes. He also thinks that Indonesia has enormous potential to expand its textile industry with the trade war between the US and China, which escalates further due to the COVID-19 pandemic.
Buyers will look for more competitive suppliers and diversify supply chain. Iwan also sets an example in terms of labor wage, of which the $700 minimum salary in China is far above the $200 average in Central Java. Thus, he calls out to the government to help the textile industry endure the crisis. The textile association has requested the government to provide several incentives such as cuts in corporate income tax, loan payments relaxation and electricity tarif reduction, and suspension of premiums that employers must pay to the Workers’ Social Security Agency.
“The government must provide a safeguard for the industry. I am worried that when things are back to normal, import products will flood our market and then it will be harder to restart the domestic industry. In this tough situation, solidarity in the industry is also crucial,” he says.