Nishat Textile MillProject Presentation

Asim RafiqMehwish MalikAneeza SarfrazMaida FarhatZaeem Saqif

Objective

Industry Analysis

•8% of the GDP in Pakistan’s economy. •Industry made rapid development

because public & private investments($5.1 billion).

•Performance measured by profitability & exports.

•Raw material –dependent-Price of cotton

Cont..

•Sensitive Industry -global economies-Energy Crisis , Govt. Polices.

•basic raw material – cotton crop• Idol inventories -pressure on gross

margin.•the performance weaken with declining

demand•seasonal cum cyclical spikes- the growth

is -distribution of wealth.

Challenges for Textile Industry:

•Acute energy crisis•High inflation•Precarious security situation•fiscal and economic imbalances

Porter’s Five Forces Model:

•Supplier's Bargaining Power: •New Entrance Threat:•Buyers Bargaining Power:•Substitute's Threat:•Rivalry Among Existing Competitors:

Where Does Nishat Mills lie?

•Market LeaderOther Players in industry • Crescent• Gul Ahmed• Kohinoor• Sapphire• Azard9

SWOTStrength Weakness

Adequate amount of resources Investment in fixed assets Produce higher quality

products at relative low prices Less Debt Burden High Coverage Ratio

Poor inventory management –take short term loans.

Inventories turnover decreases.

Converting its inventory into sales because of the higher inventory in hands.

Opportunities Threats

Still expansion in various other product categories knit wear.

international trade -increase its exports.

Cost of Raw Material Exchange rate fluctuation Electricity –Energy crisis Large no. of substitute

Information Source of Business Analysis

Quantitative Analysis:Trend Analysis

Trends: Income Statement

•Cost of Goods Sold Increase•Gross Profit up down trend•Profit from Operations up down

trend •Profit before Taxation up down

trend•Profit after Taxation up down

trend

Income Statement:CGS & Gross Profit• Load shedding

• Oil price-Transportation

• At end 2012, government is intend to give subsidiaries it reduces the CGS of Nishat Textile Mill.

• In 2014,political instability (Long march, terrorism), high inflation

• Supply and Cost of raw material

• labor cost also increase in 2014

• Exchange rate

Cont..

•Since gross profit is net sales minus CGS. The reasons for different trends in CGS have already explained.

Efficiency at which firm produces its products decrease

Profit From Operation /Before Taxation /After Taxation.

• EBITDA is maintained despite the squeeze in gross profit.

• Profit from Operation:o Earning-core business operations. o CGS – increase also reduces its operating expense and

increase its sales.

• Profit Before Taxation:o Finance cost (Interest expense) - decreaseo Operating more on equity than on debt as they have

less interest payment.o Thus, profit before taxation is increasing as compare

to previous year.

Cont..

•Profit after Taxation:Tax is decreasing over the period which depicts that company settle its prior and deferred tax and profit after taxation is still growing.

All the accounts income statement lead to one opinion that company growth is stable

and firm is in profit.

Balance SheetStock in Trade:

• Stock in trade is increasing over the period.

• Cost of maintaining inventory increases.

• Similar trends observed in the industry (Crescent).

Price basic raw material (cotton) came under pressure, piling up of inventories.

Inventory losses

Face pressure on gross margin.

Declining demand pattern.

• Efficient Management System –RIFD

• Production and supply chain management. It may also give competitor edge in working condition from next year.

Cont..

• Property, Plant and Equipment:• From 2011 to 2014 there is increasing trends in property

plan and equipment except in 2013 observation.

• In 2013, there isn’t need any investment.

• Moreover, similarly trends observe in industry.

• In 2013 company did not invested much in property plant and equipment and depreciation is high- accelerated method of depreciation- decrease of book value of assets.

• Shows that there is no negative outcome of reduced PPE. Since textile industry is very dynamic to remain at high position in marketing company invested in PPE in 2014.

Long Term Investment:

•The increasing trend in long term investment also shows that financial stability of the company that after managing and running its core business it has enough cash left to invest them in long term investments.

•Similarly, trends obverse in overall industry.

Short Term Borrowing:

•The value of this account is very important when determining a company's financial health.

•Companies go for short borrowing to meet their current operation expense.

•They have to borrow short term loans because there is very large difference in days in making complete sales and days in accounts payable.

Cont..• There are 98 days in which inventory remains with

the company and after sales the cash collection period is 19 which makes total of 117 days to receive cash.

• While Nishat has to pay back it suppliers in 34 days so there is huge amount of difference in cash collection and cash payable period so they have to borrow short term loans in order to pay off accounts payable.

• This trend is not constant over time; it varies depending upon the need of cash to meet their current operation administration expense.

Common size Current Assets and Current Liabilities:

Current Assets – Common Size• Stock in trade, trade debts, loans & advances and

short term investments, owing to about 80% of the total current assets owned.

• Stock in Trade:• the stock in trade has shown up-down trend during

the past 3 years, and so do trade debts.

• A major portion of operating cash flows in 2014 is tied up to stock in trade.

• this is overall trend of the industry and this mostly happens due to declining pattern of demand.

Cont.•Trade Debt:•Trade debts has gone down from about

17.5% to 10%, which is a good indicator

•Short term Investments:•Short term investment varies over the

period of time depending upon availability of idle cash.

Current Liabilities – Common Size

• The biggest item in current liabilities is short term borrowings

• Increased due to difference in cash collection and cash payable period

• This difference is mainly attributable due to increase number of days in inventory.

• There are 98 days in which inventory remains with the company and after sales the cash collection period is 19 which makes total of 117 days to receive cash.

Liquidity Analysis: (Exhibit 6)

Cont..•The current ratio, Acid test ratio and the cash

ratio of Nishat Mills are constantly better and higher than the crescent for the past 3 years, as it can be expected of a market leader

•Focusing on Current Ratio more specifically, it is being larger than 1 for the past 3 years for Nishat, which means that it doing exceptionally well in terms of solvency and working capital.

Cont..• However, there is a stark difference in 2012, where the

A/R turnover of Nishat is around 15, and of crescent it’s around 4, which means that during this period the managerial and liquid efficiency of Nishat is at its best.

• The inventory turnover and Days’ sales in receivables of Nishat are much lower than crescent and its comparatively better for crescent.

• The days sales’ in receivables show the recovery days of A/R which is much better for Nishat.

• The reason as we have identified above that their declining pattern of the demand in the overall industry which led to more number of day sales in inventory.

Cont..• Cash to current assets and cash to current

liabilities ratios are high for Nishat, which is not a very realistic decision.

• The reason is that it is often perceived as poor asset utilization for a company to hold large amounts of cash on its balance sheet, as this money could be returned to shareholders or used elsewhere to generate higher returns.

• While providing an interesting liquidity perspective, the usefulness of this ratio is limited.

Cont..• Days purchase in A/P and average net trade cycle are almost similar

with some exceptions, which shows that both companies are having similar Payables return portfolio over the course of these 3 years.

• Cash provided by operations to average Current liabilities are lower for Nishat as compared to crescent and less than 1, which indicates that Nishat has generated less cash in the period than it needs to pay off its short-term liabilities and this is happening due to increased number of days in inventory that’s why they have to do short term borrowing.

• Reviewing current ratios and quick ratios for the last 3 years shows the satisfactory liquidity and impressive short term financial position of the Nishat Mills as compared to crescent. Working capital requirements of market leader in textile sector needs investments of huge funds in debtors, inventories and stock in trade.

Cont..

Liquidity ratio analysis depicts that company has enough cash that it would not

leads firm in solvency problem.

Cash Flow Ratio

Cont..• Cash flow performance ratios are showing a zig

zag trend owing mainly due to • environmental factors, • Inflation and political factors If Nishat Ratios are compared with crescent they are far way better which clearly depicts strong financial performance of Nishat. Strong Coverage ratio-Solvency ratioAll of this represent that Nishat is financially stable and has enough cashflows for operations every year

to meet the financial obligations of the company

Solvency: (Exhibit: 8)

Cont..

• Nishat’s debt to total assets ratio is preferably lowers than crescent.

• Debt burden of Nishat mills decrease in 2013 as compared to 2012 but in 2014 it increases. More debt to equity ratio is risky because it shows that the investors haven’t funded the operations as creditors.

• Lack of performance is also the reason why the company is seeking extra debt financing. In 2013 Nishat uses less external debt than in 2014.

• But increase in debt is not so significant as compared to industry it means that the risk level of the firm is low as compared to other firms in industry because competitor firm is operating more on debt.

• Nishat is operating relatively low share of debt and more on equity which shows that the company is financially strong and more strong as compared to its competitors.

Cont..• Long term debt has increased in 2014

depicting company is investing more in assets by borrowing money.

• Mostly financing their operations through their equity. Nishat has low leverage as compared to others in the industry because they take less debt as compared to its competitors.

• Borrowing constantly creates an image that the company might be on high risk.

Cont..• Coverage ratio depicts that company can afford to pay

its interest payments when they come due.

• Higher ratios are less risky while lower ratios indicate credit risk.

• Nishat is two times higher than its competitors which clearly depicts the fact Nishat is the market leader.

It can be concluded that as compared to the industry Nishat mills is more solvent and has ability to pay its long term obligations. It also depicts Nishat has low financial

risk and sound reputation because it has low debt as compared to equity.

Return on Investment Ratios:

Cont..

• There is a huge difference between the return on investment of Nishat and its close competitors. Nishat performance is out class.

• Due to uncertainties and fluctuating nature of economy the return on assets have slightly decreased in 2014 as compared to 2013 but if competitors return on assets is analyzed Nishat is far way above than it.

• Return on equity capital has decreased from 12% to 8% in 2014. Similar trend can be seen in case of competitor.

It can be concluded that there is decrease in return from investments because of the economic fluctuation such as rising inflation, increasing cost of raw material and labor, exchange rate fluctuations etc. But still

return from investments is sufficient enough despite of all the reasons. It indicates that a Nishat mills is a favorable and attractive place for

investment purpose.

Per Share Results Based on Number of Shares Outstanding:)

Cont..

• The sales per share have increased in 2014 which company is operating actively and efficiently.

• The net income per share has decreased in 2014 as compared to 2013 because of the increasing effect of CGS in 2014.

• Although dividend per share has remain almost stable.

• Book value per share has also increased over time.

All of these results indicate that company is financially stable and operating efficiently.

Asset Utilization Ratios:

Cont..

• Comparing with industry, receivable turnover is much higher of Nishat as compare to other companies.

• Working capital turnover, and inventories turnover of Nishat decreases, showing that company’s efficiency decreases in converting its inventory into sales because of the higher inventory in hands.

• The overall declining demand trend of industry therefore its inventory in hands is gradually increasing over the period.

• Sales to fixed assets, sales to other assets including intangible assets, and sales to total assets, continuously decreasing in two consecutive recent years i.e. 2013 and 2014.

• The reason for decrease in asset turnover despite increase in sales is

heavy investment in new projects of the Company whose benefit will realize in future.

Analysis of Profit Margins:

Cont..• In 2014, gross profit decreases despite of increase in the sale o cost of goods sold increases. o The price of raw material o the prices of electricity in recent years increases o which is another reason of shrinking the gross profit margin.

• In 2014, operating profit decreases mainly because o of increase in administration cost.o advertisement expenseo labor cost, vehicles’ running travelling, rent, rates and taxes increases. o A similar trend can be seen in net profit margin which shows the overall

profitability of the company.

Whereas comparing the profitability of Nishat Textile Mills with other companies in industry, regardless of decrease in its profits, profit margins are still very high. Nishat is enjoying a leading position in the market. The trend of profitability of Crescent Textile Mill shows that there is no significant change in

profit margins. There is huge difference in profit margins of both companies and they are much lower of Crescent as compared to Nishat.

Accounting Policies:• Depreciation on property, plant and equipment is

charged to profit and loss account applying the reducing balance method.

• Inventories, except for stock in transit and waste stock / rags, are stated at lower of cost and net realizable value. Cost is determined by average method.

• Nishat is using conservative approach to recognized revenues because revenue from sale of goods is recognized on dispatch of goods to customers not when they just receive the orders.

Prospective Analysis:• Nishat is market leader, it has fast growing business in Pakistan

and it enjoy this prosperity in future.

• Since government policies have great influence on textile industry along with this Nishat Mill has ability to cope with future challenge in better way due to good management resources, liquidity, solvency, coverage ratio.

• In addition to this, energy crisis is primary issue faced by company, for this Nishat has its own power generation plant which also enhanced it production capacity.

• Since textile industry is very dynamic in Pakistan, any unexpected change in external environment can influence performance where as Nishat has enough cash on hands as compared to other companies. In the nutshell, we can say that future prospects of Nishat Textile Mills are bright and promising

Thank You