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Nishat Textile Mill

Project Presentation
Asim Rafiq
Mehwish Malik
Aneeza Sarfraz
Maida Farhat
Zaeem Saqif

Objective

Industry Analysis
8% of the GDP in Pakistans 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

Porters 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 Leader
Other Players in industry
Crescent
Gul Ahmed
Kohinoor
Sapphire
Azard9

SWOT
Strength
Adequate amount of resources
Investment in fixed assets
Produce higher quality products at
relative low prices
Less Debt Burden
High Coverage Ratio

Weakness
Poor inventory management take
short term loans.
Inventories turnover decreases.
Converting its inventory into sales
because of the higher inventory in
hands.

Opportunities
Still expansion in various other
product categories knit wear.
international trade -increase its
exports.

Threats

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) - decrease
o 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 Sheet
Stock 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 isnt 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 depreciationdecrease 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 its 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
thats 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 ratio
All 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..
Nishats 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 havent
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
companys 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 expense
o 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