NAKSHBANDI INDUSTRIES – Analysis of Financial Statements – Financial Year 2004 – Financial Year 2010

Nakshbandi Industries was incorporated in Pakistan as a public limited company. The shares of the Company are quoted on KSE. The Company is principally engaged in production and export of towels.

The towel division is one of the country’s most technically advanced set up. Using only high grade raw material and state of the art machinery, the Nakshbandi towel range is at par with its competition in the international market. In fact, Nakshbandi is a major supplier to retail giants in Europe and the US. Since its inception, Nakshbandi has played a dominant role in towel weaving, processing and towel made ups.

From bathrobes and kitchen towels to stripes and jacquard, Nakshbandi also specializes in pure white institutional towels, under the brand name Seagull. Nakshbandi also takes care to use only environment-friendly dyes and machinery. The company is currently in the process of expanding its laboratory facility. The fabric division which started its production in 97/98 consists of a sizeable plant for weaving and finishing with capacity of 50,000mtr/day producing apparel fabrics. The plant is fully equipped with state-of-the-art machines with a complete range of laboratory equipment to fulfill all test required for international standards.

RECENT RESULTS 3Q’11:

Production was 5.55 million kg, as compared to 3.21 million kg. Sales along with export sales were considerably higher at Rs. 1.8 billion as compared to Rs. 1.2 billion in the same period last year. Export sales were higher at 3.74 million kg as compared to 3.18 KG in the same period last year. Gross profit margin was 15.8% as compared to Gross profit margin of 16% in the same period last year. Administrative expenses increased only slightly, while the distribution cost increased by 9.2%. operating income thus increased by 80%. However, other charges along with financial charges surged, pushing the other operating expenses higher by 146%. PAT was Rs. 90.7 million as compared to Rs. 77.2 million in the same period last year. EPS was Rs. 0.77 as compared Rs. 0.55 in the same period last year taking into account discontinued operations.

Higher receivables and higher stock signify a higher need for working capital which is reflected in 109% increase in short term borrowings. Financial charges were resultantly higher as well.

MARKET OVERVIEW:

During FY’10, there was phenomenal and unprecedented increase in the prices of yarn, upward revision of gas prices, and increase in cost bank financing and high rate of inflation. The textile sector had still not fully recovered from the aftershocks of the world economic crisis before it faced the continuous rise in yarn prices followed by the worst natural disaster that hit Pakistan which affected the cotton crop. The export order situation which was discouraging during first half of the year started to improve and was regaining its momentum.

PROFITABILITY:

As compared to year 2009, exports improved by as much as Rs. 65 million and contributed to 87% of the total sales. Export rebate too gained by 1% in 2010. On the other hand, local sales declined from 13% in 2009 to 11% in 2010. Hence, any fluctuations in the international market could severely improve or hamper the Company’s performance.

The company was able to produce 4.857 million kg during the year under report in spite of all the bottlenecks faced by the management. In order to fulfill export orders, the Company got its 1million kg processed from outside sources though processing was short of 1million kg as compared to FY’09. Sales volume and gross profit have increased by 1.31% and 30.13% respectively and the Company earned net profit before tax of Rs.137.25 million while net profit after tax of Rs. 143.31 million. As compared to net loss after tax of Rs 5.39 million in FY’09, earnings had jumped to 143.31 million in FY’10. This has been made possible by reducing costs, eliminating inefficiencies and reducing wastages by disposing of assets pertaining to discontinued operations for RS.44.36 million. Profit per share during the year under report is Rs 1.2 compared to a loss of Rs 0.9 /share during the preceding year.

As opposed to the Company’s worst performance in FY’07 characterized by downfall in the above profitability ratios due to underutilization of capacity and increased costs, FY’10 showed a comparatively positive trend. The profit margin improved by a phenomenal 2724.45% in FY 10 due to reduced administrative, distribution and financial costs relative to FY’09. The improvement was also attributed to the disposal of assets pertaining to discontinued operations which had been under loss for 5 continuous years. Despite 100% increase in yarn prices gross profit margin surged by 28.5% in FY’10. Return on assets picked up pace by an increase of 2835.53% from FY’09 to FY’10 mainly due to a positive trend in profit as well as timely retirement of debt obligations by the Company. Return on Equity improved by a substantial 999.17% due to increased profit and issue of almost 43 million shares.

LIQUIDITY

Although current assets increased by 6% in FY10 and current liabilities decreased by 10%, the quick assets showed a negative trend. The reason was decline in cash and bank balances by as much as Rs.200 million showing a lower degree of solvency. That is why quick ratio showed a downward trend as opposed to current ratio which showed a rise by 18.7%. This shows that the short term solvency of the company had deteriorated due to shortage in cash and bank balances.

ASSET MANAGEMENT RATIOS

Both inventory turnover and day sales outstanding had risen in the year 2010 by 49.5% and 42.4% respectively. This shows that the Company was not efficient in either selling its inventory or managing its receivables. Had it been efficient, it would have had a higher balance in cash and at bank than what was recorded in FY’10. Stringent policy at recovering from its debtors and selling its inventory could have improved Company’s liquidity position.

On the other hand, Total asset turnover rose by 4.2% due to increased sales volume and decreased total assets. Sales to equity ratio declined from FY’09 to FY’10 by 1.97%. This was primarily because sales volume had increased by a quite small proportion as compared to a significant increase in equity by 195.7%. This was due to issue of as much as 43 million shares.

DEBT MANAGEMENT RATIOS

Despite inflation rate, cost of financing reduced substantially which led to almost a 40% decline in it in FY’10 compared to previous year. On the other hand, earnings before tax had risen by almost 200% which led to a higher Times interest earned ratio. Hence it indicates that the Company is covering its interest charges with a higher margin of safety than before. Since liabilities, most significantly, long term finances from banks had decreased in FY’10, while equity increased due to issue of shares both for cash and bonus which in turn led to a delcine in debt to equity ratio.

During FY’10, the Company was able to manage its debt effectively resulting in reduced long term debt to equity percentage as it showed that long term debt used for financing was only 37.32% of the equity employed. In contrast, its proportion in FY’09 was more than 100 % depicting that the majority of Company’s financing was done through long term debt. The proportion of debt used to purchase assets was found to be the least in these 7 years. In addition, it further reinforced the fact that equity was the major chunk which helped in financing most of Company’s asset as opposed to debt.

MARKET VALUE RATIOS

The overall market value ratios show a consistent performance on part of the Company & its management. Earnings per share though being on the negative side, remained consistent as they stood at Rs (0.09) in FY’09 and in the following year. With increased shareholders equity combined with improved net assets value of the Company, book value per share had too risen by 28.5%. Market value began improving in FY’09 after declining in FY’08 and remained consistent at Rs 10.90 in FY’10. Unfortunately, market value did not rise with increased book value per share mainly because the investors’ expectations in the Company’s profitability worsened. The reason was the occurrence of worst floods in the history of Pakistan that destroyed almost all the cotton crop. As far as Price earnings ratio is concerned, it remained consistent in FY’10 after its improvement in FY’09.

FUTURE OUTLOOK

The textile value added sector was not even fully recovered from the aftershocks of the world economic

crisis that it had to face the substantial continuous increase in the prices of yarn and now the country had worst ever natural disaster which affected the cotton crop. The cost of production which is further expected to increase in view of higher cotton prices is also to take the burden of government measures to meet cost of rehabilitation of affected people and infrastructure and enhancement in utilities prices. However, the management is committed to continue with the efforts for cost reduction and elimination of inefficiencies beside acquiring new and improved technologies and adopting methods for better operational results and is hopeful for better prospects. However, the same would be dependant to a great extent on measures taken by the government.

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RATIOS
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PROFITABILITY RATIOS FY’04 FY’05 FY’06 FY’07 FY’08 FY’09 FY’10
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Profit Margin 0.54% -0.85% -4.95% -42.54% -9.32% -0.31% 8.09%
Gross profit margin 12.17% 13.20% 11.13% -10.08% 8.86% 14.22% 18.26%
Return on Assets 0.45% -0.47% -3.47% -22.74% -5.44% -0.22% 5.99%
Return on Equity 2.23% -2.43% -18.58% -2646.57% -118.76% -1.77% 15.92%
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LIQUIDITY RATIOS FY’04 FY’05 FY’06 FY’07 FY’08 FY’09 FY’10
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Quick Ratio 0.61 0.36 0.25 0.27 0.65 0.87 0.89
Current Ratio 1.00 0.75 0.70 0.52 1.06 1.27 1.53
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ASSET MANAGEMENT RATIOS FY’04 FY’05 FY’06 FY’07 FY’08 FY’09 FY’10
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Inventory Turnover(Days) 200 168 133 96 85 67 81
Day Sales Outstanding (Days) 56 35 15 25 14 57 81
Operating cycle (Days) 256 203 148 121 99 124 162
Total Asset Turnover 0.84 0.55 0.70 0.53 0.58 0.71 0.74
Sales/Equity 4.16 2.86 3.75 62.21 12.74 5.75 1.97
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DEBT MANAGEMENT RATIOS FY’04 FY’05 FY’06 FY’07 FY’08 FY’09 FY’10
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Debt to Equity Ratio 3.97 4.18 3.70 97.40 20.83 3.70 1.03
Times Interest Earned 1.52 1.00 0.49 -1.57 -0.61 1.25 6.09
Long Term Debt to Equity (%) 121.10% 111.08% 63.67% 4172.14% 788.63% 159.66% 37.32%
Debt to Asset 79.88% 80.68% 69.09% 83.68% 95.42% 46.03% 38.63%
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MARKET RATIOS FY’04 FY’05 FY’06 FY’07 FY’08 FY’09 FY’10
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Earning per share 0.44 -0.47 -2.83 -14.69 -3.42 -0.09 -0.09
Price/Earnings Ratio 34.09 -37.23 -4.24 -0.58 -2.53 -121.11 -121.11
Dividend per share 0.50 0.50 0.00 0.00 0.00 0.00 0.00
Book value per share 19.79 19.3 15.24 0.56 -2.96 4.06 7.65
No of Shares issued (in millions) 24.21 24.21 33.89 33.89 33.89 74.90 117.59
Market Value per share 15.00 17.50 12.00 8.50 8.64 10.90 10.90
Market/Book Ratio 0.76 0.91 0.79 15.18 -2.92 2.68 1.42
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