Textiles: FAZAL TEXTILES MILLS LIMITED - Analysis of Financial Statements Financial Year 2005 - 2001 H 2010
Fazal Textiles Mills (FZTM) is one of the older mills of the country. It is located in Karachi and was taken over by the Yunus Brothers group in March 1987. Yunus Brothers took over FZTM when it had closed down since 1984 due to heavy losses.
The new management took prompt and comprehensive actions to revitalize the unit by discarding the old machinery and imported and installed the latest machinery within a year's time. Presently, FZTM is producing yarn, knitted fabrics, bed sets and fitted sheets. Export sales are mainly to Far Eastern, European, the US, South American, North African and Middle Eastern markets.
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COMPANY SNAPSHOT
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Name of company FAZAL TEXTILE MILLS LTD
Nature of Business Textile
Ticker FZTM
Sales FY '08 PKR.2,444,146,000
Sales FY '09 PKR.2,819,019,000
Share price (avg.) PKR.419.83
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RECENT RESULTS 2001 H 2010
Sales have increased to Rs 1875 million as compared to Rs 1506 million in 1H09. The major increase was witnessed in the export category, while the local sales showed a marginal increase. The sale increase was a function of increased prices plus volume along with the advantage of devalued rupee. Gross profit has increased to Rs 257 million viz-a-viz Rs 148 million in 1H09. GPM also increased from 9.85% to 13.70%. PAT showed a sharp increase to Rs 178 million as compared to Rs 20 million in 1H09. EPS was recorded at Rs 28.84 (1H09: Rs 3.23).
Financial charges show a decline to Rs 17 million to Rs 82 million due to loans on the export re-finance rate and discounting of foreign bills.
Going forward, the cotton prices are all time high, above Rs 5,500/maund, while the yarn prices are facing pressure due to government's restriction for its export. This may put pressure on FZTM's profitability for the full year.
INDUSTRY PERFORMANCE
In the current season of 2008/09, cotton production was initially estimated to be at 14.11 million bales, but later it was reduced to 12.6, and then to 12.1 million bales. However, now reliable estimates put it between 11.3 and 11.5 million running bales, which when converted into standard bales of 170-kg each, comes to between 10.635 and 10.824 million bales. Domestic consumption this season is estimated to be down by about 20%, slipping to 13.2 million running bales. The cause of these disappointing reductions is, as many would assume, the impact of the global recession in financial and economic sectors. In addition to this economic difficulty, deteriorating domestic law and order, a struggling economy, political instability, questionable security and war-like border situations are all taking their tolls on the Pakistani textile sector.
However, the shortfall in domestic requirements could be met through imports of cotton, which may equal 1.5 to 2 million bales. Due to tough competition in textile exports with China, India, Bangladesh, Vietnam and Sri Lanka, Pakistan can make or improve its viability in the textile exports if it increases its cotton production to be at least equal to its domestic requirements because local cotton has cost advantages over imported cotton.
PROFITABILITY
Net sales in FY09 stood at Rs 2.8 billion (FY08: Rs 2.4 billion) - an increase of 15%. The cost of goods sold increased by 13%. The sales are growing at an increasing rate contrary to the previous years' trend: the increase in sales was by 23% in FY06, 12% in FY07 and 8% in FY08. The cost of goods sold previously increasing at a declining trend till FY08 but it increased at an increasing rate in FY09 owing to inflation. In FY08 the gross profit has shown improvement by 58% and stands at Rs 220 million (FY08: Rs 140 million). This is mainly due to more than the proportionate increase in net sales relative to cost of sales. The main cost drivers were salaries, repairs and maintenance, power, and knitting, dyeing and printing expenses.
The net income of Fazal Textiles increased in FY06 but booked a loss of Rs 20 million in FY07. However, in FY08 the situation has turned around and the company has made a profit of Rs 10 million. The management upheld its efforts and fruitful results were evident as the company booked a bottom line of Rs 25 million. The graph also shows that the proportion of after tax income has declined considerably relative to gross profits over the last two financial years. This is due to combination rising cost of production due to inflated costs of raw materials, increase in interest rates and operating expenses for the company. In FY09, the expenses and the finance cost have increased drastically by 18% and 75% respectively. Despite these, the management has been able to significantly improve the bottom line of the company. The PAT registers a 150% increase.
The profitability of the company has improved from FY08 but is not up to the level of the prior years. The gross profit margin has increased from 5.35% in FY07 to 5.72% in F08. Net profit margin has improved from -0.90% in FY07 to 0.41% in FY08. The ROA has increased from -1.12% in FY07 to 0.30% in FY08. The total assets have increased by 82% in FY08. This is mainly due to a huge increase in operating fixed assets from Rs 250 thousand in FY07 to Rs 915 million in FY08. This is due to construction of a new factory building and development of land in FB Area. The ROE has increased from -2.88% in FY07 to 1.39% in FY08. The total equity has increased by 1%. This is primarily due to improvement in net profits by 149%.
The increasing trend persisted in FY09 as well, indicating the company's ability to remain buoyant even in tough times. The gross profit margin increased to 7.82% in the period relative to 5.72% in FY08. Net Profit Margin improved from 0.41% in FY08 to 0.89% in FY09. The ROA increased from 0.30% in FY08 to 0.87% in FY09. The total assets decreased by 13% in FY09. The company did not invest in property plant and equipment assets in this year. Operating assets increased by 45% but this was largely off set by 48% decline in current assets. Higher operating expenses were owing to the Karachi and Nooriabad projects undertaken by the company. The ROE increased to 3.41% in FY09. The total equity increased by 2% this year, on the back of addition of unappropriated profits.
LIQUIDITY
The liquidity of Fazal Textiles remained commendable till FY08 as the ratios have remained high. In FY09 the liquidity ratios demonstrated a decline mainly at the back on decrease in current assets by 48%. The main drivers were trade debts and stock in trade, each declining by 76% and 20% respectively. The cash and bank balances are another attributing factor registering a steep decline by 75%. This cash position appears volatile as indicated by the graph of cash ratio, which fell to 0.003 in FY09 against 0.01 in FY08. The current liabilities have fallen by 30% in FY09 caused by a fall of 73% of short-0term finances.
In FY09 the current ratio decreased to 0.82 (FY08: 1.10). The current ratio increased in 2006, but showed a steep decline in 2007. The company has managed to keep its head above the others even in the difficult year of 2007, when the entire textile industry as well as our economy took a downward plunge. In that year the current assets went down steeply, whereas the current liabilities were kept at almost the same level as that of FY06, which saved the ratio from going further down.
A steep fall in current ratio is witnessed once again in FY09 as the current assets fell more relative to the fall in current liabilities. The quick ratio remained constant at 0.68 in FY08 only to fall by almost 50% to 0.31 in FY09. The quick assets (current assets less inventory) fell by 69% in FY09 as against an increase of 49% in the former year.
ASSET MANAGEMENT
The Days Sales Outstanding (DSO) ratio has decreased from 126 days in FY08 to 26 days in FY09. This is due to huge decrease in trade debts by 75% in FY09 while net sales have increased by 15%. This shows that the company's credit policy as improved and the company is receiving payments in a timely manner. The cash ratio may not complement this opinion but it should be kept in mind that the increasing costs as strained the cash reserves across the textile industry.
The inventory turnover (ITO) ratio has decreased from 95 days in FY08 to 70 days in FY09. The stock in trade has decreased by an amount of 17% which shows that the company has been effective in terms of making sales this year. The operating cycle has thus shed off 124 days from FY08 and now stands at 97 days. Despite a deteriorating liquidity position, the company as recovered from last year and managed its assets efficiently.
Total asset turnover (TATO) has increased from 0.03 in FY08 to 0.09 in FY09. This is due to the company making a 149% higher post-tax profit this year as opposed to FY08. The company has experienced a reduction in its total assets by 13%.
The sales to equity (S/E) has shown an inclining trend. S/E has increased from 3.39 in FY08 to 3.83 in FY09. This is due to 15% increase in net sales and 2% increase in equity. Considering the gross profit margins and net profits the increase in this ratio does not substantially impact asset management or profitability in a positive manner. The sales are still insufficient to generate enough operating profit or cash flow to ensure and sustain liquidity. Also the company needs to increase its equity base to finance substantial growth in sales.
DEBT MANAGEMENT
The debt to asset ratio has decreased from 0.48 in FY08 to 0.40 in FY09. This is due to 15% decline in total assets while total debt decreased by 17.6%. The debt to equity has decreased from 2.23 in FY08 to 1.56 in FY09. The equity increased by just 2%. The long-term debt to equity ratio shows only a slight decline from 1.50 in FY08 to 0.47 in FY09 due to decline in deferred taxation.
Fazal Textiles has been raising its borrowed amounts over the years. This has led to the constant rise in the debt to equity ratio. The loans were used to stay competitive in foreign markets and also to put some expansionary plans in action. In 2008 the company took massive loans to stay in production after losses faced in 2007, which has led to high debt ratio and which will raise the payables in the future.
Over the years, Fazal Textiles has been facing increased finance costs due to increased interest rates over the years due to the tight monetary policy. As a result the company pays more interest on the same principal. Despite higher finance cost, the higher revenue generation by the company has made TIE ratio constant at 1.40 in FY09.
INVESTOR EXPECTATIONS
The earnings per share (EPS) of Fazal Textile had shown a volatile trend till FY08. But the positive upward trend in FY09 implies the resilience of the company and improved profitability. The EPS improved from minus Rs 3.31 per share in FY07 to Rs 1.62 per share in FY08. In FY09 the EPS stood at Rs 4.09 per share. The company recovered and the positive EPS sends out positive signals to investors amid uncertainty in the textile industry as a whole. The EPS has translated into a favorable market price trend for the stock till FY08. The stock has begun to show decline in FY09 as seen in the stock price chart. The market value fell to Rs 419 in FY09. Consequently the P/E ratio also registered a decline to 102 in FY09 from 480 in FY08. The increasing P/E ratio in FY08 indicating positive future expectations about the stock are reversed with the low market values of the stock in FY09.
FUTURE OUTLOOK
Should the world economy improve, Pakistan's textile industry is well positioned to reap some benefits. The cotton crop of the coming season was estimated to be around 13.2 million bales, has been revised at 12 million bales. Given the short supply against the demand, the spinners will not have easy time finding lint at a reasonable price without compromising quality. Moreover, the export of yarn has been placed under a quota of 35,000 tons per month, as compared to 50,000 tons per month previously. The energy crisis, inflation, erosion of Pak rupee etc could affect the probability of coming periods.
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FAZAL TEXTILE MILLS LTD - FINANCIALS
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BALANCE SHEET FY'05 FY'06 FY'07 FY'08 FY'09
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Property, plant and equipment 666,272 652,327 741,516 719,115 679,842
Operating fixed assets 3,670 0 250 914782 1,325,830
Capital work in progress 669,942 652,327 741,766 1,633,897 2,005,672
Long term loans 4,121 2,729 15,695 13,929 9,213
Long term deposit 532 532 532 532 532
NON-CURRENT ASSETS 1,344,537 1,307,915 1,499,759 3,282,255 2,015,417
Stock in trade 687,619 484,255 329,953 601,284 501,080
Trade debts 235,954 649,618 646,461 841,740 204,001
Loans and advances 15,423 27,643 42,277 168,523 108,622
Trade deposits & short
term prepayments 9,640 10,513 5,501 15,901 8,050
Cash and bank balances 3,498 2,007 1,514 14,552 3,610
CURRENT ASSETS 1,024,765 1,213,208 1,066,294 1,680,373 869,265
TOTAL ASSETS 1,699,360 1,868,796 1,824,287 3,328,731 2,884,682
Total Equity 712,688 745,838 709,908 719,948 735,960
Long term finance 0 0 0 1000000 1,000,000
Deferred gratuity 13,458 25,095 28,338 29,032 38,796
Deferred taxation 77,075 61,506 54,110 50,445 44,032
NON CURRENT LIABILITIES 90,533 86,601 82,448 79,477 1,082,828
Trade and other payables 112,071 102,738 267,442 156,057 666,707
Accured markup 9,693 15,338 17,196 48,936 42,434
Short term borrowings 774,375 918,079 747,293 1,324,313 356,753
CURRENT LIABILITIES 896,139 1,036,357 1,031,931 1,529,306 1,065,894
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INCOME STATEMENT FY'05 FY'06 FY'07 FY'08 FY'09
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Sales 1,642,382 2,027,303 2,263,195 2,444,146 2,819,019
Cost of Sales 1,480,091 1,851,733 2,142,018 2,304,242 2,598,668
Gross Profit 162,291 175,570 121,177 139,904 220,351
General & administrative expenses 29,059 38,060 35,630 31,903 35,613
Selling & distribution expenses 10,627 12,894 14,552 13,384 17,353
Other operating income -2,019 -3,622 -6,466 -3,826 -4,191
Other operating charges 5,050 2,708 66 2,028 2,538
Operating profit 119,574 125,530 77,395 96,415 169,038
Financial cost 41,407 74,071 76,159 69,054 120,819
Profit before taxation 78,167 51,459 1,236 27,361 48,219
Tax 37,285 2,840 21,697 17,321 23,093
Profit/(Loss) after Taxation 40,882 48,619 -20,461 10,040 25,126
EPS-basic and diluted (Rupees) 6.61 7.86 -3.31 1.62 4.09
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RATIO ANALYSIS
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PROFITABILITY FY'05 FY'06 FY'07 FY'08 FY'09
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Gross Profit Margin 0.10 0.09 0.05 0.06 0.08
Profit Margin 0.02 0.02 -0.01 0.00 0.01
ROA (RHS) 0.02 0.03 -0.01 0.00 0.01
ROE (RHS) 0.06 0.07 -0.03 0.01 0.03
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LIQUIDITY FY'05 FY'06 FY'07 FY'08 FY'09
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Current Ratio 1.14 1.17 1.03 1.10 0.82
Quick Ratio 0.33 0.67 0.68 0.68 0.31
Cash Ratio (RHS) 0.00 0.00 0.00 0.01 0.00
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ASSET MANAGEMENT FY'05 FY'06 FY'07 FY'08 FY'09
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DSO 52 117 104 126 26
ITO 170 95 56 95 70
Operating Cycle 222 212 160 221 97
Total assets turnover (RHS) 0.02 0.03 -0.01 0.00 0.01
Sales/ Equity 2.30 2.72 3.19 3.39 3.83
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DEBT MANAGEMENT FY'05 FY'06 FY'07 FY'08 FY'09
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Debt To Equity 1.38 1.51 1.57 2.23 1.56
Debt to Asset 0.58 0.60 0.61 0.48 0.40
Long term debt to equity 0.13 0.12 0.12 0.11 1.47
TIE (RHS) 2.89 1.69 1.02 1.40 1.40
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INVESTOR EXPECTATIONS FY'05 FY'06 FY'07 FY'08 FY'09
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Market Value (RHS) 79 150 278.5 778.14 419.83
EPS 6.61 7.86 -3.31 1.62 4.09
P/E (RHS) 11.95 19.08 -84.14 480.33 102.65
Book Value 0.12 0.12 0.11 0.12 0.12
Weighted avg. no of shares 6,187,503 6,187,503 6,187,503 6,187,503 6,187,503
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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