Nakshbandi Industries was incorporated in Pakistan as a public limited company. Its shares 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 competitors 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 specialises 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 started its production in 1997/98, consists of a sizeable plant for weaving and finishing with a capacity of 50,000mtr/day production of apparel fabrics. The plant is fully equipped with state-of-the-art machines with a complete range of laboratory equipment to fulfil all the tests required in accordance with international standards.
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RECENT OPERATING PERFORMANCE
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(In Rupees) H109 H108 %?
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CONTINUING OPERATIONS
Sales 1,042,546,956 554,825,454 88%
Cost of Sales (811,881,155) (506,532,430) 60%
Gross Profit 230,665,801 48,293,024 378%
OPERATING EXPENSES
Administrative expenses (35,377,485) (23,986,372) 47%
Distribution Cost (72,533,811) (37,843,069) 92%
(107,911,296) (61,829,441) 75%
Operating profit/ loss 122,754,505 (13,536,417) -1007%
Other income 3,066,679 (905,827) -439%
Finance Cost (35,305,336) (52,534,656) -33%
Workers Profit participation fund (4,525,792) - -
(36,764,449) (53,440,483) -31%
Profit/ loss before taxation 85,990,056 (66,976,900) -228%
Profit/ loss after taxation 75,490,056 (72,576,900) -204%
DISCONTINUED OPERATIONS
Net loss from Discontinued Operations (748,055) (13,796,253) -95%
Profit/ loss after taxation 74,742,001 (86,373,153) -187%
Profit/ loss per share basic
and diluted from continuing operation 1.02 (2.35)
from discontinued operation (0.01) (0.02)
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The operating performance of Nakshbandi Industries has improved in H1'09 compared to the first half of last fiscal year FY08. The sales have increased from Rs 555 million in H1'08 to Rs 1.042 billion in H1'09. This represents an increase of 88%. The cost of sales has also increased by 60% (507 million in H1'08, 812 million in H1'09). This has simultaneously led to a huge increase in gross profit from Rs 48 million in H1'08 to Rs 231 million in H1'09.
The operating expenses have recorded a cumulative increase of 75% with an increase in administrative expenses being 47% and that in distribution cost being 92%. This consequently led to an operating profit of Rs 123 million in H1'09 as against operating loss of Rs 14 million in H1'08. This represents an increase of 1007%. Other income increased by 439% in H1'09. In H1'08, there was a loss in this category. Also in H1'09, worker participation fund charges were incurred but not in H1'08.
Even after these charges and tax, there was a profit after tax from continued operations amounting to Rs 75 million in H1'09 as against a loss of Rs 73 million in H1'08. This represents an increase of 204% in profit after tax from continued operations. The loss from discontinued operations in H1'09 was lower than the loss incurred in H1'08. There was a 95% change. Consequently the firm reported a profit after taxation both from continuing and discontinued operations. This represents a 187% increase. The profit per share in H1'09 was Rs 1.02/share while in H1'09 it was minus Rs 2.35/share.
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(In Rupees) Q209 Q109 ?
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CONTINUING OPERATIONS
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Sales 600,303,851 442,243,115 36%
Cost of Sales (442,105,327 (369,775,840) 20%
Gross Profit 158,198,524 72,467,275 118%
OPERATING EXPENSES
Administrative expenses (20,742,058) (14,635,426) 42%
Distribution Cost (47,316,169) (25,217,642) 88%
(68,058,227) (39,853,068) 71%
Operating profit/ loss 90,140,297 32,614,207 176%
Other income 3,163,401 (96,721) -3371%
Finance Cost (18,001,479) (17,303,857) 4%
Workers Profit participation fund (3,765,111) (760,682) 395%
(18,603,189) (18,161,260) 2%
Profit/ loss before taxation 71,537,108 14,452,947 395%
Profit/ loss after taxation 65,437,108 10,052,947 551%
DISCONTINUED OPERATIONS
Net loss from Discontinued Operations (719,460) (28,595) 2416%
Profit/ loss after taxation 64,717,648 10,024,352 546%
Profit/ loss per share basic
and diluted from continuing operation 0.89 0.13
from discontinued operation (0.01) -
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The table represents a quarter on quarter analysis of the half-yearly performance in FY09. The sales registered a 36% increase in Q2'09 from Q1'09. The sales of Q2'09 stood at Rs 600 million as against Rs 442 million in Q1'09. The cost of sales increased by 20% on a Q-o-Q basis. The gross profit increased by 118%. It was Rs 158 million in Q2'09. The operating expenses increased by 71% with an increase in administrative expenses by 42% and that in distribution cost by 88%.
The operating profit increased by 176% to Rs 90 million in Q2'09 from Rs 33 million in Q1'09. There was other income of Rs 3 million in Q2'09 as compared to a loss of Rs 96 thousand in Q1'09. The finance cost rose by 4% while the contribution in worker participation fund rose by 395%. There was a profit after tax from continuing operations of Rs 65 million in Q2'09 as against Rs 10 million in Q1'09.
This represents a 551% increase in profit after taxation. There was not a significant loss from operations in both quarters. Hence the final profit after tax remained the same in both quarters. The EPS in Q1'09 was Rs 0.13/share, which improved to Rs 0.89/share. This shows a progressive improvement in operating performance on a Y-o-Y basis as well as Q-o-Q basis.
PROFITABILITY
The sales break-up reveals that the major chunk of sales revenue is obtained through export (91% in FY07) and export rebate at 1% also adds to the revenue. The local sales make a very small proportion of the sales revenue (8% in FY07). Hence the firm's revenues will be sensitive to the international demand. The net sales of the company have shown a progressive decline over the years. Compared to FY07 the net sales have shown a decline of 21.05% in FY08.
However, for the period from FY03 to FY08, the sales have peaked by 11.31%. The cost of goods sold has declined by 35.99% on a Y-o-Y basis while for the period (FY03 to FY08) the decline in cost of goods sold is 33.44%. The final loss to the company in FY08 was Rs 119.08 million against Rs 497.82 million in FY07. In FY07, the decline was due to an underutilization of capacity. The company still made an operating loss of Rs 36.25 million in FY08 as against Rs 372.57 million in FY07.
A large customer base withdrew its orders as per their strategic policy. The company also had to sell its finished goods inventory at lower prices to earn revenue sufficient to keep the firm afloat. Moreover, increase in cost of production had also attributed to losses and poor performance in FY07. During FY08, the company has witnessed a huge increase in the prices of raw material, dyes, chemicals, fuel power and freight.
However, compared to FY07, the company has successfully managed to increase the volume of sales orders which resulted increase in production by 1,110 tons (increased by 30.37% over the previous year) including commercial production and hence managed to absorb substantial portion of fixed overhead. In addition to above, devaluation of Pak rupee further supported the company's operation and company made a gross profit of Rs 112.51 million in FY08 as compared to gross loss of Rs 117.97 million in FY07.
Overall loss for the year has been reduced considerably due to complete shutdown of the fabric processing unit. The administrative expenses have reduced from Rs 60.37 million in FY07 to Rs 54.67 million in FY08. However the selling and distribution expenses have increased from Rs 48.56 million in FY07 to Rs 94.09 million in FY08. The trend shows that FY07 has been the worst-performing year for the company, as all performance ratios in terms of profitability show a downward trend.
The reasons have been accounted for in the preceding section. In FY08, the ratios have improved and this is a positive signal after a major setback in FY07. The profit margin though negative has increased from -30.78% to -9.33%. The gross profit margin has increased from -7.29% in FY07 to 8.81% in FY08. The ROA has increased from -26.90% in FY07 to -6.44% in FY08. The ROE has increased from -2646.57% in FY07 to 118.76% in FY08.
In FY07 the equity had substantially reduced from Rs 516.63 million in FY07 to Rs 18.81 million in FY08. The loss was also huge so this plunged the ROE ratio to -2646.57%. In FY08 the equity has turned negative (-Rs 100.27 million). The smaller loss and negative equity are responsible for an ROE of 118.76%. This indicates that the company still needs to recoup its losses and increase its equity for sustainability in the future.
LIQUIDITY
The liquidity ratios show that liquidity improved from FY03 to FY04 then declined from FY04 to FY07 and has again improved in FY08. The current assets and current liabilities have declined over the time. The current assets have declined from Rs 1091.53 million in FY03 to Rs 679.55 million in FY08. The quick assets do not show a substantial change as these changed from Rs 504.5 million in FY03 to Rs 396.26 million in FY08.
The current liabilities have declined from Rs 1205.18 million to Rs 683.5 million in FY08. Hence the ratios are misleading as the change in ratios is due to a proportional change in current assets and current liabilities and there has been no improvement in current assets.
In FY08 current ratio has increased from 52.3% in FY07 to 99.42% in FY08 while quick ratio has increased from 27.01% in FY07 to 57.98% in FY08. This is because the current assets and quick assets have increased at 26.81% and 43.20% respectively while current liabilities have reduced by 33.29%. The company underwent debt restructuring with banks and does not have any overdue installments to make.
ASSET MANAGEMENT
The operating cycle of the company has reduced from a high of 241 days in FY04 to a low of 70 days in FY07. The operating cycle has increased in FY08 to 103 days with 89 days to sell inventory and 14 days to collect receivables. The volume of sales for the company has declined which has affected business. Hence the improvement in operating cycle cannot be attributed to prudent inventory or asset management.
The total asset turnover has declined from 87.38% in FY07 to 69.01% in FY08. The sales to equity ratio plunged on a y-o-y basis. The increase in the ratio was attributable mainly due to a drastic decline in equity, which left equity at Rs 18.81 million. As the equity in FY08 turned negative Rs 100.27 million the S/E ratio remained negative despite improvement in sales.
DEBT MANAGEMENT RATIOS
The debt of the company has increased with respect to both assets and equity. The debt to asset ratio has increased from 98.98% in FY07 to 105.42% in FY08. The debt to equity ratio has changed from 9739.82% in FY07 to -1945.19% in FY08. This is largely due to imbalances in equity. The firm has attained long term finance amounting to Rs 61.94 million from independent sponsors at zero interest rate. This long-term finance can be converted to equity after completion of formalities.
There is also an unsecured long-term finance facility by Naz Textile Pvt Ltd. There is no finance cost attached in the first year but will start from next year. Even this facility has an option to be converted into loan. These two developments may help company improve its equity in the future.
The TIE ratio has severely plunged from 1.52 in FY04 to -0.62 in FY08. Yet there is an improvement from FY07 when TIE ratio stood at -1.57. The finance charges have reduced from Rs 144.98 million in FY07 to Rs 58.14 million in FY09 - a decline of 59.90% which is also why the TIE ratio has improved.
MARKET VALUE RATIOS
The market value of the share has seen a progressive decline from Rs 17.5 in FY05 to Rs 8.64 in FY08. The number of shares issued has declined from 181.55 million in FY03 to 33.89 million in FY08. The book value per share has declined from Rs 20.79 in FY03 to negative Rs 2.96 in FY08. The company paid out dividend per share of Rs 0.5 for three consecutive years (FY03-FY05) but since then the company has not paid any dividend due to losses.
The EPS has remained negative for the entire period under consideration (FY03-FY08). In FY08, the EPS was -3.52 while in FY07 it was -14.69. The price to earnings ratio has shown a decline from a high of 34.09 in FY04 to -2.45 in FY08. This can be attributed to negative EPS and low market price.
FUTURE OUTLOOK
The firm undertook the following milestone achievements during the year:
- Strategic marketing alliance for USA market with 1888 mills LLC
- Issuance of right shares
- Restructuring of bank loans
- Sale of assets of discontinued operation
These changes will bring the company new capital and improvement in its operations. The firm has also taken steps to increase its laboratory facilities that will enable to better customize products according to customers. Considering the global scenario, the post quota MFA regime has increased international competition in textile trade. Now countries with low costs of production in term of raw materials, labour, energy and exchange rate are doing well.
Also efficiency in operations and high value addition is also important. The international financial crunch has significantly depressed the demand of textile products in foreign markets especially the US and the UK. The company must look for well-diversified foreign destinations for its exports. Moreover, the local economic outlook is not well either. The tightening of monetary policy has increased the financial charges and made new loan prospects difficult to consider.
The energy shortages and input costs as well quality of raw material (cotton) are big issues in the textile market in Pakistan. Moreover the incentives given to the industry are not rationalized and have not yielded any return. The 6% R&D subsidy is unaccounted for and the tax refunds and rebates do not produce encouraging results in terms of increase in sales or greater investment in R&D to produce better quality products. The overall situation of textile sector is deteriorating day-by-day and the mills are on the verge of closure while smaller mills have already closed. The need of the hour is to do away with management problems in the textile sector.
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NAQSHBANDI INDUSTRIES
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FY'03 - FY '08
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INCOME STATEMENT FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Rs In millions
Turnover (Net) 1147.1 1991.87 1335.14 1938.45 1617.29 1276.85
Cost of goods sold -1749.35 -1001.23 -1161 -1722.62 -1819.11 -1164.34
Gross Profit/Loss 145.87 242.51 176.28 215.83 -117.965 112.51
Operating (Loss)/ Profit 40.68 79.21 65.24 70.13 -226.896 -36.25
(Loss)/ Profit Before Taxation -49.77 26.22 0.12 -74.98 -372.567 -92.93
(Loss)/Profit After Taxation
(Loss)/ Profit Before Taxation -51.67 10.69 -11.33 -95.98 -384.067 -105.68
& before discontinued
operations Dividend 0.25 0.25 0.25 0 0 0
Transfer to reserves -51 10 -11 0 0 0
(Loss)/ Profit after taxation -51.67 10.69 -11.33 -95.98 -497.82 -119.08
& discontinued operation
Financial Charges 90.46 52.03 65.1 144.31 144.98 58.14
Loss per share - Basic &
Diluted from continued operations -2.85 0.44 -0.47 -2.83 -14.69 -3.12
from discontinued operations - - - - -3.36 -0.04
EPS -2.85 0.44 -0.47 -2.83 -14.69 -3.52
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BALANCE SHEET FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Total production (in tons) 2894.00 4979.00 3664.00 4666.00 3275.00 3910.00
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ASSETS EMPLOYED
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Fixed Assets 1037.16 1091.77 1349.56 1680.23 1648.51 1365.22
Investments Long term, 0.45 0.38 1.76 3.70 4.92 3.03
Advances and Deposits
Current Assets 1091.53 1287.79 1066.57 1082.71 535.88 679.55
Stock in trade 587.03 508.85 560.26 694.99 259.16 283.29
Quick assets 504.50 778.94 506.31 387.72 276.72 396.26
Trade debts 94.75 304.79 126.78 80.20 81.09 50.10
Total assets employed 2129.14 2379.94 2417.89 2428.19 1850.87 1850.17
FINANCED BY
Shareholder's equity 377.49 478.70 467.10 516.63 18.81 -100.27
Total Liabilities 1751.65 1901.24 1950.79 1911.56 1832.06 1950.44
Long term liabilities 500.50 580.01 518.85 328.95 784.78 790.76
Obligation under Finance Lease 13.09 2.52 1.64 19.50 10.81 0.00
Deferred Liabilities 32.88 33.11 17.31 21.29 11.83 0.00
Current Liabilities 1205.18 1285.60 1412.99 1541.83 1024.63 683.50
Liabilities classified
as held for - - - - - 134.30
Total Funds invested 2129.14 2379.94 2417.89 2428.19 1850.87 1850.17
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PROFITABILITY RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Profit Margin -4.50% 0.54% -0.85% -4.95% -30.78% -9.33%
Gross profit margin 12.72% 12.17% 13.20% 11.13% -7.29% 8.81%
Return on Assets -2.43% 0.45% -0.47% -3.95% -26.90% -6.44%
Return on Equity -13.69% 2.23% -2.43% -18.58% -2646.57% 118.76%
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LIQUIDITY RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Quick Ratio 41.86% 60.59% 35.83% 25.15% 27.01% 57.98%
Current Ratio 90.57% 100.17% 75.48% 70.22% 52.30% 99.42%
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ASSET MANAGEMENT RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Inventory Turnover(Days) 122 186 176 147 52 89
Day Sales Outstanding (Days) 30 56 35 15 18 14
Operating cycle (Days) 153 241 211 162 70 103
Total Asset Turnover 53.88% 83.69% 55.22% 79.83% 87.38% 69.01%
Sales/Equity 303.88% 416.10% 285.84% 375.21% 8598.03% -1273.41%
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DEBT MANAGEMENT RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Debt to Asset 82.27% 79.89% 80.68% 78.72% 98.98% 105.42%
Debt to Equity Ratio 464.03% 397.17% 417.64% 370.01% 9739.82% -1945.19%
Long Term Debt to Equity (%) 132.59% 121.16% 111.08% 63.67% 4172.14% -788.63%
Times Interest Earned 0.45 1.52 1.00 0.49 -1.57 -0.62
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MARKET RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08
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Earnings per share -2.85 0.44 -0.47 -2.83 -14.69 -3.52
Price/Earnings Ratio 0 34.09 -37.23 -4.24 -0.58 -2.45
Dividend per share 0.5 0.5 0.5 0 0 0
Book value per share 20.79 19.79 19.3 15.24 0.56 -2.96
No. of Shares
issued (in millions) 181.55 24.21 24.21 33.89 33.89 33.89
Market Value per share 0 15 17.5 12 8.5 8.64
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