Nakshbandi Industries is principally engaged in production and export of towels. The towel division is one of the country's most technically advanced setup. Using only the 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 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.
MARKET OVERVIEW
The entire textile sector has gone through and still having the aftershocks of the world economic crisis. Since Pakistan's textile industry is a major contributor to the national economy in terms of exports and employment, a setback for the industry translates into a sizeable adverse impact on the economic indicators of the country. During FY09, textile industry, particularly the spinning industry, suffered a loss - exports dropped from $12 billion in FY08 to $9 billion in FY09. One of the major reasons for this loss was the unstable law and order condition of the country during the year. This was further aggravated by the continued higher inflationary pressure, heavy bank interest rates, unprecedented increase in the cost of utilities and withdrawal of research and development support by the government.
PROFITABILITY
The sales breakup reveals that the major chunk of sales revenue is obtained through export, 87% and 86% in FY08 and FY09, respectively. Export rebate at 1% also adds to the revenue. Local sales, in contrast, make a small proportion of the sales revenue - 12% and 13% in FY08 and FYO9, respectively. Hence, the firm's revenues are quite sensitive to international demand.
The operational results showed an improvement of about 27% and the company was able to produce 6.063 million during the year as compared to 4.765 million as compared to the last year. This was achieved through marketing efforts and about 2.5% increase in the production capacity. Sales volume and gross profit rate has gone up by 37% and 5% respectively and the company earned a net profit before tax of Rs 10.63 million as compared to net loss of Rs 92.93 million incurred last year. However, due to minimum tax incidence, Nakshbandi incurred a loss after tax and discontinued operations of Rs 5.39 million as compared to loss of Rs 119.08 million suffered during the last year.
The loss per share during the year under report is Rs 0.09 as compared to Rs 3.42 during the preceding year. The financial results of the Company would have been much better but the world economic crisis forced customers to curtail orders, look for reduced prices and to maintain low level of inventories.
The profitability trend shows that FY07 has been the worst performing year for NAKI, as all performance ratios in terms of profitability show a downward trend, mainly due to under-utilization of capacity and increase in cost of production during the year. However, the profitability ratios have substantially improved in FY08 and FY09. In particular, the profit margin of the Company improved by 96.7% over last year and the return on assets improved by 95.98%, mainly due the increase in sales and retirement of debt obligations by the company. In contrast, NAKI's Return on Equity reduced by 101.49% over the last year. This is due the fact that the 95.47% improvement in the losses of the company was more than offset by a 403.59% increase in shareholder's equity during FY09.
LIQUIDITY
The liquidity position of NAKI has improved from FY07 onwards. In FY09, the company's current assets increased by 16.23% and the quick assets increased by 30.99%, whereas the current liabilities of the company actually reduced by 4.34%. This, consequently, led to a 36.94% increase in quick ratio and a 21.51% increase in the current ratio of the Company. This shows the short-term solvency of NAKI has greatly improved.
ASSET-MANAGEMENT RATIOS
Nakshbandi's asset management ratios in FY09 depict a mixed trend. The inventory turnover of the Company has reduced by 27.68%, from 89 to 64 days. Similarly, there is an increase in NAKI's days sales outstanding from 14 to 57 days.
On the other hand, in FY09 the total asset turnover and sales/equity ratios of the company have increased by 21.75% and 145.10%, respectively. The increase in sales/equity ratio is commended as it was despite a rise in equity of the company due to issuance of right shares. The rise in total assets turnover ratio is due a 36.92% growth in sales volume of the business in FY09.
DEBT MANAGEMENT RATIOS
The Debt Management ratios of NAKI have improved from FY08. NAKI continues to meet its financial commitments and debt obligations on time. During the year, the board of directors approved a right issue of 57%, a substantial portion of which was received as advance before June 30, 2009. The Company utilized the proceeds to repay its short and long term financial obligations. Once, the remainder of the proceeds from the right issue are received, this would result in a reduction in financial cost and would further improve the profitability of the company.
During FY09, the company's current liabilities decreased by 4.34% and its long-term liabilities reduced by 38.54%, which led to an overall reduction of 5.77% in total liabilities. However, the debt to equity ratio of the company seems to have risen. This does not suggest a deterioration of NAKI's debt management, rather than the debt to equity, debt to asset and long-term debt to equity ratios of the Company were so low in FY08 because of negative value of equity in that year due to accumulated losses of the company from prior years. Therefore, an increase in the values of these ratios in FY09 is merely due to equity taking on a positive value in the year, primarily through conversion of loans into equity. This shows that in absolute terms the overall debt position of the Company has vastly improved. This conclusion is further supported by the fact the NAKI's times interest earned ratio has increased by 306.81% in FY09, which indicates that NAKI is covering its interest charges with a higher margin of safety than before. Moreover, Nakshbandi's debt-to-asset ratio has reduced by 16.21% during the year, as all the leases have matured and all the assets have been transferred to the company name. Hence, NAKI's financial leverage position appears favourable in FY09.
MARKET VALUE RATIOS
Nakshbandi's market value ratios show an overall improvement in FY09. Due to losses during the last 4 years, the company has passed over the dividends in the period from FY06 to FY09; hence, the dividend per share ratio remains stagnant in the current year. Despite that, the company's earnings per share ratio has improved by 97.37% over the last year. The book value per share of NAKI has also increased by 237.3% and the market/book ratio has increased by 191.88% as compared to FY08. This improvement in market ratios of the company can be attributed to an improvement in NAKI's return on assets during FY09. The Price/Earnings ratio of the Company has also improved; its negative direction is basically due to earnings per share still taking on a negative value, despite having improved 97% over last year. Hence, we can conclude that NAKI's investors are optimistic about the Company's growth prospects and are willing to pay 191.88% more for its book value - a fact supported by a 26.16% increase in the market value per share of the company during FY09.
FUTURE OUTLOOK
The management of the company is optimistic about the future on account of factors like government's commitment to provide an effective support to the textile sector by announcing a Textile Policy, continued drive by the management to eliminate inefficiencies, reduce cost and improve operational achievements and the persistent support of their major customers. The GoP has withdrawn customs duty on import of plant and machinery by the manufacturing industries and is working hard to get duty free market access for Pakistan's textile products for EU and US markets. The new five-year textile policy's (2009-14) focus is to promote value-added sector in textiles and revive the industry. The textile policy allows the industry to have a prioritized gas and electricity supply; and it enables an amount of 42 billion rupees in subsidies and incentives during the fiscal year 2009-10. Further, the textile policy has allocated Rs 5 billion as a relief on the existing long-term loans of the textile industry and has proposed a technology upgradation fund for the industry.
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RATIOS
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PROFITABILITY RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Profit Margin -4.50% 0.54% -0.85% -4.95% -42.54% -9.32% -0.31%
Gross profit margin 12.72% 12.17% 13.20% 11.13% -10.08% 8.86% 14.22%
Return on Assets -2.43% 0.45% -0.47% -3.47% -22.74% -5.44% -0.22%
Return on Equity -13.69% 2.23% -2.43% -18.58% -2646.57% 118.76% -1.77%
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LIQUIDITY RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Quick Ratio 41.86% 60.59% 35.83% 25.15% 27.01% 64.70% 88.60%
Current Ratio 90.57% 100.17% 75.48% 70.22% 52.30% 106.15% 128.98%
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ASSET MANAGEMENT RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Inventory Turnover (Days) 122 186 176 147 52 89 64
Day Sales Outstanding (Days) 30 56 35 15 25 14 57
Operating cycle (Days) 153 241 211 162 77 103 121
Total Asset Turnover 53.88% 83.69% 55.22% 70.07% 53.45% 58.37% 71.06%
Sales/Equity 303.88% 416.10% 285.84% 375.21% 6220.73% -1273.98% 574.58%
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DEBT MANAGEMENT RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Debt to Asset 82.27% 79.89% 80.68% 81.33% 99.14% 104.58% 87.63%
Debt to Equity Ratio 464.03% 397.17% 417.64% 435.52% 11539.07% -2282.71% 708.55%
Long Term Debt to Equity (%) 132.59% 121.16% 111.08% 63.67% 4172.14% -788.63% 159.66%
Times Interest Earned 0.45 1.52 1.00 0.49 -1.57 -0.61 1.25
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MARKET RATIOS FY'03 FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Earning per share -2.85 0.44 -0.47 -2.83 -14.69 -3.42 -0.09
Price/Earnings Ratio 0 34.09 -37.23 -4.24 -0.58 -2.53 -121.11
Dividend per share 0.50 0.50 0.50 0.00 0.00 0.00 0.00
Book value per share 20.79 19.79 19.3 15.24 0.56 -2.96 4.06
Market Value per share 0.00 15.00 17.50 12.00 8.50 8.64 10.90
Market/Book Ratio 0.00 0.76 0.91 0.79 15.18 -2.92 2.68
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