FAZAL TEXTILE MILLS LIMITED - Analysis of Financial Statements Financial Year 2005 - September 2009
OVERVIEW (December 05 2009): Fazal Textiles Mills (FZTM) is one of the oldest mills of the country. It is located in Karachi and was taken over by Yunus Brothers Group in March 1987. Yunus Brothers took over the mill when it had closed down since 1984 due to heavy losses.
The new management of FZTM took prompt and comprehensive actions to revitalize the unit by discarding the old machinery and installed the imported and latest machinery within a year's time. Presently, FZTM is producing yarn, knitted fabrics, bed sets and fitted sheets. Its exports are mainly to Far Eastern, European, US, South American, North African and the Middle East markets.
NAME OF COMPANY FAZAL TEXTILE MILLS LTD
Nature of Business Textile
Sales FY '07 PKR.2,263,195,000
Sales FY '08 PKR.2,444,146,000
Share price (avg) PKR.355
Market Capitalization 2,196,563,565
RECENT PERFORMANCE SEPTEMBER 2009
Sales increased by Rs 110 million to Rs 900 million in 1Q10. The increase in sales was the virtue of rupee devaluation and a growth in exports, especially the knitted garments. The local sales failed to keep the last year's performance and remained laggard, while the exports showed an upward trend. The gross profit was recorded at Rs 96 million, which is Rs 23.3 million higher than the last year. GPM was higher at 10.74% as compared to 9.28% in 1Q09. PAT of Rs 60 million was recorded in 1Q09 as against PAT of Rs 18 million.
Financial charges declined drastically by 72%, due to discounting of foreign bills and lower rates on the (EFS) Export Re-finance Scheme. The future expectation is that FZTM would do well, as the price of the yarn is rising in the international market, which would help it improve its GM. However, the cost element needs to be managed wisely by taking cautious positions in cotton trade.
In 2007, the economy took a downward plunge due to political crisis in the country affecting the inflation rate and fiscal deficit, and the global recession. The most affected sector was textiles. All the companies, major players or small ones received a blow in that year. Many companies were affected severely, while some slightly. Fazal Textiles also took a blow as its financial values were seriously affected. But the company showed remarkable progress in 2008, as in 3 quarters, its financial statements are quite positive.
Nowadays Pakistan's entire textile sector is in a bad shape. Many mills have been forced to shut down due to the constantly increasing problem of high production costs, which makes them uncompetitive in the global markets and locally as well, as today our local markets are also flooded with foreign products. The government policies are also not of much help. In view of all these issues we see that Fazal Textiles is going through a hard time to avoid difficult situations.
The gross sales of the company stood at Rs 2.58 billion in FY08 (FY07: 2.38 billion). Exports contributed Rs 1.91 billion and local sales Rs 672 million (FY07: exports Rs 1.81 billion, local sales Rs 575 million). Exports and local sales exhibited 6% and 17% growth respectively. The net sales in FY08 stood at Rs 2.4 billion (FY07: Rs 2.26 billion) an increase of 8%. The cost of goods sold also increased by 8%. The sales are growing at a declining rate as the increase in sales was by 23% in FY06, 12% in FY07 and 8% in FY08. The cost of goods sold followed a similar trend and hence the gross profit has remained in the band of Rs 120 million to Rs 180 million over the period studied. In FY08 the gross profit has shown improvement by 15% and stands at Rs 140 million (FY07: Rs 121 million). This is mainly due to decline in cost of goods sold from 16% in FY07 to 8% in FY08.
The staff benefits worth Rs 9.782 million (FY07: Rs 9.64 million) were given while the company earned an R&D subsidy worth Rs 2.326 million (FY07: Rs 1.549 million). The main cost drivers were salaries, power and other operating expenses while the R&D subsidy neutralized the impact. Net income of Fazal Textiles increased in FY06, but incurred 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 graph also shows that the proportion of after tax income has declined considerably relative to the gross profits.
This is due to combination rising cost of production due to the inflated costs of raw materials, increase in interest rates and the operating expenses for the company. In FY08, the expenses and the finance cost have declined by 1% and 9% respectively which have significantly improved the bottom-line of the company. The PAT registers a 149% increase. The profitability of the company has improved from FY07 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 FY08. 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 liquidity of Fazal Textiles is commendable, as the ratios have remained high. The main reason for the strong liquidity of the company is that its current assets have always been on the rise, with only the exception of 2007, where it fell by 12%. The main driver was cash and bank balances and it showed an increase of 861% in FY08. The cash ratio proves that, as it has increased from 0.001 in FY07 to 0.01 in FY08. This component showed a declining trend in the past years, but in FY08 it has shown a steep rise. The current liabilities have increased by 48% in FY08 with the driver being accrued markup as it has shown increase of 185%.
In FY08 the current ratio increased to 1.10 (FY07: 1.03). 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. The quick ratio has remained constant at 0.68. This is due to the offsetting impact between quick assets and current liabilities. The increase in quick assets (current assets minus inventory) and current liabilities was 0% in FY07 and 48% and 49% respectively in FY08.
Hence the ratio remained constant despite huge increase in stock in trade of 82% in FY08. The company has shown improved liquidity on the back of trade debts in the past few years. Maintaining a high level of trade debts is not compatible with good asset management and indicates that the cash is tied up. In FY08, improvement in current ratio is driven by cash. However, keeping surplus cash is also not in the interest of the company as it has an opportunity cost attached. The company must find a balance between these contradictory objectives. It must determine the optimum level of current assets keeping the debt and asset management in view. After that the company must maintain that optimum level consistently. Otherwise it will face liquidity difficulties.
The Days Sales Outstanding (DSO) ratio has increased from 104 days in FY07 to 126 days in FY08. This is due to huge increase in trade debts by 30% in FY08 while net sales have increased by 8%. This shows that the company's credit policy needs improvement, as the customers are not paying on time. The inventory turnover (ITO) ratio has increased from 56 days in FY07 to 95 days in FY08. The stock in trade has increased by a humungous amount of 82% which shows that the company was not able to sell off a considerable proportion of goods it manufactured.
The company produced more than the last year level but was not able to sell-off proportionately which indicates erroneous sales forecast. The operating cycle has thus accumulated 60 additional days from FY07 and now stands at 221 days. The operating cycle analysis shows that the rosy picture created with high liquidity ratios does not hold up with the asset management analysis.
Total asset turnover (TATO) has increased from -0.011 in FY07 to 0.03 in FY08. This is due to the company making a profit this year as opposed to FY07 when it incurred net loss. The company has also increased total assets due to additions in fixed operating assets. This dampened the TATO, which would otherwise have been higher. TATO was high in the initial years on back of high net profit and low total assets. The sales to equity (S/E) has shown an inclining trend. S/E has increased from 3.19 in FY07 to 3.39 in FY08. This is due to 8% increase in net sales and 1% 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.
The debt to asset ratio has decreased from 0.61 in FY07 to 0.48 in FY08. This is due to 82% rise in total assets while total debt increased by 44%. The debt to equity has increased from 1.57 in FY07 to 2.23 in FY08. The equity increased by just 1%. The long-term debt to equity ratio shows a declining trend from 0.12 in FY07 to 0.11 in FY08 due to a decline in deferred taxation. Hence the debt management ratios are in contradiction with each other. 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.
The earnings per share (EPS) of Fazal Textile has shown a volatile trend. The EPS has improved from minus Rs 3.31 per share to Rs 1.62 per share. The company has recovered and the positive EPS sends out positive signals to investors amid uncertainty in the textile industry as a whole. Many textile companies have incurred losses over consecutive years. However, in the current analysis of FZTM, only FY07 was the unfortunate year when the company incurred loss. Also in FY08 the company is seen to be recovering quickly from the setbacks it had in FY07. 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 price has shown a huge increase from Rs 278.50 per share in FY07 to Rs 778.14 per share in FY08. Consequently the P/E ratio shows an increase from minus 84.14 in FY07 to 480.33 in FY08. This can also indicate that the stock is overvalued which shows the subsequent decline in market value of the stock. Hence the P/E ratio indicating positive future expectations about the stock are reversed with the low market values of the stock in FY09. Overall, Fazal Textiles has shown some good trends over the years and promise the shareholders good profits. The economic events of FY07 also hurt the company, but so far in FY08 it is seen to be recovering quickly.
It has shown good profitability, liquidity and debt management trends, but its fault lies in its large portions of cost of goods sold and asset management, which could hurt the net income of the company. Hence Fazal Textiles has to be careful in managing its costs in the future, to ensure that the shareholders get something back for keeping their confidence in the company shares. The company has given dividend of Rs 1.5 per share this year due to better profitability of the company vis-a-vis last year.
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. Fazal Textiles incurred increased loans over the years, especially in short term borrowing and trade payables. The policy of the company was to keep the long term loans as low as possible. Due to this we see a steady stream of short term borrowing over the years. 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. Also the net income has been decreasing over the years, resulting in decreased ratio of times interest earned. TIE ratio has increased from 1.02 in FY07 to 1.40 in FY08. This is due to the company making a higher operating profit, which increased 25% owing to increase in gross profit and lower operating expenses. The financial cost also showed a 9% decline in FY08. This contributes to improvement in the ratio. The company seems to be able to finance interest expenses through operating profit/EBIT.
FAZAL TEXTILE MILLS LTD - FINANCIALS
BALANCE SHEET FY'05 FY'06 FY'07 FY'08
Property, plant and equipment 666,272 652,327 741,516 719,115
Operating fixed assets 3,670 - 250 914,782
Capital work in progress 669,942 652,327 741,766 1,633,897
Long term loans 4,121 2,729 15,695 13,929
Long term deposit 532 532 532 532
NON-CURRENT ASSETS 1,344,537 1,307,915 1,499,759 3,282,255
Stock in trade 687,619 484,255 329,953 601,284
Trade debts 235,954 649,618 646,461 841,740
Loans and advances 15,423 27,643 42,277 168,523
Trade deposits &
short term prepayments 9,640 10,513 5,501 15,901
Cash and bank balances 3,498 2,007 1,514 14,552
CURRENT ASSETS 1,024,765 1,213,208 1,066,294 1,680,373
TOTAL ASSETS 1,699,360 1,868,796 1,824,287 3,328,731
Total Equity 712,688 745,838 709,908 719,948
Long term finance - - - 1,000,000
Deferred gratuity 13,458 25,095 28,338 29,032
Deferred taxation 77,075 61,506 54,110 50,445
NON CURRENT LIABILITIES 90,533 86,601 82,448 79,477
Trade and other payables 112,071 102,738 267,442 156,057
Accured markup 9,693 15,338 17,196 48,936
Short term borrowings 774,375 918,079 747,293 1,324,313
CURRENT LIABILITIES 896,139 1,036,357 1,031,931 1,529,306
INCOME STATEMENT FY'05 FY'06 FY'07 FY'08
ales 1,642,382 2,027,303 2,263,195 2,444,146
Cost of Sales 1,480,091 1,851,733 2,142,018 2,304,242
Gross Profit 162,291 175,570 121,177 139,904
General & administrative expenses 29,059 38,060 35,630 31,903
Selling & distribution expenses 10,627 12,894 14,552 13,384
Other operating income (2,019) (3,622) (6,466) (3,826)
Other operating charges 5,050 2,708 66 2,028
Operating profit 119,574 125,530 77,395 96,415
Financial cost 41,407 74,071 76,159 69,054
Profit before taxation 78,167 51,459 1,236 27,361
Tax 37,285 2,840 21,697 17,321
Profit/(Loss) after Taxation 40,882 48,619 (20,461) 10,040
EPS-basic and diluted (Rupees) 6.61 7.86 (3.31) 1.62
Profitability FY'05 FY'06 FY'07 FY'08
Gross Profit Margin 0.10 0.09 0.05 0.06
Profit Margin 0.02 0.02 -0.01 0.00
ROA (RHS) 0.02 0.03 -0.01 0.00
ROE (RHS) 0.06 0.07 -0.03 0.01
Liquidity FY'05 FY'06 FY'07 FY'08
Current Ratio 1.14 1.17 1.03 1.10
Quick Ratio 0.33 0.67 0.68 0.68
Cash Ratio (RHS) 0.00 0.00 0.00 0.01
Asset Management FY'05 FY'06 FY'07 FY'08
DSO 52 117 104 126
ITO 170 95 56 95
Operating Cycle 222 212 160 221
Total assets turnover (RHS) 0.02 0.03 -0.01 0.00
Sales/ Equity 2.30 2.72 3.19 3.39
Debt Management FY'05 FY'06 FY'07 FY'08
Debt To Equity 1.38 1.51 1.57 2.23
Debt to Asset 0.58 0.60 0.61 0.48
Long term debt to equity 0.13 0.12 0.12 0.11
TIE (RHS) 2.89 1.69 1.02 1.40
Investor Expectations FY'05 FY'06 FY'07 FY'08
Market Value (RHS) 79.00 150.00 278.50 778.14
EPS 6.61 7.86 -3.31 1.62
P/E (RHS) 11.95 19.08 -84.14 480.33
Book Value 0.12 0.12 0.11 0.12
Weighted avg no of shares 6,187,503 6,187,503 6,187,503 6,187,503
COURTESY: Economics and Finance Department, Institute of Business Administration