THE BUSINESS & FINANCIAL PERFORMANCE over A PERIOD OF THREE YEARS
INTRODUCTION
This report presents the business and financial performance of Nishat Chunian Ltd. (NCL), one of Pakistan's leading Textile Company over a period of three years.
NCL is the fifth largest textile listed company of Pakistan with a turnover of over USD 140 million. It is a vertically integrated unit comprising of spinning, weaving, dyeing and stitching units and employs more than 6,000 people.
The following section will discuss the reasons of selection of this company as well as the project objectives, the research questions along with the approach used to make this report.
REASONS FOR SELECTION
The following aspects were considered while selecting the topic and the company for this project,
I want to become a financial analyst after my ACCA studies.
The topic was straight forward in nature with little ambiguity and a clear direction
Financial analysis looks into the affairs of a company, which is quite interesting and is full of learning.
The topic provided with an opportunity of exploring Pakistan's leading industry sector, namely textiles. Textiles contribute significantly to the country's GDP and exports and is a major employer of the country's work force.
The topic provided hands on practical experience that can be applied in both academic as well as professional life. The analytical tools used were part of the ACCA studies included in paper F7 (Financial Reporting) and P3 (Business Analysis).
NCL being a public limited company enabled easy access to relevant and reliable information from a wide range of sources.
PROJECT OBJECTIVES AND RESEARCH QUESTIONS
PROJECT AIMS AND OBJECTIVES
The purpose of this research project is to analyze the performance of NCL over a period of last three years i.e. 2005 to 2007 & to compare it with the performance of its major competitor, Nihat Mills Limited (NML).
Following were the major aims and objectives of this project,
To review the company as well as the industry in which it exists.
To analyze the performance of the company in terms of:
Profitability: To measure the efficiency of a company's performance. (Watts, 1993)
Liquidity: To measure the short term financial health of the organization; to assess the ability of the firm to pay its short-term debts. (Peter Stimpson, 2002)
Capital and debt structure: To assess how much a company owes in relation to its size, and whether it is entering into heavier debt or improving its situation. (FTC, 2007)
Investment: To assess the value of investment in the ordinary shares of the company. (BPP, 2007)
To use SWOT analysis for analyzing the strengths and weaknesses of the company, and comparing them with the opportunities and threats in the environment.
To use Porter's five force model for evaluating the intensity of competition in the industry. (Fred R. David, 2002)
To use the Value Chain Model to analyze the core competencies of the firm.
To get a thorough understanding of the textile industry of Pakistan and its major players. Textile is the backbone of the country's economy.
To draw a conclusion regarding the performance of the company and make recommendations.
RESEARCH QUESTIONS
The following research questions were used to ensure a proper, consistent and relevant framework for the whole project while keeping the objectives in view:
What different sources can be utilized to gather data most relevant to the project?
How can the reliability of the sources be confirmed?
Which tools and techniques can be used to analyze the company's performance?
Which factors affect the profitability, liquidity and capital and debt structure of the company?
What are the major strengths and weaknesses of the company?
What are the major opportunities and threats that the company faces?
Does the company have sufficient resources and capabilities to compete in today's competitive environment?
What is the future outlook of the textile industry and how does the company fits in?
What are the problems and challenges faced by the company as well as the industry as a whole?
How do the macro environmental factors affect the company as well as its competitors?
RESEARCH APPROACH
To be able to complete my research on time I first had to develop a clear cut strategy towards doing my research. After the identification of the topic for the research project, a company was selected to carry out the research. The objectives of the research project were identified. To gather the needed information, research plan was developed using a variety of data sources and deciding about mix of research approaches to give the optimum results. These included primary sources - interviews with the company's management - as well as secondary sources including annual reports, text and reference books, newspapers and magazines, and last but not the least; the internet. Plenty of time was given to retrieve the relevant information. The analysis primarily uses qualitative measures. We used the qualitative data to extract the market trends and also used NCL's financial statements to get the relevant financial information. Different tools were used to analyze the performance of the company which included Ratio analysis, SWOT analysis and Five Force model and Value Chain analysis. Finally, a conclusion was drawn and some recommendations were also made.
People at the company were also interviewed to get an insight into the market trends as well as the opportunities and challenges faced by the company.
SECTION 2 - INFORMATION GATHERING AND ACCOUNTING/BUSINESS TECHNIQUES
SOURCES OF INFORMATION AND THE METHODS USED FOR THE COLLECTION OF INFORMATION
Relevant and reliable data is a key for meaningful analysis. Keeping this requirement in view, both primary as well as secondary data sources were used. These are discussed in detail in the following sections.
PRIMARY DATA
Interviews were conducted with the Management of NCL to gather primary data. The interview was conducted with Mr. Ahmad Subhani, General Manager Accounts of NCL. The interview gave an insight into the company affairs, its competitive environment in which it operates as well as the company's corporate structure, its business profile & its future outlook & plans. The interview was also aimed at discussing the financial highlights of the company.
Another interview was conducted with Mr. Taha Baig, Manager Marketing of NCL. The interview helped me a lot in carrying out the Value Chain Analysis of the company.
SECONDARY DATA
The numerous secondary data sources used included.
The audited annual financial statements of NCL. These proved to be the most critical source for extracting financial information and analyzing company's performance over the last three years. These were obtained from the Lahore Stock Exchange.
Internet proved to be vital in providing market intelligence & trends. It broadened the focus to international trends and the global market competitiveness instead of restricting just to the local news. The search engines used for this purpose included Google and Yahoo. The company's official website www.nishat.net also proved to be helpful in providing an overview of the company's operations and capabilities.
Daily newspapers were used to get the latest information about the textile industry and the factors affecting its competitiveness. These were obtained from public libraries.
The ACCA textbooks including FTC & BPP textbooks were used for a thorough understanding of the numerous models available for analysis. The ACCA Student Accountant magazine assisted in improving both the technical and non technical skills needed to prepare the report.
Numerous books and journals on this subject available at college libraries were also used to further strengthen the framework of this report and to give a thorough understanding of the situation at hand.
LIMITATIONS OF INFORMATION GATHERING
Following are the limitations of the information gathering process.
Due to the shortage of time, the interview conducted with NCL's key account personnel was not able to elicit enough details. Only major issues were discussed.
There is a chance of the interviewee's being biased towards or away from the company and the information provided is solely based on the interviewee's assessment of the company and the overall industry.
The accuracy and reliability of not all websites could have been tested.
Due to the huge volume of data available at the internet, the selection of the most relevant, complete as well as consistent information was extremely difficult and based on human judgment.
It was time consuming to obtain the financial statements from the Stock Exchange as I had to go there three times before they provided me with the statements.
The financial statements are based on historic data and fail to provide the current status of the company. The current status can be quite different than the last three years performance documented in these statements.
ETHICAL ISSUES
While collecting information I had to make sure that I abide by all the rules and considerations of ethics. I had to objective, show integrity, maintain confidentiality, and demonstrate professional behavior and professional care. The assistant marketing manager was hesitant in disclosing some information regarding value chain analysis, as he was unsure whether he was supposed to disclose such information or not. Respecting the confidentiality of the company, I talked to his senior, the marketing manager and ensured that the disclosure of this information would only be used my academic purposes.
ACCOUNTING & BUSINESS TECHNIQUES USED AND THEIR LIMITATIONS
RATIO ANALYSIS
A tool frequently used to evaluate a firm's financial condition and performance, is a financial ratio, or index, which relates two pieces of financial data by dividing one quantity by another. The ratio analysis not only involves comparing a present ratio with past, but also with target/ standard ratios, industry averages and expected future ratios of the company. (Horne and Wachowicz, 1998)
LIMITATIONS OF RATIO ANALYSIS
A reference point is needed. To be meaningful, most ratios must be compared to historical values of the same firm, the firm's forecasts, or ratios of similar firms.
Year-end values may not be representative. Certain account balances that are used to calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio. (www.netmba.com)
Ratios provide current and past trends, but not future trends.
Comparing the ratios with past trends and with competitors may not give a correct picture because of the differences in accounting policies and accounting period.
Ratios don't capture significant off-balance sheet items. (www.financialmodelingguide.com)
SWOT ANALYSIS
SWOT Analysis is a critical assessment of the strengths and weaknesses, opportunities and a threat affecting an organization to establish its condition before the long-term plan is prepared. It also helps the companies for gaining and maintaining competitive advantage over the rival firms. (BPP, 2007)
LIMITATIONS OF SWOT ANALYSIS
The assessment of strengths and weaknesses may be unreliable, being based on aspirations, biases and hopes. (Mintzberg, 1990)
SWOT framework has a tendency to oversimplify the situation by classifying the firm's environmental factors into categories in which they may not always fit.
The classification of some factors as strengths or weaknesses, or as opportunities or threats is somewhat arbitrary. (www.netmba.com)
PORTER'S FIVE FORCE MODEL
This model determines the level of competition an organization is facing by assessing the extent to which the five forces are relevant. The five forces are threat from new entrants, bargaining power of buyers, bargaining power of suppliers, threat from substitute products, and extent of competitive rivalry (Student Accountant, 2007).
LIMITATIONS OF PORTER'S FIVE FORCE MODEL
It is best applicable for analysis of simple market structures but is difficult to use in analyzing complex industries. It assumes a relatively static market structures in today's dynamic environment. (www.themanager.org)
The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations. (www.12manage.com)
Its focus is on the external environment of the company and does not look inside the company.
VALUE CHAIN MODEL
Porter's value chain model subdivides an organization into its key processes or functions. This helps in linking classical accounting to strategic capabilities by using value as a core concept, i.e. the ways a firm can best position itself against its competitors given its relative cost structure, how the composition of the value chain allows the firm to compete on price, or how this composition allows the firm to differentiate its products to specific customer segments.
LIMITATIONS OF THE VALUE CHAIN MODEL:
It is time consuming since it often requires recalibrating the accounting system to allocate costs to individual activities.
The Value Chain is used to analyze a firm's position in relation to its direct competitors with the assumption that rivalry drives profitability.
The Value Chain Analysis was developed to analyze physical product. It does not take into account intangible assets and service organizations.
(www.provenmodels.com)
SECTION 3 - RESULTS, ANALYSIS, CONCLUSION AND RECOMMENDATIONS
RESULTS AND ANALYSIS
COMPANY HISTORY AND BUSINESS PROFILE
Nishat Chunian Ltd. (NCL) was incorporated in 1990 as a public limited company with an equity investment of PKR 100 million. Since its inception as a single spinning unit, the company has expanded and diversified into a manufacturing and finishing operation consisting of spinning, weaving, dyeing & finishing and stitching units. During the FY 2005, the Company enhanced its spinning capacity substantially by acquiring the operating assets of Umer Fabrics Limited comprising of 38,544 spindles and by addition of a new spinning unit with 40,128 spindles. In 2006, the Company also diversified into Home Textile Business. The Company is currently operates with 150,000 spindles and 293 air jet looms with a monthly production capacity of 7.5 million lbs of yarn and 4.0 million yards of greige fabric. The dyeing & finishing unit has a capacity of 3.5 million yards per month supported by an equivalent stitching capacity. Sales have steadily increased from USD 8.5 million in 1991 to over USD 128 million in 2007, which includes exports of over USD 105 million. (Annual Report 2007 & www.nishat.net)
THE TEXTILE SECTOR
Textiles is the largest Industrial sector of Pakistan with 27% of the total industrial output, employing 38% of the total labor force and making exports worth 62.1% of the total country's exports. The textile sector contributes 11% to the country's GDP and accounts to 46% of the total manufacturing. (Pakistan Economic Survey, 2006)
The growth in the textile exports of Pakistan is gradually declining over the years. Textile exports in Pakistan grew from USD 8.92 billion in 2004-05 to USD 10.11 billion in 2005-06, reflecting a growth rate of 18.00%. Against this, the export growth has been only 5.00% during the current year. (Riaz Haq, 2008)
Pakistan textile industry is currently facing several challenges. The increase in minimum wages, the increase in interest rates, energy crisis, lack of Research and Development and reduction in cotton production has had a negative impact on the industry's competitiveness internationally.
RATIO ANALYSIS
Ratio analysis has been carried out using the audited annual financial statements of NCL for the FY 2005 to FY 2007. To facilitate the comparison, the figures of FY 2005 have been annualized as the financial statements of that year were prepared for 09 months. Nishat Mills Ltd. (NML) has been selected as a competitor to compare the company's performance. NML's financial statements have been used for this purpose.
PROFITABILITY RATIOS
NCL
NML
FY2005
FY2006
FY2007
FY2007
Turnover Growth (%)
11.60
(9.92)
17.20
3.12
Gross Profit Margin (%)
22.46
17.84
12.47
16.56
Net Profit margin (%)
13.23
3.83
0.14
9.74
Return On equity [ROE] (%)
35.96
8.99
0.38
5.59
Return On Capital Employed [ROCE] (%)
22.24
12.31
11.32
7.98
During the FY 2007, the company's profitability is at its lowest in last three years. The sales revenue of NCL has grown over the past few years with the exception of a slight dip in 2006. Sales during the year are highest ever at PKR 7,678 million as compared to PKR 6,551 million for the last year. This shows a growth in turnover of around 17.20%. This growth was due to an increase in sales of the recently set up finishing and home textiles division. The sales from weaving section remained stable with respect to last year. While the spinning units resulted in net loss due to a partial shutdown in one unit for the shifting of machinery for change in the product mix.
The company's gross profit margin dropped to 12.47% as compared to 17.84% for the last year. This decrease in gross profit is due to increase in imported cotton rate by 7.24%, increase in local cotton rate by 6.38% and increase in minimum wage rate by 25.00%. The company's profit before tax declined sharply by 67.38% as compared to the last year. Profit after tax is PKR 10.16 million because of the tax provision of PKR 101 million as the company is under a tax regime. Higher cost of production and increased price competition reduced the profitability margins substantially. The increase in financial charges also reduced the profitability. Financial charges are PKR 648 million showing an increase of 31.19% over the last year. This was mainly due to the rise in the interest rates in the country. During the year, NCL had a partial shutdown in one of their spinning units for the shifting of machinery. Higher cotton prices and partial shutdown of the spinning unit resulted into a loss of around PKR 150 million in the spinning division of the company during the year.
During the FY 2006, the company's performance remained below that of last year. Sales were PKR 6,551 million which were 9.92% lower than that of last year. The gross profit margin decreased by 28.47% as compared to the last year. The profit after tax of NCL also decreased to 3.83% as compared to 13.83% for the last period. The increase in local cotton prices by 20.79%, imported cotton prices by 5.88% and finance cost by 97.20% were the major factors causing the profit for the period to reduce. During the year, financial charges almost doubled mainly due to the substantial rise in interest rates in the country. In addition, the capacity utilization of the Home Textiles Plant remained around 50% which resulted in lower contribution towards fixed costs. Higher depreciation cost also resulted into the declined profitability. Depreciation expense for the year increased by 57.86% as compared to the corresponding period.
Both the ROCE and ROE are decreasing over the years and this decrease is mainly due to the substantial reduction in profits for the year. There hasn't been a substantial change in the debt and equity base of NCL over the 3 year period.
The sales revenue of NML for FY 2007 (PKR 17,180 million) was substantially higher than that of NCL Still the sales growth rate of NCL is much better than that of NML. During the year, the sales revenue of NML only increased by 3.12% as compared to the last period. The overall performance of NCL is poorer as compared to its competitor. Even though the growth in the sales of NCL was much higher than that of NML, the profitability of NCL is much poorer than that of NML. The ROCE of NCL is higher than that of NML but the ROE is lower because of the effect of a very high finance cost. The better performance of NML was mainly attributed to its profitable investments.
LIQUIDITY RATIOS
NCL
NML
FY2005
FY2006
FY2007
FY2007
Current Ratio (X)
0.88:1
0.78:1
0.78:1
1.74 : 1
Quick Ratio (X)
0.45:1
0.30:1
0.34:1
1.28 : 1
Inventory Turnover Period(Days)
79
107
98
79
Debtors Collection Period (Days)
17
30
40
18
Creditors Payment Period (Days)
11
11
11
24
Net Operating Cycle (Days)
85
126
127
73
Over the three year period, the current ratio of NCL decreased from 0.88:1 in FY 2005 to 0.78:1 in FY 2006 and remained the same in FY 2007 as compared to the last year. It is below the industry average of 1:1 which indicates that NCL does not have enough current assets to settle its current liabilities. By looking at the current assets in detail it is seen that a major portion of the current assets is the inventory held by NCL which is not able to convert readily into known amount of cash. So to exclude the effect of inventory, a quick ratio was calculated. The quick ratio follows the same trend as of current ratio. The quick ratio is much lower which indicates that NCL is not able to pay its short term obligations efficiently. The major portion of current liabilities consists of short term borrowings and the current portion of non-current liabilities. It is seen that the current portion of long term liabilities has almost doubled as compared to FY 2006 and has increased almost four times as compared to FY 2005. This is a sign of skillful management as current ratio is being fairly regular with such abnormal growth of the current liability. It seems that the main reason for a high amount of short term borrowing is that NCL has to finance its working capital.
The inventory turnover period increased to 107 days in FY 2006 as compared 79 days in FY 2005. In the next year the inventory turnover period decreased to 98 days. This indicates that NCL is efficiently able to turn its inventory to sales. The reason why a high level of inventory is held by NCL is that it is trying to protect itself from the unstable cotton prices and is trying to prevent any shortage of cotton.
Debtors' collection period for NCL has increased from 17 days in FY 2005 to 40 days in FY 2007. This shows that the company may be allowing more time to its debtors for payment to attract more credit sales.
Creditors' payment period for NCL has remained stable over the three year period which indicates that NCL is taking a smaller period of time to payoff its creditors. It may be doing so to maintain the satisfaction of its suppliers.
The net operating cycle for NCL decreased during FY 2006 to 126 days as compared to last year and remained stable during FY 2007. The main reason for any changes in the operating cycle was due to the fluctuation in inventory turnover period and the rise in payment received from debtors over the three year period. The financial position of NCL may be worsening as it is making short term borrowings to finance its working capital.
When comparing NCL with NML, it is seen that NCL is in a poorer liquidity position than NML. The current and quick ratios of NCL are lower than the industry average and are not as good as NML results. Also the net operating cycle of NCL is poorer than that of NML as NCL holds inventory for a larger period and receives payments from debtors later than that of NML. However, NCL pays its dues to its creditors earlier than the period NML takes to pay them.
CAPITAL AND DEBT STRUCTURE RATIOS
NCL
NML
FY2005
FY2006
FY2007
FY2007
Gearing Ratio (%)
52.88
58.88
59.94
9.42
Debt to Equity Ratio [D/E] (%)
112.24
143.22
149.61
10.40
Interest Cover (X)
5.04
1.68
1.17
3.22
The significant increase in the gearing and debt to equity ratio during the FY 2006 was due to the considerable rise in its debt financing. The substantial rise in the debt structure during FY 2006 was because NCL took a loan for expanding its spinning and weaving section. During FY 2007, there weren't any significant in the capital and debt structure of NCL. There were no substantial changes in the equity base of NCL over the three year period. These ratios are very high and indicate that NCL heavily relays on debt financing and faces a higher level of financial risk due to the increased volatility of profits. This high debt level is the major factor of such a high finance cost along with the rise in interest rates. These ratios are extremely high as compared to those of NML showing that NCL is a highly geared company. The capital and debt structure of NML is much better than that of NCL.
This increase in debt financing has decreased the interest cover for NCL. The interest cover ratio for NCL has decreased from 5.04 times in FY 2005 to 1.17 times in FY 2007. This indicates that NCL can only pay its interest costs once from its earnings. The interest cover ratio for NCL is lower than that of NML showing that NCL is in a poorer position than NML to pay its interests from the earnings it has earned.
INVESTMENT RATIOS
NCL
NML
FY2005
FY2006
FY2007
FY2007
Market Price Of Share (PKR)
95.1
44.5
44.5
130.45
Earnings Per Share [EPS] (PKR)
9.6
3.34
0.14
10.48
Price/Earning Ratio [P/E]
9.91
13.32
317.86
12.45
Dividend Per Share [DPS] (PKR)
2.0
1.5
1.5
2.50
Dividend Yield (%)
2.10
3.37
3.37
1.92
Dividend Payout (%)
20.83
44.91
1071.43
23.85
The share price of NCL remained stable during FY 2007 as compared to last year after a substantial decrease in share price during FY 2006 to PKR 44.5/share as compared to PKR 95.1/share for FY 2005. The poor profitability seems to be the major factor for such a decrease in share price.
During the three year period there was a dramatic fall in EPS of the company. It decreased from PKR 9.6 in FY 2005 to PKR 0.14 in FY 2007 which was quite poor. During FY 2005, the boom in cotton crop was the main reason for such a high EPS and this resulted in the increase in profits. The significant decline in EPS in the next two years was due to its poor profitability and significant changes in accounting policies regarding depreciation and financial instruments.
In contrast, the P/E ratio is increasing over the years and has reached a very high figure. This increase is due to the fall in both the EPS and share price of NCL. By seeing at such a high P/E ratio it is assumed that investors' have a high confidence in the company.
The DPS of NCL remained the same during FY 2007 as compared to last year even after a substantial decrease in profits. The dividend yield for NCL remained the same at 3.37% during FY 2007 as that of FY 2006 after an increase from 2.10% in FY 2005. This indicates that the shareholders of NCL are expecting a high return in terms of both, dividend and capital gain. The dividend payout has increased enormously over the three years showing a higher return to its shareholders. During FY 2007, the dividend paid to the shareholders of NCL was extremely high as compared to the profits earned. This may have been done to maintain the shareholders assurance in the company.
The P/E ratio of NCL is enormously greater than that of NML, because of lower EPS and share price of NCL. The investors have confidence in both of the companies. Although the DPS of NCL is lower than that of NML, the dividend yield and dividend payout of NCL is much higher than that of NML. Overall, NCL is a good potential investment according to investors' perspective, because of the higher return made on the investment.
SWOT ANALYSIS
STRENGTHS
Strong Financial Position
Production Adaptability to adjust to the changing market trends and customer requirements
Diversified products and markets
Emphasis on product development and R&D
Competitive prices
Textile Industry leader
Well known name in local and international markets
An integrated ERP system to facilitate production and planning processes
Good customer service and customer response time
Compliance with health, safety and environment rules and regulations.
Diverse customer base in regions like USA, Canada, Europe and the Middle East
Highly skilled workforce.
WEAKNESSES
No long term strategy to maintain the sustainable competitive advantage
An adhoc based approach to sales & marketing with no out look for future
Centralized decision making
Heavy reliance on foreign customers and little participation in local market
A high net operating cycle.
OPPORTUNITIES
Availability of skilled labor force
Opportunity to build economies of scale
Advancements in weaving, spinning, & dyeing technologies.
Growing Asian consumer markets
Restructuring of global textiles - industry moving from EU & USA to Asia
THREATS
Highly unstable political situation in the country
Unstable law & order situation
Expectation of world wide recession & depression
A massive industry shakeout in progress. Too many suppliers fighting for the same piece of cake
An ever increasing energy and raw material prices
Ever reducing consumption especially in US & Europe which represent more then 80% of the world demand
Exchange rate fluctuations
Power shortage in the country
Increase in input costs and interest rates are making the textile sector unattractive internationally
PORTER'S FIVE FORCE MODEL
Porter's five force model is used to identify the competitive intensity and attractiveness of the Pakistan textile industry.
RIVALRY:
The following factors indicate a strong rivalry in the textile industry:
A large number of firms are competing in the market having similar market shares, leading to a struggle for market leadership.
The market growth rate is very slow.
High fixed costs.
Low switching costs for customers.
Low product differentiation and Brand identification.
High exit barriers for existing players.
Low diversity of rivals.
THREAT OF SUBSTITUTES:
In textile industry the threats of substitute is almost not existent. There is no material which can be a substitute for textiles as it represents a very basic commodity.
BUYER POWER:
The power of buyers is the impact that customers have on a producing industry. The following factors indicate a high power of buyers for Pakistan Textile industry:
The major chunk of buyers who pay high margins are concentrated in US & Europe. They have significant market share.
The 80% of the world's consumption is concentrated in US, and with in US there are few major players, who buy substantial quantities of textile from Pakistan.
A credible backward integration threat is a constant threat for the textile producers, as companies have been buying out specific companies or forming partnerships.
The products are very standardized, and there are many suppliers providing the same exact product.
The buyers are not fragmented.
SUPPLIER POWER:
A powerful supplier can exert an influence on the industry, such as selling raw materials at a high price to capture some of the industry's profits. The following factors indicate a high power of suppliers for the Pakistan textile industry:
Credible forward integration threat by suppliers is a huge threat by the suppliers, as the suppliers of the raw material have all the opportunities, and expertise to move forward in the integration chain.
Suppliers are concentrated and have formal markets, and try to follow & set the market rates.
The purchasers are not concentrated and have no extra influence as a group.
The power of suppliers in the textile industry is low if the following factors are taken into account:
There are many factories providing the same raw materials, which are standardized.
Switching cost is almost zero for customers.
They have to rely on the industry for majority of their sales.
BARRIERS TO ENTRY / THREAT OF ENTRY:
The textile industry is easy to enter because of easy access to distribution channels, low scale threshold, easily available human recourse and standardized products. However, the textile industry is difficult to enter because of very high fixed cost and difficulty in switching the product specialization within the industry.
PORTER'S VALUE CHAIN MODEL
PRIMARY ACTIVITIES
Inbound Logistics: NCL operates separate warehouses for its raw materials. Such warehouses are operated by each of different spinning, weaving, processing & stitching units. Inventories are monitored daily and daily reports are sent to the concerned of the inventory levels of each item. Transportation of raw material is arranged by the suppliers that reduces the overhead for the management. The management however keeps a close review of the transportation costs in the market so that the company doesn't pays any extra cost.
Operations: NCL has the latest machinery and one of the most skilled workforce available in the market. Packaging and testing of the products is performed in-house. Maintenance of machineries is also done regularly that maintains the efficiencies & lasting life of machines.
Outbound Logistics: NCL has automated systems to record and monitor the status of each order. An effort is made by the company to timely manufacture all the goods such that there is minimal need of warehousing. The company has contracts with transportation companies that bind them to provide efficient and reliable service. The company also maintains contracts with numerous clearance agencies that enable smooth distribution of goods.
Marketing and Sales: NCL has representatives in all of its different markets that have an exclusivity agreement with the company that avoids any conflict of interest in their part. This strategy enables the company to provide prompt feedback and foster lasting relationship with the clients. The company also regularly exhibits in the prestigious exhibitions and trade fairs that enable it to have a global presence. Pricing is done according to the market conditions.
Service: NCL takes customer comments seriously and provides prompt feedback to the customers. In case of valid complaints and claims from the customers, the company also services claims and pays all the damages. This adds to the credibility & reliability of the company.
SUPPORT ACTIVITIES
Firm Infrastructure: Each unit is headed by general manager. That general manager is given full authority to manage and run his plants. The marketing department is given the overall responsibility to monitor & control the overall functioning of each department.
Human Resource Management: NCL promotes new talent & hires well qualified students and then trains them thoroughly through both on job training and mentoring. The recruitment is based on merit only & promotions and increments & bonuses are based on hard work and results.
Technology Development: NCL has ERP systems that enables efficient and transparent data flow. It has an in-house MIS department to continuously update the company's systems according to the market trends. The company also gives emphasis to R&D and is one of the market leaders that come up with innovative products.
Procurement: There is a dedicated department for the purchasing of raw materials. These continuously monitor market trends and make decisions accordingly. An effort is made to maintain reliable and cost effective suppliers.
CONCLUSION
Nishat Chunian Ltd. is the fifth largest textile listed company of Pakistan with a turnover of over US $ 140 Million. It is a vertically integrated unit comprising of spinning, weaving, dyeing & finishing and stitching units and employs more than 6,000 people. It engages in the manufacture and trading of yarn, fabric, and made-ups from raw cotton, synthetic fibre, and cloth in Pakistan.
The company is a core player of the textile industry which is the largest Industrial sector of Pakistan which contributes substantially to the country's earnings, total manufacturing, employment, GDP and economy. The current year was a very challenging year for Pakistan's textile industry. High cotton prices, non-guaranteed energy supplies, high wage rates, high interest rates and strong competition were the major factors affecting the profitability of the industry. The textile industry is trying to balance, modernize, and rehabilitate its operations and maintain competitive prices.
The Company's profitability has been at its lowest in the FY 2007 despite the sales being the highest ever at PKR 7,678. The annual increase in sales was around 17.20%. However, the Company's profit before tax has sharply declined to PKR 111.16 million. Higher cost of production and increased price competition has reduced the profitability margins substantially. The Company's gross profit margin has dropped to 12.47% from FY 2006's 17.84%. Further increase in the financial charges also reduced the profitability. The decrease in the profitability of NCL also has adversely affected the ROE and ROCE of the company. The profitability of NCL is poorer as compared to NML.
The liquidity ratios for NCL are below the industry average which means that NCL has not enough recourses to pay its short term obligations. The high operating cycle of NCL reflects that it should reduce its inventory turnover days and receive payments from debtors on time. NCL is in a poorer liquidity position than NML.
NCL is expanding its business and updating its technology. This has resulted in an increase in the capital expenditure of the company. NCL doing is this in order to improve its competitive position in the industry. This has resulted in the increase in gearing of NCL which is very high as compared to its competitors. The interest cover for NCL has decreased substantially over the years and has reached 1.17 times which means that it can only pay its interest cost only once from the profits earned.
The P/E ratio for NCL has risen substantially because of the decrease in its share price and EPS. In addition, the company paid an enormous amount of dividend to its shareholders regardless of the fall in the profits earned. This is done to maintain the confidence of its investors.
The SWOT analysis of the company highlighted the opportunities that NCL can cash with its strengths as well as the weaknesses that make the company vulnerable to numerous threats in the environment. The country's deteriorating law and order situation and the fluctuating exchange rate are posing serious problems for the company. NCL is however committed at providing the best services to its customers and further diversify its customer base to include the growing Asian markets.
Porter's five force model was also used to analyze the industry's attractiveness and the degree of rivalry that exists in it. High degree of rivalry exists within the industry. Though the threat of substitutes is almost non-existent, yet the companies face the problem of having both powerful buyers as well as suppliers leading to very little margins for the company. Entry and exit barriers are also high making the industry unattractive.
Porter's Value Chain model was also used to analyze the primary and support activities of NCL and how they can help the company to understand its core competencies and use it effectively to maximize its profits. The primary activities including inbound logistics, operations, outbound logistics, marketing and sales and service were analyzed. Moreover, the secondary activities including the firm's infrastructure, its human resource management, its technology usage & procurement activities were assessed to gain a better picture of how the company can better utilize its strengths and what weaknesses it needs to address to better serve its customers and thus get higher profits.
RECOMMENDATIONS
Some recommendations are as follows:
NCL should increase its participation in the local market as well as the developing Asian markets. The American & European markets are now already saturated and now these Asian and Middle East markets have a high potential.
NCL is currently heavily in debt due to loans borrowed for the financing of its recently set up home textiles division as well as its Power Plant project that is still underway. The financial cost due to this increased debt is very high and an effort should be made by the company to minimize these long term & short term finances.
NCL should try to improve its net operating cycle by reducing its inventory turnover period and by receiving timely payments from its debtors. This can be done by establishing a good relationship with the suppliers to receive deliveries on time and by providing discounts to the customers.
APPENDICES
Appendix A
