Nagina Group was founded on May 16th 1967 with the incorporation of Nagina Cotton Mills Limited. Since then Nagina Group has expanded its operations in textile manufacturing and has diversified into other sectors. Currently, Nagina Group's textile manufacturing capacity is 100,956 spindles and 324 air jet looms.
A steady and well thought out growth strategy coupled with a solid commitment to quality has earned Nagina Group a family of satisfied customers, hardworking employees, appreciative shareholders and the confidence of the banking community. The core businesses of Nagina Group generate an annual turnover in excess of 100 Million US dollars. Due to decades of dealing with Pakistani, North American, European and Far Eastern customers Nagina Group has created a skilled and knowledgeable management fully capable of understanding and responding to customer needs in record time.
Nagina Group consists of three publicly listed companies on the Karachi Stock Exchange (Nagina Cotton Mills Limited, Ellcot Spinning Mills Limited, Prosperity Weaving Mills Limited), five private companies (Monell (Pvt.) Limited, Icaro (Pvt.) Limited, Haroon Omer (Pvt.) Limited, Ellahi International (Pvt.) Limited), ARH (Pvt.) Limited), and employs over 3,500 employees. Nagina Group was selected in 2003 by Forbes Magazine as one of the best 200 international companies with an annual turnover of under a billion US dollars.
Ellcot Spinning Mills Ltd.
Established in 1991, Ellcot Spinning Mills Limited operates state of the art spinning machinery comprising of 54,528 Spindles with related process machines. The company produces high quality yarns of 100% cotton, synthetic, and polyester / cotton blends. Both carded and combed Yarns for weaving and knitting application are produced in many blends. Ellcot Spinning Mills Limited high quality yarns are used to produce apparel fabrics, sheeting, toweling, canvas, and Knitted products.
Products
10/1 to 80/1 polyester / cotton blend yarns both carded and combed. Brand: Grape
30 NE to 100 NE 100% combed cotton yarns manufactured from Pima, Giza 86, and contamination free cotton. Brand: Apricot
Core yarns with "Lycra ®" from Dupont. Count ranges from 30/1 to 60/1 for both carded and combed yarns in a variety of deniers.
Industry Outlook
Textile Industry Outlook
The textile industry is one of the most important sectors of Pakistan. It contributes significantly to the country's GDP, exports as well as employment. It is, in fact, the backbone of the Pakistani economy.
Established capacity
The textile industry of Pakistan has a total established spinning capacity of 1550 million kgs of yarn, weaving capacity of 4368 million square metres of fabric and finishing capacity of 4000 million square metres. The industry has a production capacity of 670 million units of garments, 400 million units of knitwear and 53 million kgs of towels.
The industry has a total of 1221 units engaged in ginning and 442 units engaged in spinning. There are around 124 large units that undertake weaving and 425 small units. There are around 20600 power looms in operation in the industry. The industry also houses around 10 large finishing units and 625 small units.
Pakistan's textile industry has about 50 large and 2500 small garment manufacturing units. Moreover, it also houses around 600 knitwear-producing units and 400 towel-producing units.
Contribution to exports
According to recent figures, the Pakistan textile industry contributes more than 60% to the country's total exports, which amounts to around 5.2 billion US dollars. The industry contributes around 46% to the total output produced in the country.
In Asia, Pakistan is the 8th largest exporter of textile products.
Contribution to GDP and employment
The contribution of this industry to the total GDP is 8.5%. It provides employment to 38% of the work force in the country, which amounts to a figure of 15 million. However, the proportion of skilled labor is very less as compared to that of unskilled labor.
Organizations in the industry
All Pakistan Textile Mills Association is the chief organization that determines the rules and regulations in the Pakistan textile industry.
Opportunities available
The world demand for textiles is rising at around 2.5%, due to which there is a greater opportunity for rise in exports from Pakistan.
Spinning Sector
Spinning industry of Pakistan is one of the oldest and well organized manufacturing sector of Pakistan and according to 2009 data there are more than 450 spinning mills and nearly 12 million spindles installed in Pakistan. Spinning industry is capital intensive in nature and needs a huge investment and continuous support of banks for the regular supply of fibers.
Future Outlook
The Ministry of Textile has issued a notification No. 3(18)TID/10-P-I to support investment for upgrading textiles machinery and technology, on the directives of the Federal Government, in pursuance of entry 7 of item 29A of Schedule II to the Rules of the Business, 1973: This order called 'Technology Up-gradation Support Order 2010 shall cover the whole of Pakistan. The order shall take effect from September 01, 2009 and shall remain valid up to June 30, 2014. Disbursements under this Order will continue for the duration of loans obtained till June 30, 2014.
Benefits under the support order 2010
For projects exceeding investment of Rs. 10 million in machinery or technology, the Federal Government will pick-up 50% of mark-up subject to a maximum of 5 percentage points p.a., whichever is less.
For projects with investment in machinery and technology not exceeding Rs. 10 million, the Federal Government may provide grant up to 20% of the capital cost for new Plant and Machinery only as "Investment Support". This support will be available to SMEs as defined under the SBP Prudential Regulations for SMEs.
The repayment period shall not exceed ten years including grace period as may be allowed by the SBP.
Accounting Policies and Disclosures
Statement of compliance
These financial statements have been prepared in accordance with approved accounting standards as applicable in Pakistan and the requirements of Companies Ordinance, 1984. Approved accounting standards comprise of such International Financial Reporting Standards (IFRSs) and the International Accounting Standards (IASs) as notified under the provisions of the Companies Ordinance, 1984. Wherever, the requirements of the Companies Ordinance, 1984 or directives issued by the securities and Exchange Commission of Pakistan differ with the requirements of these standards, the requirements of Companies Ordinance, 1984 or the requirements of the said directives take precedence.
Basis of measurement
These accounts have been prepared under the historical cost convention except for certain financial assets at fair value and employees retirement benefits at present value. In these financial statements, except for the cash flow statement, all transactions have been accounted for on accrual basis.
Functional currency
These financial statements are prepared in Pak Rupees which is the Company's functional currency.
Property, plant and equipment
Recognition and measurement
Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses with the exception of freehold land, which is measured at cost less accumulated impairment losses. Cost comprises purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates, and includes other costs directly attributable to the acquisition.
Parts of an item of property, plant and equipment having different useful lives are recognized as separate items.
Major renewals and improvements to an item of property, plant and equipment are recognized in the carrying amount of the item if it is probable that the embodied future economic benefits will flow to the Company and the cost of renewal or improvement can be measured reliably. The cost of the day-today servicing of property, plant and equipment are recognized in profit or loss as incurred.
Depreciation
The Company recognizes depreciation in profit or loss by applying reducing balance method over the useful life of each item of property, plant and equipment.
Depreciation on additions to property, plant and equipment is charged from the month in which the item becomes available for use. Depreciation is discontinued from the month in which it is disposed or classified as held for disposal.
Depreciation method, useful lives and residual values are reviewed at each reporting date.
Capital work in progress
Capital work in progress is stated at cost less identified impairment loss, if any, and includes the expenditures on material, labor and appropriate overheads directly relating to the construction, erection or installation of an item of property, plant and equipment. These costs are transferred to property, plant and equipment as and when related items become available for intended use.
Stores, spares and loose tools
These are generally held for internal use and are valued at cost. Cost is determined on the basis of moving average except for items in transit, which are valued at invoice price plus related expenses incurred up to the reporting date.
Stock in Trade
These are valued at lower of cost and net realizable value, with the exception of stock of waste which is value at net realizable value. Cost is determined using the following basis:
Raw material First In First Out ("FIFO")
Work in process Average manufacturing cost
Finished goods Average manufacturing cost
Stock in transit Invoice price plus related expense incurred to reporting date
Waste Net Realizable Value ("NRV")
Net realizable value signifies the estimated selling price in the ordinary course of business less estimated
cost of completion and estimated costs necessary to make the sale.
Financial instruments
Loans and receivables
Non-derivative financial assets with fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Assets in this category are presented as current assets except for maturities greater than twelve months from the reporting date, where these are presented as non-current assets. The Company's loans and receivables comprise advances, deposits, trade and other receivables, and cash and cash equivalents.
Financial liabilities at amortized cost
Non-derivative financial liabilities that are not financial liabilities at fair value through profit or loss are classified as financial liabilities at amortized cost. Financial liabilities in this category are presented as non-current liabilities except for maturities greater than twelve months from the reporting date where these are presented as non-current liabilities. The Company's financial liabilities at amortized cost comprise trade and other payables, and borrowings.
Borrowings
Borrowings are recognized initially at fair value less attributable transaction costs. Subsequent to initial recognition, these are stated at amortized cost with any difference between cost and redemption value recognized in the profit or loss over the period of the borrowings on an effective interest basis.
Trade and other payables
Trade creditors and other payables that meet the definition of financial liabilities are initially recognized at cost, being fair value at the date the liability is incurred. Subsequent to initial recognition, these are measured at amortized cost using the effective interest method, with interest recognized in profit or loss. Advances from customers, payables created as a result of statutory requirements such as income taxes, constructive obligations and other non-financial liabilities are carried at cost.
Trade and other receivables
Trade and other receivables that meet the definition of financial assets are initially recognized at cost, being fair value at the date the asset is acquired. Subsequent to initial recognition, these are measured at amortized cost using the effective interest method, less accumulated impairment losses, with interest recognized in profit or loss. Advances to suppliers, receivables created as a result of statutory requirements such as income taxes and other non-financial assets are carried at cost.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and cash at banks. Cash and cash equivalents are carried at cost.
Taxation
Income tax expense comprises current tax and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the amount of tax payable on taxable income for the year, using tax rates enacted or substantively enacted by the reporting date, and any adjustment to the tax payable in respect of previous years. Provision for current tax is based on current rates of taxation in Pakistan after taking into account tax credits, rebates and exemptions available, if any. However, for income covered under final tax regime, taxation is based on applicable tax rates under such regime. The amount of unpaid income tax in respect of the current or prior periods is recognized as a liability. Any excess paid over what is due in respect of the current or prior periods is recognized as an asset.
Deferred tax is accounted for using the balance sheet approach providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. In this regard, the effects on deferred taxation of the portion of income that is subject to final tax regime is also considered in accordance with the requirement of "Technical Release - 27" of the Institute of Chartered Accountants of Pakistan. Deferred tax is measured at rates that are expected to be applied to the temporary differences when they reverse, based on laws that have been enacted or substantively enacted by the reporting date. A deferred tax liability is recognized for all net taxable temporary differences. A deferred tax asset is recognized for net deductible temporary differences to the extent that future taxable profits will be available against which temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Deferred tax is not recognized for timing differences that are not expected to reverse and for the differences arising from the initial recognition of goodwill and initial recognition of assets and liabilities in a transaction that is not a business combination and that at the time of transaction affects neither the accounting nor the taxable profit.
Financial Ratios
The future of firms can be determined to some extent from financial ratios derived from their financial statements. This report highlights current problems and financial health of the mills and considering these ratios, one can develop an idea about the future of this sector. Financial Ratios indicate financial health and strength of the firms.
Liquidity Ratios
Current Ratio:
Current Ratio for Ellcot spinning mills ltd have been fairly consistent over the five years of analysis. Year 2009 current ratio is 1.01 which signifies that the company has Rs. 1.01 to compensate every Re. 1 of current liability. The ratio peaked in the year 2007 at 1.08 and the average for the period of analysis turns out to be 1.02. Average industry indicator for current ratio for spinning sector in Pakistan is 1.00.
Quick Ratio:
Quick ratio or mostly known as the acid test ratio reveals the short term liquidity position of a firm. For the year 2009 the company had Re. 0.36 to meet one Re. 1 of current liabilities which has been skimming over the years of analysis. Year 2007 was the highest indicator at 0.62 and the average for the period of analysis is 0.42.
Collection period:
Collection period signifies the ability of the company of turning its credit sales into cash sales. Over the period of analysis its is evident that the companies ability to liquidate its sales has increased steadily closing on a very reasonable 14 days for the year 2009 compared to the average of 32.6 days.
Days to sell inventory:
The average days to sell an inventory are the days in which the stock that comes into for sales and then is given out to for sales. So the lower the ratio, the better its is signifying companies supply chain and sales ability.____________________________
Solvency Ratios:
Debt to Equity Ratio:
Debt to equity ratio signifies the amount of debt as a percentage of total equity of the business. There has been a steady increase in the debt to equity ratio of Ellcot Spinning mills ltd. Year 2009 shows the highest at 74.32% compared to an average at 72.43%. Industry debt to equity ratio for spinning sector is 64%, hence the company in question has more debt as a percentage of its equity.
Times Interest earned:
This ratio shows the times of earnings made before interest and tax over the amount of interest i.e. debt servicing. In the case of Ellcot spinning mills the ratio has decreased over the years closing at 1.03 times in the year 2009 compared to its average of 1.88 over the period of analysis. This coupled with the debt to equity ratio shows that the company in relying heavily on debt. Over the years company has invested heavily in long/ short term borrowings of secured nature.
Return on investment ratios:
Return on Assets (ROA):
Return on Assets (ROA) is an indicator which tells about the efficiency of firm in using the assets. It is calculated by dividing the annual earning of the company with total assets, shown as percentage. ROA for Ellcot spinning mills ltd indicates the money earned for every rupee invested as a percentage has been decreasing over the years. Company's profits have been decreasing over the years countered also by a steady increase in assets of the firm. The ratio was highest in the year 2005 at 5.55% and lowest in year 2009 at 0.05%. In case of the company is question, it has been doing considerably well when compared to industry average at -1.73%.
Return on Equity (ROE):
Equity is the money invested by the shareholders for profit. This ratio indicates the firm's ability to earn against the investment. It is also called return on average common equity, return on net worth, and return on ordinary shareholders' funds. ROE in the case of Ellcot Spinning mills ltd has decreased significantly over the years with the year 2006 and 2009 experiencing the biggest drops attributing to low profits and steady increase in equity over the years especially 2008. Highest ROE was for the year 2005 at 18.88% to the lowest at 0.21% for the year ended 2009. Industry average for the year 2008 was -10.74% which shows that the business in question is doing considerably well in retaining incomes from equity investments.
Operating Performance:
Operating profit margin:
Operating Profit Margin (OPM) is also called operating margin, operating income margin or return on sales (ROS). It is calculated by dividing operating profit with net sale usually presented in percentage. It shows the efficiency of the firm in generating profits from its operations. OPM for Ellcot Spinning mills ltd has been variable over the time of observation which attributes mainly to the fluctuations in operating income of the business. Sales have steadily increased over the years. Highest OPM was in the year 2008 at 15.08% and lowest recorded for the year 2009 at 10.83%
Pretax profit margin:
Pretax operating margin shows earnings before tax as a percentage of net sales. Pretax operating profit for Ellcot spinning mills ltd have gradually decreased over the years attributing largely to the increase in the costs of debt servicing and other operating expenses. The highest pretax profit margin was recorded for the year 2005 at 6.94% with the overall 5 year average at 4.18%
Net Profit margin:
Net profit margin signifies the profits as a percentage of net sales after adjusting all relevant costs. The trend of net profit margin can be reflected in the pretax profit margin as well. Net profit margin was highest at 7.99% in 2005 and the lowest at 0.04% in 2009. Industry average for net profit margin in spinning sector was -6.25%.
Asset Utilization indicators:
Account Receivables turnover:
The ratio depicts the management efficiency to have a control over its customers (receivable). The indicator stays consistent over 2006 - 2009 with the highest at 35.73 times for the year 2008.
Inventory turnover:
Inventory turnover is calculated by dividing cost of goods sold to inventory (stocks in hand). Inventory turnover for Ellcot Spinning mills ltd has been fluctuating over the period. The COGS has increased over the period steadily whereas the company started to maintain higher levels of inventory in the latest two years over the period of analysis. Highest inventory turnover was recorded for the year 2006 at 5.15 and current turnover at 3.72 times for the year 2009.
Asset Turnover:
Total Asset Turnover (TAT) is a ratio that deals with net sales and total assets. This ratio measures how well a firm is using its assets to generate revenue. Asset turnover for Ellcot Spinning mills ltd has increased over time which shows the ability of firm to general revenue higher to the total assets invested. Year 2009 saw the highest inventory turnover at 1.33 times compared to the industrial average 0.95 which signifies the favorable condition for the business.
Market Measures
Price to earning ratio
Price to earning ratio is calculated by dividing market price of a share to EPS. In case of the said business price to earning ratio has shown a steady increasing trend but in the year 2009 due to low profits and hence very low EPS the ratio comes out to be at 475.78.
Earnings Yield
Earnings yield is calculated by dividing EPS with the market price of a share which in this case has shown a fluctuating trend attributing to variable EPS over the period of analysis. Earnings yield for Ellcot spinning mills ltd dropped to its lowest in year 2009 at 0.21% due to low profits and hence very low Earnings Per Share.
Dividend Yield
Dividend yield is calculated by dividing dividend per share to the market price per share. This is used to calculate the income over the price of share in percentage. Dividend yield has been fluctuating attributing to the changes in the price of shares.
