To make a research and analysis project for obtaining B.Sc. Honors in applied accounting degree from Oxford Brookes University has always been my priority right from the days I entered ACCA studies. I decided to make research and analysis project as soon I met the eligibility criteria. First thing I did was reading the guidelines provided by Oxford Brookes University. After taking into to account the merits and demerits of the preparation of all the topics provided in the guidelines I decided to make my research and analysis project on: "The business and financial performance of an organization over a three year Period". I easily reached this decision as I am a student of accountancy studies so the analysis of the business and financial performance of an organization is the area of my expertise.
Reasons of choosing the sector and the organization:
Pakistan textile sector is by far the most important sector of the economy contributing 53.7% to export earnings and engaging 38% of labour force. At present it comprises of 521 textile units (50 composite units and 471 spinning units). Pakistan has the third largest spinning capacity of 7.6% in Asia after China and India and 5% of the global spinning capacity. (Memon, 2010)
D.M. Textile Mills Limited (DMTML) was incorporated on 28th May 1958 as a public limited company in Pakistan under the companies Act 1913 and is quoted on stock exchanges at Karachi and Islamabad. The company is one of the premier manufacturers of textile products in Pakistan, fully equipped not only with the modern machinery and equipments but also professional management and staff. (DMTML, 2009) A cousin of mine was working in this organization as an Accounts Assistant so I found it easier to access primary information of the company.
Project aims and objectives:
Deciding the aims and objectives of the project was a key element of preparing a good project. What I realized was that without knowing what I wanted to achieve specifically I would have been unable to make a project at the satisfactory level.
I will analyze the sales revenue of the company over the period of time and identify the reasons of specific trend in the sales revenue of DMTML over last three years.
I will analyze the profitability ratios which measure the profit a company makes in relation to assets and sales. (www.freeworldacademy.com)
I will also perform an analysis of the major cost drivers of DMTML and identify the impact of these of the profitability
I will also perform the liquidity analysis which indicates the ease of turning assets into cash. (Allis, 2002)
I will identify the trend in the long term solvency which is described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth. (Wikipedia.org, n.d.)
I will also identify the reasons of specific trends in return on common shareholder's equity also referred to as investors' ratios. (Lynch, Williamson, 1984)
I will perform SWOT analysis that involves analyzing the strengths and weaknesses of the company, and comparing them with the opportunities and threats in the environment. (Stone, 2001)
I will also perform Porter's five forces analysis to analyze the business performance of the DMTML. (BPP, 2006)
Research questions:
Research questions were developed at the initiation of the project. They were made keeping in mind the main objectives of the project and designed in a way to ensure fulfillment of those objectives.
How will I gather relevant and reliable data on the area of topic on which I was working?
What will be overall approach for the collection of information and from what sources?
What are the tools and techniques which are required for the financial and business analysis of an organization?
What are the limitations of tools and techniques that I will use in the preparation of research and analysis project?
How I will achieve the practical application of ratio analysis for analyzing the business performance?
What are the internal strengths and weaknesses and external opportunities and threats of DMTML?
What is the bargaining power of DMTML's buyers, suppliers?
What is the threat of substitute products, new entrants or from existing firms does it face?
What are the necessary interpersonal and IT skill required for the preparation of this project? (Johnson, 2005)
Research Objective and Approach:
After deciding the topic and company for research, the next step was to decide which tools and techniques that I will use in the preparation of research and analysis. I planned the whole research and analysis work so that I can use my time effectively. After performing the preliminary search I reached a conclusion that I will rely on both primary and secondary sources of information, as without taking information from both of them my project would not have been completed. I searched through newspapers, Magazines, books and the internet to get valuable information regarding company as well as the textile sector. After collecting the data, I started sorting it in an understandable way. Then the next step was the analysis of the information I had gathered with the help of ratio analysis, SWOT analysis and five force analysis. With the help of these tools I reached out a conclusion for my work.
Information gathering and accounting / business techniques:
Primary sources of information are sources created by direct observation. The writers were participants or observers in the events they describe. (Rozakis 2007)
Primary data:
The main source of primary information was interviews of the company personnel that I conducted. I asked my cousin to help me get access to the key executive management of the company. Although I wanted to interview the CEO of the company, he was out of station, so I had to suffice with an interview with Chief Financial Officer, who was also kind enough to get me some time with the Manger Sales.
I had also drafted a questionnaire in which I had mentioned questions relating to key operations. These were responded to by two employees from the sales department. Through these sources I was able to get valuable information regarding the performance of the company in general. They explained to me the industry mechanism and the behavior of DMTML when it came to facing challenges in the industry. They also provided information regarding trends in different ratios, particularly the reason of negative earnings.
Secondary sources:
These sources were more in quantum as compared to primary information. Hard copies of most information were available. Most of the information from these sources was from internet; this was the cheapest sources of information available which highly accessible huge volume of data and I had to search by typing in key works in search engines such as Yahoo and Google, text and reference books; These were used first and foremost to refresh my understanding of analytical tools, annual reports obtained from the Islamabad Stock Exchange primarily to calculate and analyze ratios, magazines, newspapers and other printed media to gain sector specific and company specific information.
The information from the internet was voluminous but to get more authentic information I searched a few e-libraries and the Public library in my vicinity to search for that information in books as they are more authentic. ACCA course books helped me in understanding the business tools and heir applications in a much better way than any other source. There was also some information that I got from published materials such as newspapers and magazines. Although most recent articles proved to be the best I also thoroughly searched through the archived editions to find relevant data and statistics.
I also kept reading ACCA's student accountant. For business analysis I took help from Harvard business reviews. While gathering the information I also took help from different research and analysis reports. These reports were very helpful in performing the business and financial analysis of the company over the period of time. Pakistan Trade Journal related to textile sector was also very useful in giving me an understanding on the overall sector and company.
Limitations of information gathering:
While preparing the research and analysis project I was encountered with a number of limitations in information gathering process which are as follows:
One of the most notable point while gathering information was that most of the information available in trade journals of textile sectors and textile sector related websites was from the prospective of equity holders of the company so, it was focusing on the performance of the share in the stock exchange which made the extraction of relevant data from these sources difficult.
Another limitation I encountered was that I was not having the access to the management reports of the company for example budgets and variance analysis of the company. The management did not provide these due to confidentiality issues.
There were also some difficulties in obtaining the published financial statements from Islamabad Stock Exchange as the staff of data room was reluctant to issue these reports.
Ethical issues that arose during my information gathering and how they were resolved:
While preparing this research and analysis project during the information gathering process I was encountered with a number of ethical issues which I solved accordingly.
One of the main problems I faced was the trust that I could place in truthfulness of information provided by the management. There had been some legal issues with the company in 2007 and this cast serious doubt about the integrity of the management and as a professional accountant I could not base my information on unauthentic data.
During the preparation of research and analysis project another difficulty I faced was that the company personals were not willing to discuss the company's matters with me as they were concerned about the confidentiality of the data. I told them that I was a student of professional body and I was required to follow the professional ethics of ACCA and confidentiality is one of the professional ethics I was required to follow.
During the analysis, my cousin who works for the organization was asked by his superiors to calculate a few ratios for the company for analysis and he asked me to show him my workings on ratios. Although he had helped me getting interviews with company personnel I told him that as per rule of the university I could not share this information and he understood.
Accounting and / or business techniques used, including a discussion of their limitations:
I performed profitability analysis, liquidity analysis, solvency analysis and investor's analysis. For performing business analysis in conjunction to the techniques in financial analysis I performed the SWOT analysis for the business analysis of the company. I also analyzed the Porter's five forces for business analysis of the company.
Ratio analysis is useful, but analysts should be aware of these problems and make adjustments as necessary. Ratios analysis conducted in a mechanical, unthinking manner is dangerous, but if used intelligently and with good judgment, it can provide useful insights into the firm's operations. (Brigham, Houston, 2007)
Limitations of Ratio analysis
The choices of accounting policies may distort inter-company comparisons.
The businesses apply creative accounting in trying to show the better financial performance or position which can be misleading to the users of financial accounting.
Ratios need to be interpreted carefully. They can provide clues to the company's performance or financial situation. But on their own, they cannot show whether performance is good or bad.
The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the company's current financial position.
IASB Conceptual framework recommends businesses to use historical cost of accounting. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decision making.
Ratios are based on financial statements which are summaries of the accounting records. Through the summarization some important information may be left out which could have been of relevance to the users of accounts. (NGFL Wales, 2008)
Assessing your firm's strengths, weaknesses, market opportunities, and threats through a SWOT analysis is a very simple process that can offer powerful insight into the potential and critical issues affecting a venture (Berry, n.d.)
Limitations of SWOT
SWOT analysis is often either trivial or so broad as to be relatively meaningless in the context of making actual marketing decisions.
Something about a firm may be both a strength and a weakness
The assessment of strengths and weaknesses may be unreliable, being based on aspirations, biases and hopes (Mintzberg, 1990)
The five force analysis developed by Porter focuses on rivalry among competing firms, bargaining power of consumers, bargaining power of suppliers, threat of substitutes and threat of entrant as the five forces which influence the competitive position of the industry. (David, 2002)
There are also limitations of other tools and techniques I used. As Porter's five forces model have some major limitations in today's market environment. It is not able to take into account new business models and the dynamics of markets. (Recklies, 2001)
It cannot be applied in isolation. It implies that the five forces apply equally to all competitors in an industry. It does not adequately cover product and resource markets (Campbell et al, 2002)
Results, analysis, conclusions and recommendations
Company profile:
DMTML engages in the manufacture and sale of textile products in Pakistan. It offers cotton and blended yarn; cotton and poly cotton fabrics in grey, bleached, dyed, and printed; and bed sheets, pillow covers, and cotton shopping bags. The company was incorporated in 1958 and is headquartered in Rawalpindi, Pakistan. (Bloomberg, n.d.)
The company is listed on the Karachi and Islamabad stock exchanges of the country and its main operations include sales and trade of cotton, polyester, viscose, blended yarn and cloth. (DMTML, 2009)
Overview of Pakistan's Textile Industry:
Overview:
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. 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. (Batool, n.d.)
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. All Pakistan Textile Mills Association is the chief organization that determines the rules and regulations in the Pakistan textile industry. 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.
(Doshi, 2007)
Trade organization
All Pakistan Textile Mills Association (APTMA) is the premier national trade association of the textile spinning, weaving, and composite mills representing the organized sector in Pakistan. APTMA emerges as the largest association of the country as it represents 396 textile mills out of which 315 are spinning, 44 weaving and 37 composite units. (APTMA, 2009)
Capacity:
The textile industry of Pakistan has a total established spinning capacity of 1,550million kgs of yarn, weaving capacity of 4,368million square meters of fabric and finishing capacity of 4,000million square meters. The industry has a production capacity of 670million units of garments, 400million units of knitwear (Anon. 2007)
Ratio analysis:
The ratios have been calculated over years ended 30 June 2006, 2007, 2008. The financial statements of 2009 were not available at the time of preparation of the project.
Sales:
For the year 2006 the sales of DMTML were Rs.768.053Million as compared to Rs.456.258Million in 2005 increasing by 68.34% due to increase in production from 9.124Million Kgs to 15.757Million Kgs and. The yarn prices during this period remained stagnant.
During the year 2007 there was a 13% increase in the sales of the company as compared to the last year. The sales volume increased only slightly. The main reason for this increase was an upshot in sales of raw cotton from Rs7.5Million to Rs64.0Million, during the year cotton support prices increased in a larger proportion as compared to yarn prices; to take benefit of higher margin on its sales DMTML sold a higher proportion of raw cotton. DMTML also exported Rs.26Million worth of goods, which was a first time venture for the company, despite Pakistan's textile industry being the leading exporter of yarn, cloth and value added (Arifeen, 2009).
For the year 2008 the sales revenue of the company remained almost constant and were Rs.867Million, despite fall in sales volume of 8%. This time the slight increase in sales was virtually entirely due to local increase in prices of cotton and yarn. However, a fall in production levels and a rise in finished goods inventories are suggestive of fall in future sales of DMTML. The revenue of STML (which is the key competitor of DMTML due to proximity in location and operation) are much higher at Rs.4,489Million and have grown at a higher pace of 18%.
Profitability Ratios:
Following are the profitability ratios of DMTML.
For the year 2006 cost of raw material consumed was Rs.490.004Million as compared to Rs.309.630Million and gross margin increased on account of increase in sales. In 2007 cost of sales increased by 17.69% as compared to increase in sales revenue by 13.19% resulting decrease in gross profit margin to 8.50%. There was a sharp increase in raw material prices during the period (The News, 2006). Electricity and Gas also increased by 10% and by 38% to Rs.238 per MMBTU during this period of time which also affected the gross profits of the company. The company also has to deal with operation disruptions due to electricity crisis in the country.
For the year 2008 there was a further decrease in the gross profit margin to 7.63%, despite the fact that sales volume saw a decrease during the period, although sales prices increased considerably during the period. However, this was followed by a much higher increase in raw cotton prices. The management is trying its level best to control men, material and machinery with maximum efficiency and optimum production.
The gross margin of STML was better than DMTML at 9.81%. The main reason for this is that the company has higher sales volume and sells a larger proportion as exports (one third of total sales) which provide relatively higher margin than local sales.
For the year 2007 there was a decrease in the operating profit margin ratio to 3.91% against 9.60% in 2006. Besides a fall in gross profit the main reason for this fall in other operating expenses which rose to six times their size at Rs21Million. This was on account of loss on sales of fixed assets during the period. These were extra unused fixed assets on the Balance sheet so the management decided to sell it off to generate liquidity. Selling and distribution expenses also increased considerably on account on increase in export freight and increase in international and national fuel prices.
There was an improvement in the operating margin in 2008 as it rose to 4.29%. This was because the one-off loss on sale incurred in 2007 did not incur this year. However, despite a fall in sales volume the selling and distribution costs increased. Export freight was not incurred during the period DMTML engaged in Research and Development regarding advances spinning techniques to improve quality of yarn. This was supported by Government of Pakistan to encourage and regulate research and development in the country.
The operating margin was of STML was close to that of DMTML at 5.25% despite a much higher gross margin. The reason for this was that as STML exports a larger quantity its export freight is much higher.
If we analyze the net earnings it can be seen that there was a major downturn from Rs.30.7Million profits in 2006 to Rs.4.8Million losses in 2007, showing a loss margin of 4.69%. During this period of time there was a sharp increase of 64% in the finance costs of the company as compared to the previous year. Financial cost increased due to linkage of markup with KIBOR which was increased drastically by the State Bank. There was also a slight increase in short-term borrowings of the company, which added fuel to the fire. Despite a loss before tax there was a sudden increase in taxation of DMTML. There was a huge increase in provision of deferred tax of Rs.12.863Million due to unfavorable temporary differences.
For the year 2008 the company losses reduced from Rs.40.8Million to Rs.24.1 Million. And the net loss ratio was only 2.78%. Besides a slight improvement in operating margin there was also a decrease in taxation f the company as deferred tax charges reduced. Despite of further increase in the interest rate in the country the finance costs of DMTML reduced slightly, because of fall in both long and short-term loans taken by DMTML.
STML also incurred a loss due to increase in several cost components during the year, but its loss percentage was much lower than DMTML. This was because its operating margins were better owing to larger size of operations.
The Return on capital employed (ROCE) of DMTML fell from 5.05% in 2006 to loss percentages in 2007, 2008 thus commenting on the trend on this ratio would not be very meaningful. However it can be said that despite injecting capital in the business throughout the three years the Management was unable to improve performance. STML's loss on capital was lower than that of DMTML. The asset turnover shows a downward trend. The ratio was 1.23times in 2006 but fell in 2007 to 0.87 despite an increase in sales. The reason for this was that in 2007 the management revalued the assets of the company, rendering their book value upwards. But even after giving consideration to this the turnover of STML is much better than DMTML as it generates a much larger amount of sales.
Liquidity Ratios:
Following are the liquidity ratios of DMTML.
The liquidity of the company is not satisfactory and it can create problems for continuation of its operations, thus going concern assumption can be affected. The liquidity conditions have fallen as due to operational losses being incurred by the company. Both the current and quick ratios were relatively high in 2006 and 2007, but since then things have gone downhill. For the year 2007 there was a 34% decrease in the current ratio of the company as compared to the year 2006. A 23% reduction in the total current assets was caused by fall in inventory level and reduction in advances to suppliers. This was a part of internal policy of DMTML to reduce advances to manage working capital in a better way. There was a 17% increase in the total liabilities of the company. One of the most notable increases was in the trade payables of the company. During this period of time there was 23% increase in the trade payables, this was because of a financing decision to manage the cash cycle and an increase in current portion of long term lease liability increase by 45%.
For the year 2008 there was a 7% decrease in the current ratio, but the quick ratio improved slightly. During the year stock levels were decreased but these were followed by an increase in trade debts and advances to suppliers. The trade debt increased but one of the major things to notice was that DMTML wrote off a debt worth Rs2.4Million. If we take a glance at current liabilities they increased again on account of trade payables. The current asset base of the company is very low. Although most of DMTML's sales are on cash and it generated Rs129Million from operations, most of these were reinvested in plant and machinery as the management has taken the strategy to expand its operations in the near future.
Activity Ratios:
In 2007 there was a sharp decrease of 79% in the receivable turnover as compared to the year 2006. However debtor days of 7days in 2007 compared to 2days in 2006 shows that there is no major deterioration in receivables. Most sales of the company are on cash basis. This slight increase in on account of a debt outstanding from a foreign customer in 2007. This ratio increased further in 2008 to 13days. However this year it was not on account of foreign customers. DMTML sold goods to large customers, payment for which was outstanding at the end of the year. During this year there was a of 1.71times increase in the trade debtors of the company. The receivable days of STML are much higher at 71days. This is because STML does not have selective customers and its offers much more relaxed credit terms, which is why its sales are higher than DMTML.
During the year 2007 there was an increase of 33% in the inventory turnover of the company as compared to the year 2006. Because of this increase in the inventory turnover of the company there was a decrease of 25% in the inventory turnover days of the company which depicts that the management of the company decided to free some portion of working capital invested in inventory.
In 2008 there was also an increase of 28% in the inventory turnover of the company as compared to the year 2007. During this year the liquidity position of DMTML had deteriorated considerably. DMTML, resultantly the management decided to reduce the capital invested in inventory levels so raw material levels were reduced. However one noteworthy point is that over the three years there has been an increase in finished goods inventory level from Rs2Million to Rs22Million. This is a major warning sign for the company, as it means the company is unable to sell its produce quickly. The main reason for this the Cash sales policy that DMTML has which is not an industry norm. The inventory days of STML are higher at 81days but most of the inventory is on account of raw material. Also reducing inventory levels lead to fall in liquidity as it is a major part of current assets.
During the year 2007 there was a decrease of 4% in the payables turnover of the company as compared to the year 2006. The payable days of 81 in 2006 were very high which increased slightly to 84days in 2007. Due to the investment in plant and machinery the company is running low on finances, keeping that in view DMTML takes more time than usual to pay its suppliers. During this year there was a of 23% increase in the trade creditors of the company and the payable days rose further to 98days in 2009, which is way beyond normal credit terms. It is understandable that the company is unable to pay due to liquidity problems, but such high creditor days will lead to the dissatisfaction of suppliers and may jeopardize future supply of raw material. The creditors may start demanding on-the-spot payment or they may simply shift their supply to competitors who promise to pay the suppliers on time such as STML which has a payable days ratio of as small as 21days.
Solvency ratios:
Following are the solvency ratios of DMTML.
During the year 2007 there was a sharp decrease in the total debt to equity ratio, which fell from 38.24% to 20.56%. One of the most notable things during this year was the 2.05times increase in the equity of the company as compared to the previous year. This was on account of revaluation of fixed assets carried out during this period. There was a decrease in long term financing as DMTML used cash generated from operations to pay some of its liabilities. The ratio decreased again slightly in 2008 to a figure of 18.46%. The equity of the company remained almost stagnant, but there was a decline in the long-term loans. Recently management has taken the strategy to finance its growth through internally generated finance, which is why DMTML is paying off majority of its debts..
Interest coverage of the company reduced dramatically during the year 2007 from 1.81 times to 0.59times. Although the finance costs increased owing to increase in mark-up of short-term borrowings and interest on finance leases, the most important reasons of this decrease in the coverage ratio was a decrease of 28% in the operating profits. Interest coverage of the company increased slightly in 2008 to 0.69times as the profitability stabilized slightly. However in both years the finance cost has been less than 1 which means that the high debt financing has caused such high financial risk in the business, which is eroding the reserves of DMTML.
By analyzing the solvency position of the DMTML and its competitor we come to know that the DMTML has less reliance on debts as compared to STML. However despite that the Interest coverage of STML was higher, which is because STML had higher profits.
Investor's ratios:
Following are the investor's ratios of DMTML.
Investor's ratios of DMTML depict the deteriorating profitability of the company with the passage of time. There has been no change in the issued share capital of the company in all three years. During the year 2006 and 2007 the market price of the company remained almost stagnant. In 2008, however, there was a sharp decline in the market price of the share and the reason was stock market crisis of Pakistan. Due to faltering of US economy and deteriorating market conditions of Pakistan such as the rising interest rates, the stock markets performance deteriorated considerably (Daily times, 2008). The decline was also a result of negative earnings of the company and litigation against the company management regarding unauthorized purchase of assets.
Over the period of time there has been no change in the issued share capital of the company, although the company needed finances, low share prices did not favour the issue of new shares. No dividend has been paid by the company over the period of time as the liquidity of the company is low and no profits were earned in 2007 and 2008 out of which dividend could be paid. (Pakistan Securities)
SWOT Analysis:
STRENGTHS:
DMTML is one of the leading textile mills in the Pakistan and it was amongst the pioneer textile mills to start business in Pakistan.
Abundance of raw cotton in Pakistan is one of the most notable points for the textile producers in the country and DMTML is reaping the benefits of the availability of this raw cotton which gives it an edge over international companies. (PTV Channel, 2009)
The factory is located in Rawalpindi, which is easily accessible to the large cloth market on the Capital city of the country.
One of the few companies in the country engaged in research and development in textile sector will involvement of the Government of Pakistan.
Strong strategy for future growth including a plan for capacity expansion, DMTML spent $0.2million on Balancing, Modernization and Replacement in 2001, (Pakistan Textile Journal, 2001) this investment levels has been growing ever since.
WEAKNESSES:
Another thing which needs to be taken into account is the unstable structure of DMTML because of which there is a lot of variation in the profitability results.
Weakness in the finishing of DMTML is also very notable point. Value added products in the industry are lacking this is due to cotton contamination. Until contamination free cotton is made available, value-added textile cannot be produced and exported (Bashar, 2001)
Another weakness of DMTML is that there is a general perception that the products of DMTML are low in the quality.
The company management faced a legal charge from the Securities and Exchange Commission of Pakistan on account of advance paid for purchase of a Guesthouse in Islamabad without prior written approval of the Board of Directors. (SECP, 2007)
OPPORTUNITIES:
Although the local market has been slow, recently economic variable such as FOREX and import growth of Pakistan have shown some improvement. (Government of Pakistan, 2009)
There is an opportunity if DMTML performs a forward integration then it can potentially improve its results. Growing popularity of knitting products these days nationally and internationally is also potential opportunity
THREATS:
Political instability in Pakistan ever since the death of Ex-Prime Minister Benazir Bhutto has not settled. The government coalition if weak and industrial developments have been hindered. (Farooqi, 2008)
Economic instability due to high inflation and interest rates and weak form efficiency of Stock Markets.
Energy crisis in Pakistan is also one of the major threats for DMTML as it can severely damage the production of the industry.
Porter's Five Forces Analysis:
THREATS OF NEW ENTRANTS
What might encourage a new textile mill to set up business in the country could be the fact that there is huge amount of raw material available and infrastructure facilities for textile mills are available. However the new entrants face several barriers which primarily includes the high costs involved in starting this business. Secondly the new entrant in the industry will be completely unable to differentiate itself from others which also discourage new entrants. The costs of being involved in active marketing campaigns are very high which also serves as a barrier to entry.
THREATS OF SUBSTITUES
In textile industry there are different fibers and which good substitutes to each other are in general. Cotton products' main substitutes comes from synthetic fibres, but these are not as widely used or produced to be a major threat to the industry.
BARGAINING POWER OF SUPPLIERS
The supplier of raw material can supply its raw material to any textile manufacture it wants. The cotton crop for the past few years has been in short supply which renders the power of cotton farmers even higher. They have support from farmer's associations and the Government itself and the textile industry cannot substitute cotton with any other raw material, which is as abundantly available.
BARGAINING POWER OF BUYERS
DMTML buyers are either retailers or weaving companies while buy yarn to produce cloth. The bargaining power of local buyers is high in the textile industry, this is because they are aware of quality of good and their relative prices, and their switching cost is also low..
RIVALRY AMONG EXISTING FIRM
In case of the local market the number of competitors is very large and all moves are competitive. It is very easy for customers to switch suppliers and quality of products if of utmost importance. In international market there is strong competition from Chinese and Indian textile mills, which even threaten the local share of the industry.
Conclusion:
The company is listed on the Karachi and Islamabad stock exchanges of the country and its main operations include sales and trade of cotton, polyester, viscose, blended yarn and cloth. The sales of DMTML increase in 2006 due to volume increase, but in 2007 the volume of sales did not increase the increase in revenue was result of rising yarn prices. In 2008 the sales volume fell, which is a grave sign for the company. Sales of STML are much higher and its exports a major quantity of its sales
The price of raw material has increased tremendously without corresponding increase in sale prices and has affected profitability of the company. By comparing the profitability of DMTML competitor it can be seen that the performance of STML has been much better due to larger volume of export sales, which provide higher margin. The profitability of DMTML deteriorated in 2007 due to high national and international cotton prices, the administration cost rose and selling costs also rocketed due to increased international fuel prices. Although DMTML managed an operating profit it was all consumed in finance costs.
Even a company which is profitable in long term may not be going concern because of liquidity crisis. The liquidity position of DMTML has deteriorated mainly due to investment strategy followed by the management. STML's liquidity is much better as it is not undergoing expansion projects.
The receivable days of DMTML are low as it sells on cash. The inventory holding days have decreased overall but a rise in finished goods inventory means DMTML is having trouble selling the produce. The Payable days were all time high in 2008 at 98 days which might lead to dissatisfaction of suppliers. STML offers longer credit so does not have trouble selling goods and pays its suppliers in 26days.
By taking a glance of the solvency ratios it can be concluded that the company has reduced its reliance on the debt with the passage of time and has dragged it way below the debt ratio of STML, but due to low profits its coverage was less than that of STML. The performance of the company from the point of view of investors has not been satisfactory due to negative earnings and no dividends. The share prices have fallen due to above factors and general underperformance of the stock exchange.
DMTML is one of the premier manufacturers of textile products in Pakistan, fully equipped not only with the modern machinery and equipments but also professional management and staff. Lack of diversification by DMTML is one of the most notable weaknesses of the company. There is a potential growth in the ready made garments these days nationally and internationally. Present political instability in the country is a notable threat for the company as affects the production process.
The threat of new entrants in the textile industry keeping in view the current market conditions is low. There are no major replacements of cotton cloth so risk of substitutes is low. The bargaining power of the suppliers of DMTML is very high. The bargaining power of local buyers is high. The rivalry among the textile mills of the textile industry also is high.
recommendations:
I would suggest that DMTML should move towards forward integration and increase the diversification of its operation this will help in the reduction of risk. DMTML also need to pay attention to finishing of its products as at present the finishing of its goods is not good for which DMTML will need to train its staff. Company should also use its resources in a more efficient manner. The company needs to start selling on credit like other companies. DMTML is also facing a shortage of funds and several liquidity issues. It also needs to ensure its is complying with listing regulations at all times, otherwise similar litigation such as that mentioned above could seriously damage reputation.
