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Textile: Azgard Nine Ltd - Analysis of Financial Statements Financial Year 2003 - 3Q 2010

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Highlights - Corporate News

OVERVIEW  : Pakistan being the fourth largest cotton producing country in the world, its textile industry receives great importance locally as well as globally. The industry plays a pivotal role in the national economy, contributing 60% to the total exports.

However, due to the economic slowdown in the USA and Europe, Pakistan s textile industry has suffered greatly, with exports declining by 20% in 2008. Additionally, the cotton crisis of last year led to a sharp increase in the price of cotton yarn, causing the value added sector of the country to suffer. Power shortages, the unstable political situation and the high cost of finance are also making things difficult for those operating in this sector.

Established in 1886 by the Shaikh Family, Azgard Nine Limited, is one of the leading textile exporters of the country. Being vertically integrated, the company is involved in composite spinning, weaving, dyeing, and stitching of yarn, denim, and denim products in Pakistan and internationally. The company has affiliations with well-known international retailers such as H&M, Zara, and Gap, with customer bases across USA, Canada and Europe. The company also engages in the manufacture and sale of nitrogenous and phosphate fertilizers; and import, export, wholesale and retail marketing, and manufacture of textile and apparel products and accessories. In addition, it involves in the development, implementation, and sale of software products, as well as provides related services. The company s subsidiaries include Nafees International, Agritech Limited, Hazara Phosphate Fertilizers (Private) Limited and Farital AB.

Recent results (3Q10)

Sales in 3Q10 have increased by 3. 48% as compared to 3Q09. Sales in 3Q10 are Rs 8,938. 8 million as compared to Rs 8638. 4 million. The increase in sales is mainly due to the fact that textile and denim markets are sound with good volumes.

However the cost of goods sold has increased by 33% in 3Q10 as compared to 3Q09. The increase in COGs is due to the fact that cotton pledge lines were not available to Azgard Nine Limited. Due to this, Azgard Nine had to buy cotton at the prevalent high prices thereby increasing their COGs. Also, the company was working at partial capacity only due to lack of working capital. The company s gross profit fell by around 62% as compared to 3Q10 (Rs 2685. 8 in 3Q09 to Rs 1019. 6 in 3Q10). This is because of huge increase in cost of sales. The selling and distribution expenses increased by 46. 1% in 3Q10 as compared to the third quarter of 2009. Administrative and general expenses went up by 25. 8%. The net other income in September 2010 is positive at Rs 811. 8 million as compared to a negative figure in September 2009. Overall operating profit has fallen by 47. 8% in 3Q10 as compared to 3Q09. Finance cost has fallen by 16. 7% and the profit after tax has become a negative figure as compared to a positive one in 3Q09. This loss after tax could be attributed to company operating at partial capacity, energy shortages, high raw material costs (cotton and yarn), a very disturbed law and order situation and increase in interest rates.


                  Nine months       Nine months

                 ended September    ended September

                    30, 2010        30, 2009

                     Rupees         Rupees


Sales - Net              8,938,820,464   8,638,376,007

Cost of sales            (7,919,265,722)  (5,952,599,476)

Gross profit              1,019,554,742   2,685,776,531

Selling and distribution expenses    (33,165,182)   (235,581,237)

Administrative and general expenses  (363,802,551)   (289,275,053)

Net other income/(expenses)       811,769,008    (9,312,644)

Operating profit            1,123,356,017   2,151,607,597

Finance cost             (1,521,217,220) (1,827,120,380)

other charges                   -         -

(Loss)/profit before taxation      (397,861,203)   324,487,217

Taxation                 (90,318,476)   (86,755,091)

(Loss)/profit after taxation      (488,179,679)   237,732,126

(Loss)/earnings per share -

Basic and diltued               (1. 12)       0. 46

Sales (3Q10)

Sales in 3Q10 have increased by 3. 48% as compared to 3Q09. The gross profit margin in 3Q10 was 11. 4%, which has dropped from 31. 1% in 3Q09. The decline is due to a sharp decline in gross profit and only a slight increase in sales.

There has been a sharp decline in profitability in 3Q10 as compared to 3Q09. The sales increased slightly but due to the hug rise in cost of sales the increase in sales could not lead to higher profits rather a negative figure for after tax profit is there.

Profitability (3Q10)

When comparing the profitability of 3Q10 with that of 3Q09 it can be observed that there has indeed been a sharp decline in profitability over this time span. The profit margin for 3Q10 is -5. 46%. This is because of a net loss reported in the income statements due to reasons mentioned above. The profit margin for 3Q09 was 2. 75%. The return on asset or 3Q10 is also negative, the value being -1. 3% (a compared to 0. 82% in 3Q09). The return on equity is -3. 73% in 3Q10 (as compared to 2. 1% in 3Q09). These are again due to negative returns during this period. The negative profit margin is because of the huge increase in Cost of sales previously mentioned, Increase in selling and distribution charges of 46. 1% and administrative and general expenses by 25. 8%.

Liquidity 3Q10

The liquidity in 3Q10 is slightly better as compared to that of third quarter of 2009. The current ratio in the third quarter of 2010 is 1. 2 whereas that in third quarter of 2009 was 1. 02. The quick ratio for 3Q10 is 0. 93, an increase from 0. 62 in 3Q09. The cash and bank balances in 3Q10 have reduced by around 80% when compared with 3Q09. Advances, deposits, prepayments and other receivables have increased in 3Q10 by around 70% as compared to third quarter of 2009. The short-term investments for 3Q10 have increased by 153. 5%. This shows that the company has invested much of its cash in short-term investments and has increased credit sales in the third quarter of 2010.

Asset management 3Q10

The inventory turnover for 3Q10 is 1. 89 as opposed to 1. 39 of the third quarter of 2009. This increase is because as mentioned above the cost of sales in the third quarter of 2010 have increased. The operating cycle for 3Q10 stands at 255 days, a decline from previous year s third quarter. DSO for 3Q10 is around 65 days. The total asset turnover in 3Q10 was 0. 24, a decline from 0. 3 at 3Q09. This decline is due to the increase in assets by 29. 3%. The sales/equity ratio for 3Q10 is 0. 53 a decline from 0. 75 of the previous year s third quarter ratio. The decline is due to the increase in equity by 46. 4%.

Debt management 3Q10

The debt to asset ratio at 3Q10 is 1. 82; an increase from 2009 s third quarter s 1. 66. This is due to the increase in debt in the third quarter of 2010. Liabilities have increased by a greater amount than assets have. The debt to equity in 3Q10 is 1. 22 - a decrease from 1. 51. This is because equity has increased by 46. 4% in this quarter. The long-term debt to asset ratio at 3Q10 is 0. 23. This is due to the 29. 3% increase in assets. The TIE ratio in 3Q10 stands at 0. 74, a decline from 1. 18 in 3Q09. This decline is due to the fact that EBIT has fallen in 3Q10 by 47. 8% as compared to 3Q09. Even though the interest cost has decreased by 16. 7%, it is not sufficient to increase the TIE ratio.

Market value.

The market value ratios for 3Q10 have declined significantly. The EPS for third quarter of 2010 is -1. 12 whereas it was 0. 46 in the third quarter of 2009. The EPS is negative because the profit after tax too is negative with a value of -RS 488 million. The market value on September 30, 2010 was Rs 10. 13 as compared to Rs 27. 58 on September 30, 2009. Since the EPS is negative the P/E ratio for 3Q10 too is negative at -9. 04. This is a huge decline from 59. 9 in the third quarter of 2009.

The dividend payable for 3Q10 stands at Rs 3456326. No dividend for the period would have been approved as the company has reported a net loss. The book value per share at the third quarter of 2010 was Rs 38. 7 as opposed to Rs 22 in third quarter of 2009. However the market values have a reverse trend as mentioned before.

Financial performance FY09

Over the years, Azgard Nine has shown steady growth in terms of sales with 2009 being no different. During 2009, Net Sales grew by 16%, with 85% of the Total Sales being exported. Exports rose by almost 22% in 2009, while local sales declined by 12%. Despite the global economic slowdown, Azgard Nine had managed to grow Net Sales from Rs 10. 14 billion in 2008 to Rs 11. 74 billion in 2009.

Although the Net Sales increased, Profitability of Azgard Nine witnessed a sharp decline during FY09. The Gross Profit Margin fell from 34. 15% in 2008 to 27. 19% in 2009. Sales increased by 16% over the previous year, but due to the sharp rise in Cost of Goods Sold, the increase could not be translated into higher profits. Cost of Goods Sold grew by 28. 32%, primarily due to the increases in the cost of raw materials. Analysis of the Cost of Goods Sold account showed that the company had large amounts of Work in Progress and Finished Goods in 2008, while the amounts were much lesser in 2009. By using 2008 s stock, the company suffered from a much smaller impact from the rise in prices of raw cotton than it would have had it not built up an inventory. Thus rather than seeing a 60% rise in Cost of Goods sold, there was only a rise of 28% in FY09, which however was enough to reduce the Gross Profit Margin.

The Profit Margin of Azgard Nine witnessed an almost shocking decline; from 8. 8% in 2008 to 0. 5% in 2009. This decline of 94% was caused mainly due to the 58% increase in Administrative Expenses over the previous year. Salaries and Benefits was the major component of this rise, with an increase of 56% during 2009. Sharp increases in Travelling and Entertainment, and Legal Charges add to the expenses. Another factor leading to the sharp decline in Profits was the reduction by 68% in Other Income. Within Other Income, Net Gains on Financial Instruments declined by 74%. The main component of the Financial Instruments was Return on Investments which included TFC s from Agritech Limited, a subsidiary of the company, and this account witnessed a sharp decline as there were no returns from the investment in 2009. The overall impact of all the increasing expenses and decreasing income was thus heavy deterioration of the Profit Margin.

Net income for the year declined by 93%. Tax expense for the year increased by 15% despite the fact that income has tumbled during the year. This is because the company falls under the policy of Final Tax Regime, according to which taxation is based on the Sales, and not the Profits. Tax expense had thus increased similar to the increase in Sales, and had no relation to Profits. While Net Income fell drastically, Total Assets of the company increased by 41%. Return on Assets thus decreased by a large margin, from 3. 28% in 2008 to 0. 16% in 2009. Similarly, Equity rose by 43%, and the effect of this increase when combined with the sharp decrease in Net Income caused the Return on Equity to crash from 8. 7% to 0. 33%.

Like profitability, the liquidity of Azgard Nine declined in 2009. The Current Ratio fell from 1. 08 to 0. 82, a decline of 23% from 2008. The reason for this decline is that Current Liabilities rose by almost 45% during FY09, while Current Assets grew by only 11%. The increase in Current Liabilities can be attributed to the sharp increases in Current Portion of Non-Current Liabilities, as well as short-term borrowings and due to related party. Further Analysis showed that within Current Portion of Non-Current Liabilities, there were considerable increases in Redeemable Capital and Preference Shares to be redeemed. Within short-term borrowings, cash finance and export refinance were the major components witnessing increases. Current Assets on the other hand did not increase greatly due to the opposing effects of certain components increasing and certain decreasing. For example, large increases were seen in Advances, Deposits, and other receivables and short-term investments, while an equally large decrease was seen in Fair Value of Derivative Financial Instruments. Similar to the Current Ratio, the Quick Ratio fell from 0. 67 to 0. 5, a decline of 24% from 2008.

Asset management of Azgard Nine again showed a decline during FY09. Inventory Turnover fell from 150 to 147 Days, but Days Sales Outstanding rose sharply from 63 to 96 Days, causing the Operating Cycle to rise from 214 to 244 Days. This basically reflected the inability of the company to quickly convert credit sales to cash, thus hampering the company s cash flows. Trade Receivables rose by almost 76% over last year, which was the main reason for the large change in Days Sales Outstanding.

During FY09, the Total Asset Turnover Ratio also witnessed a decline, dropping by 17%, from 0. 37 to 0. 30. This decline was due to the fact that Sales rose by only 16% compared to the 41% rise in Total Assets. The Sales/Equity ratio fell in a similar manner, from 1. 0 to 0. 81 in 2009. This again was due to the much smaller rise in Sales as compared to the rise in equity.

Debt Management of Azgard Nine, like everything else, declined during 2009. The decline however was marginal, with the Debt Management ratios maintained at a similar level as 2008. The Debt to Asset Ratio remained constant at 0. 62, as Assets and Liabilities grew in a similar fashion over the year. The Debt to Equity Ratio fell slightly from 1. 68 to 1. 66 in 2009. This was due to the fact that Liabilities grew by 41% while Equity saw a rise of 43%. The increase in Liabilities was higher within Current Liabilities, with Non-Current Liabilities seeing a comparatively smaller increase. This is evident in the fact that the Long Term Debt to Equity Ratio dropped from 0. 66 to 0. 62. The increase in Long Term Liabilities was only 35% compared to the 43% rise in Equity.

The Times Interest Ratio was the one Debt Management Ratio that witnessed a great change in 2009. The ratio fell from 1. 40 to 1. 08, a decrease of 23%. Finance Charges of Azgard Nine saw a small decline of 2%, while EBIT dropped by almost 25%, leading to deterioration of the TIE Ratio. It was seen that the company was paying a large proportion of its income as Finance Charges, almost 93% of the operating income in 2009. These high costs of financing were heavily dampening the company s Profits.

Market Value Ratios of Azgrad Nine were sending mixed signals in FY09, with some showed improvement while others declined. The company paid no dividends 2009, while it had paid Rs 1. 02 per share in 2008. Earnings per Share of the company declined greatly from Rs 2. 65 to Rs 0. 12. This was due to the combined effect of decreasing earnings and increasing number of shares. The Price-Earnings Ratio saw a magnificent jump from 21. 23 in 2008 to 201. 7 in 2009. This was largely due to the sharp drop in Earnings per Share. Share Price of the company dropped during the year but not as much as it should have considering the low EPS. This shows that investors had hopes that the company would perform better in the future. Book Value per Share again increased, from Rs 27. 03 to Rs 37. 85, a rise of 40%. This was due to the 43% increase in Equity, while number of shares only increased by 27% in FY09.

Performance (FY03-08)

In 2008, Azgard Nine saw sharp increases in Sales, Gross Profit, Operating Profit, and Profit Margins. Sales rose by 52%, jumping from Rs 6. 7 billion to Rs 10. 2 billion. Gross Profit saw a rise of 72%, while Operating Profit increased by 81%. The Gross Profit margin increased from 30% to 34%, thus proving the improved performance of the company. Cost of Goods Sold rose sharply during FY08, from Rs 4. 6 billion to Rs 6. 7 billion. This rise can be attributed to the rise of almost 50% in Raw Materials Consumed. Despite this sharp increase both the Gross Profit and the Gross Profit margin showed an increase during the year.

The Net Profit margin has however seen a decline over the past few years, dropping from 23. 4% in 2006, to 8. 9% in 2008. This is mainly due to the increasing administrative expenses and Finance Charges faced by the company, with Finance Charges taking up almost 25% of the Sales Revenue of 2008.

Liquidity of Azgard Nine fell in 2008 as compared to the previous year. After reaching a high of 1. 51 in 2007, the Current Ratio dropped sharply to 0. 67 in 2008. While Current Assets of the company increased by 20% over the year, Current Liabilities increased by 67%, leading to deterioration of the Current Ratio. Liquidity of the company has seen yearly fluctuations, but until FY08, the Current Ratio had always stayed above 1. 0, a healthy sign.

Asset Management of the company has been following a healthy trend since 2006, with Inventory Turnover, Days Sales Outstanding, and the overall Operating Cycle decreasing. This is a strong indicator that the company has been able to utilize its inventory at an optimally better level each year, and has been able to receive cash from its debtors over shorter periods of time subsequently over the lapse of time. Although Inventory Turnover has increased in 2008, Days Sales Outstanding has decreased, causing the overall Operating Cycle to decrease. The Operating Cycle has fallen from 424 Days in 2005, to 214 Days in 2008, a decrease of 98%. Total Asset Turnover and Sales/Equity have also shown improvement over the years, with Total Asset Turnover increasing from 0. 21 in 2006 to 0. 37 in 2008, and Sales/Equity rising from 0. 53 in 2006 to 1. 0 in 2008.

The company s TIE Ratio has been following a steady decline since the year 2004. Finance Costs of the company are increasing at a higher rate than the increases in EBIT, with the company paying Rs 2. 5 billion in as Finance Charges in FY08. The Debt to Asset Ratio of the company has been maintained at a fairly constant level over the years, staying at or around 0. 6. The Long Term Debt to Asset Ratio has been on a decline, with greater reliance on Short Term Financing. In 2008, Short Term Finances rose from Rs 3. 82 billion to Rs 6. 57 billion, a rise of 72%.

Book Value of the company has been increasing steadily over the years, with increases in both Total Equity as well as the number of shares outstanding. Dividend payments have been fluctuating, but not falling below the rate of Rs 1. 0 per share. Earnings per Share have seen a steady decline since 2005 when it was Rs 7. 42 per share. EPS in 2008 was down to Rs 2. 65 per Share, primarily due to the falling Net Profit Margin of the company over the last few years. Market Price has however been increasing, with the Average Market Price rising from Rs 38. 03 in 2005, to Rs 56. 26 in 2008. Investor expectations from the company are thus high.

Future outlook

The textile industry in Pakistan has been facing difficulties in recent years. Several factors are leading to these difficulties. There are extended periods of load shedding for electricity and gas, and the situation is further deteriorating as a result of recent floods which are causing serious damage to the country s economy. While it is too early to forecast exact consequences for economy and trade, nevertheless it is expected that higher raw material prices of cotton will prevail due to damage to local crop, which will compress the already tight margins.

Along with this, the unstable political situation in the country is only making matters worse. High Interest rates in the economy are making it difficult for companies to obtain financing. Rising costs of production, along with increasing regional competition are making Pakistani textile products uncompetitive in the international market. As the main focus of Azgard Nine lies on exports, the company is likely to face even more difficulties in the future.

The company is confident that with steps towards improving efficiency and cutting costs, Azgard Nine will bounce back. It has intensified its efforts to reduce costs, maximize synergies and increase service levels in an effort to increase manufacturing efficiencies, enhance the product value and exceed customer expectations. The management is confident that it can achieve its goals through this process and increase business viability and profitability over the long-term.

However, this is dependent on the timely availability of working capital facilities by the lenders in order to be able to run the operations of the Company at full capacity. Currently efforts are still in progress to conclude such arrangements but have as of yet not been finalised. The company is also in the process of disinvesting the major portion of its investment in AGL. It may be expected that after the financial re-profiling is complete, and as the working capital lines expand, the Company will be able to increase its production and secure a good financial performance.

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].


Courtesy: Business Recorder

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