SUNRAYS TEXTILE MILLS LIMITED Financial AnalysisIndustry Overview: Textile is the most important industry in Pakistan. It accounts for approximately 40 percent of manufacturing employment, over 60 percent of total exports, and over 30 percent of value-added production. Pakistan's textile industry, based on locally grown cotton, produces cotton yarn, cotton cloth, and made-up textiles and apparel. Its small woolen industry uses mostly imported fibers to manufacture woolen yarn, acrylic yarn, fabrics, shawls blankets and carpets. The polyester fiber and yarn industry has also grown significantly in recent years, and meets over 80 percent of country requirements, but viscose and acrylic fibers are imported. The artificial silk and synthetic weaving industry remains largely in the unorganized sector. In Pakistan Fiscal Year (PFY) 1998 (Pakistan Fiscal Year starts July 1 and ends June 30), Pakistan had a total of 503 spinning mills with an installed capacity of 8,332,000 spindles and 145,000 rotors. The weaving industry has 53 integrated units (composite units with spinning and weaving in one unit) with an installed capacity of 14,130 looms; 512 shuttle less weaving units with an installed capacity of 13,340 1ooms; and approximately 30,000 units in the power loom (shuttle loom) sector, with an estimated 225,253 looms. In PFY-97 it additionally had 670 finishing units with a production capacity of 3,460 million sq. meters of fabric per annum, 700 knitwear units with 15,000 knitting machines, and 4,000 garment units with 160,000 industrial and 450,000 domestic sewing machines. Pakistan's textile industry is based on domestically grown cotton. Imports meet the shortfall of domestically grown medium staple cotton and the requirements for long staple and extra-long staple cotton. Exports of all textiles in PFY97 totaled a value of USD 5.4 billion. The major buyer of textile clothing and accessories was the United States, which purchased USD 309.2 million of goods. Pakistan's spinning and weaving industry is in a crisis, largely owing to higher prices for domestically produced cotton, financial mismanagement and the subsequent difficulty in obtaining loans for new, technically-advanced machinery. Loans from financial institutions are unavailable to the spinning industry, and several weaving units are working under contract for lack of working capital. The East Asian crisis and rising electricity charges have further exacerbated the situation. Source: US Department of State and US Foreign Commercial Service Spinning Industry Spinning is the process of converting fibers into yarn. This is the first process of value chain that adds value to cotton by converting into a new product i.e. conversion from ginned cotton into cotton yarn. If spinning industry produces sub-standard yarn, its effect goes right across the entire value chain. Of the total 163 million spindles in the world, 113 million spindles are installed in Asia. Major Asian yarn producers along with their number of installed spindles and share in world and Asia are shown in the following table: World share of Spindles Country Spindles ‘000’ Share in World Share in Asia Growth Rate (1992-96) 027 23.1% to 13.7 5. However 92% of yarn exports from Pakistan are concentrated just in this one category.94% -2.2% to 5.70% -8.334 2.50% 19.50% 7.458 -12.050 4.2 1995 28.80% 3. Japan.3 million and yarn production is around 1.00% 1.50% 4.10% 2.100 3.80% -11.672 1.16% 6.8 13.00% 1.6 1996 27.60% 6.525 16. Pakistan is the fourth largest producer of cotton yarn in the world.00% 3.7 10. Pakistan’s yarn exports and its market shares during the time 1993-97 are shown in the Table: Years World Market (‘000’ $) % Change Asian Market (‘000’ $) % Change Pakistan’s Exports (‘000’$) % Change World Market Share (%) % Change Asian Market share (%) % Change 1993 19.424 18. India and Pakistan.10% 1994 24.50% 5.975 25.200 6.34% -10. In the Asian export market.7 5. Pakistan’s exports have decreased in the period 199697 from $1. Pakistan’s market share dropped from 6.90% -4.2 11.2% in the global yarn exports.432 6. 70% of total yarn production in Pakistan is based on coarse and medium count cotton yarn. As a percentage of total Asian exports.6 10. Pakistan had 13% share and ranked 4 . Pakistan used to hold 2nd position in Asian Yarn export market but its position declined from 2nd to 4th in 1997.30% 2. Major markets for Cotton Yarn are Hong Kong. Two third of the total global spinning capacity is installed in Asia and as a result Asian exporters account for 40% of total world exports.159 7.9 1.360 4.60% 29.108 4.China India Pakistan Indonesia Turkey Japan Thailand Taiwan Korea Iran 41.25% Yarn is a $27 billion global market.80% 2. in line with the global trade patterns.20% -14.22% 4. Pakistan’s market share dropped from 17.20% 38.617 0. Global consumption of fiber is shifting from Cotton to MMF.135 1.60% -0.835 8.596 0. UK and the USA.45 billion.30% 1.00% 4.10% 3.4 15.8 5.90% 0 15. Cotton yarn is the largest product category within yarn and accounts for around 25% of total global exports.50% 2. China.6 th During the period 1993-97. Total number of installed spindles in the country is 8.025 16. In Pakistan.4 1.07% 7. Korea. Major Asian yarn producing countries are China.59% 2. .5 million tones.80% 0. Germany.990 1.00% 1.648 15.1%. however only 18% of spindle utilization is for man made fiber and the need is to increase this percentage to 40% at least. Pakistan’s Position in Global Yarn Market Pakistan held 4% share of the total global yarn exports and ranked 7th in 1997 among the yarn exporters.6 9. The performance looks even more unsatisfactory in view of the fact that the total export market for yarn is growing.6 1. Italy.20% 17.547 -1.3 1.8 15.039 29.544 4.67 billion to $1.00% 4.70% 2. Therefore there is a strong need for spinning industry in Pakistan to diversify its product mix and increase the share of high value added finer count yarns.6 1997 27. This means that Pakistan is losing market share in yarn export market.10% -16.5 6.70% 0.01% 3.710 31. which has 32 million spindles and contributes 20% to the world and 30% to Asian installed spindles. SUNRAYS TEXTILE MILLS LIMITED Sunrays Textile Mills Limited was established in 1987 as a public limited company and is listed on Karachi Stock Exchange. Growth in PV yarn has been lesser significant compared to that in PC yarn.6% of the capacity in Asia. Blended yarns constitute a smaller portion of the Pakistan’s total yarn production. Comparison with India and China is more realistic because they are larger cotton producers than Pakistan and their competitive edge in textiles also stems from local cotton production.3 billion. .7 million kg which amounted to Rs 1. Taiwan has the highest figure where 66% of the total spindles are being used for spinning MMF. Pakistan is found to be operating at a very low usage of spindles for MMF spinning.Blended Yarns In the category of the blended yarns. Viscose fiber industry has not developed in Pakistan and almost all of the viscose fiber used is imported. Pakistan is operating at 18% utilization for MMF that is lowest amongst all the competitors. From 1996 onwards. The company operates a spinning unit of 192000 spindles in Muzaffargarh (40 KM from Multan). Pakistan’s growth rate has been 6. There has been no change in China’s spinning capacity during the period 1992-96. But they are trying to follow the world trend in which Pakistan is lagging far behind. Percentage share trend of PC and PV for the period 1982-99 is shown in figure below. The share increased from 4.2% in 1982 to 7. which started commercial production in 1991. Polyester/Cotton (PC) and Polyester/Viscose (PV) are the main types of yarns produced by the Pakistani spinning industry. Major reason for this trend has been the growth of polyester industry in Pakistan leading to easy availability of polyester staple fiber. The reason for this is the non-availability of local cotton and large local manufacturing base of MMF. Their figure is more than double than that of Pakistan. India has increased its spinning capacity at a growth rate of 3%. there has been a trend of continuous increase in production of PC yarn and its percentage share has increased to 17. the rest 30% claimed by PV yarn. Although local availability of cotton is the competitive edge of Pakistan and its utilization should naturally be higher for cotton but even India and China use 40% and 35% of their spindles for spinning MMF. total imports of viscose staple fiber were 20. For the year 1997-98. Spindle Capacity Utilization for MMF China has the largest number of installed spindles in the world and accounts for 25% of the world and 39% of the Asia. Far Eastern countries have the higher reliance on MMF compared to other countries. Looking at the spindles capacity utilization for MMF in major textile exporters. Source: SMEDA website.5% in 1999.9% in 1999. Pakistan is the third largest player in Asia.2% and is second only to Iran amongst the major players. China is followed by India. PC yarn claims 70% share of the total production of the blended yarn. Pakistan’s spinning capacity is 5% of the total world and 7. was established in 1957. Indus group has been engaged in the textile industry since 1955. Yousuf Textile Mills Ltd. it has shown a outstanding export performance for which it has earned trophies for highest export in cotton yarn from the FPCCI. since 1960. through providing high quality product and services. that is the leading textile group in Pakistan. Indus Group of companies. The company has spinning factory at Hyderabad of 37. The current capacity of group includes 30. The group is involved in the supply of yarn to the national and international markets for the weaving and knitting industry. OBJECTIVES ü To increase our production capacity.Sunrays is part of family group of companies. and Mill 3) and another unit in Muzaffargarh of 15360 spindles.000 (16. It consists of 15.000 spindles (Mill 1. Its production facilities have been modernized over the years and latest automatic cone winding machines of Murata. ü To serve our customers. These are located near Multan in Shujabad. It is public limited company and is listed on Karachi stock exchange. Over the years. Mission Statement: We will achieve sustainable competitive advantage by consistently producing quality yarn that will satisfy both our customers and in return. Yousuf Textile Mills Ltd. drawing machines of Toyoda and Toyoda ring frames have been installed. ü To reduce production cost . GOALS ü To produce best quality yarn. mainly to Japan. employees. shareholders and the society as a whole. In addition to manufacturing and exporting cotton yarn it also exports raw cotton. Other companies of Indus group are Indus dyeing and manufacturing company Ltd.000 tons) cotton bales annually. The group has been operating Cotton Ginning and Seed Crushing Factories.696 spindles located in Karachi. cotton ginning and seed crushing factories. suppliers. Indus Dyeing and Manufacturing Company Ltd. operating in the sector of yarn manufacturing and cotton ginning. Gellawala and Bahadurpur. ü To become profitable and groom. our investors and employees. a public limited company listed in Karachi Stock Exchange was set up in 1966. Vision: To become a leading exporter of best quality yarn. Annual production of these factories is over 100. Mill 2.000 tons of cotton yarn and over 100.000 tons).000 cotton bales (16. Last year the company got ISO 9002 Certification for this purpose. integrated backward by purchasing ginning factories on lease. high interest charges and high ocean freight charges. E. they have acquired latest technologies and they also improved the process of production. the new machinery (Reiter) will give high level of production. ü To build good relationships with all stakeholders. The high production cost includes the high raw material cost. Related diversification: The Indus group follows strategy of related diversification. Business level strategies: Cost leadership: The company has planned to reduce its operational costs to stay competitive in the industry. Problem statement: Sunrays Textile Mill is facing high production cost. It is a value addition to yarn. high electricity charges. The company has control over the quality of raw material. they have engaged in the business of dyeing the yarn.ü To increase export of yarn. Corporate level strategies: Backward integration: Sunrays textile mills Ltd. the automation will help in reducing cost in the long run. And it has reduced its transaction cost of purchasing ginned cotton from ginning factories. . it will save labor cost of about 35 workers. For this purpose. E.g. ü To acquire good quality raw material. ü To have good human resource. Existing Strategies: Operational level strategies: Product development: The company always tries to improve the quality of its products.g. It is reducing its profits. 87 4.09 2.43 2.31 2.27) (0.g.62 0. E.1 14.6 12.3 8.79 0.91 13.06 8.97 0. the company should find some new markets.25 3.S. Concentric diversification: They should add new but related products to the existing one. that is the most profitable market. they should product polyester/cotton (PC) and Polyester/Viscose (PV) in order to reduce the threat of substitute products.8 2001 82 19.2 0. the company is selling yarn through commission agents.52 8.17 1. Financial Analysis: Financial Ratios 1996 88.1 8. Company management is exploring new markets.68 0.98 9.67 1.32 2000 100 79.97 8.8 10.67 0.1 11.19 8.5 4.72 1.4 8.42 11.06 0.43 1.46 Cost of goods sold % of sales Gross profit % of sales Operating profit % of sales Net profit before tax % of sales Net profit after tax % of sales Stock % of sales Current ratio Quick ratio Debt equity ratio Total debt asset ratio Earning per share Common Size Income Statement for five years Net Sales Less CGS Gross Profit Less Operating Expenses Net Operating profit Less Interest Expenses Plus Non-operating Income Profit before tax Income tax Net Profit after tax %age % % % % % % % % % % 1996 100 88.64 0. Market development: They should continuously search for new markets as it important for success and gain competitive advantage.A market.052 0.1 20.S.44 0.46 2.58 12.72 0.57 0.42 1997 87.94 8.64 1.78 1998 85.76 0.75 11.05 0.55 2.A to reach the whole U.89 7.21 2.74 1998 100 85.51 0.89 2.78 2000 79.22 0.79 0.78 0.28 -0.74 0.08 20.8 9. they have their own office and setup in U.93 14.59 0.9 13.19 -0.67 1999 100 86.27) 1997 100 87.82 0.53 0. Kashif Riaz.12 2. In other countries.99 4.13 14.92 5.19 8.51 0.27 2.42 4.9 14.4 5. Director of Sunrays Textile Mill.09 4.2 6.73 .46 (0.98 9.Proposed Strategies: Forward integration: Sunrays Textile Mill should go for forward integration and should install weaving and stitching factories.2 9.1 8.28 4. To increase its exports and face the competition.05 0.26 0.51 1999 86.8 0.21 10.85 3.15 0.82 0.2 13 0.8 11.52 2.23 0. According to Mr.23 07.12 5. From 1997 and onwards. . due to huge increase in ocean freight.Different costs that incurred in Sunrays reveal that cost of material is 75% of total cost of goods manufactured which is less than 1999 (78%). return on assets. Net profit before taxes has decreased from 10. INBOUND LOGISTICS Cotton is the major raw material that is used in its production.94% of sales. Financial and other charges are fourth major items of cost. It is affected by the demand and supply conditions. Total cost incurred on stores and spares. So in 2000 it is considered to be a liquid firm. From the ratio analysis of Sunrays Textile Mills Ltd.44%. In this way company has more control over the quality of cotton. which was 2. During 2000 profit of Company substantially increased and Company declared 20% cash dividend. we come to know that from 1996 to 1999. Company improved its financial position during 1999 sales increased by 14. In the year 2001. Gross profit improved.1% to 5. we see that the firms’.96% to 5. VALUE CHAIN ANALYSIS Sunrays Textile Mill performs the activities efficiently and effectively to provide quality product and services. Main reason of this low cost of raw material is decrease in prices of cotton nationally and internationally.5% cash dividend. By analyzing the profitability of the firm. to meet the annual requirement. repair and maintenance is 1. The company tries its best to keep the quality of cotton better. debt is increasing every year and thus it has to pay interest expense every year which is increasing.81%. Fuel and power cost is 31% of total operating cost the administrative and selling expenses increased from 4. As a result of which export sales of the company increased by 223% during 1998 sales increased by 8. Management has no direct control over the price of raw material. net profit margin. Sunrays Textile Mill also imports cotton if the good quality cotton is not available in the country. Cotton is stored in their own warehouses as it is a seasonal product. They must control the wastage and over utilization of spare parts. operating profit margin. 137 million for that.5% in 2001. Because any spinning unit has to hold raw material inventory and for this purpose it has to take loan from banks. These are under the control of management so they should control these expenses. we see that gross profit margin. By analyzing the debt ratios of the firm. benefit cost increased from 5% to 8% in 2000. The firm is in better financial position in terms of activity.81%. which is very high ratio and has a negative impact on the profitability. Company improved financial position and declared 12. 50 % external debt. Management must control the cost. They should also minimize the need for repairs by providing the employees with necessary training. The company purchases cotton from its own ginning factories. return on equity has increased in the next years. the firm is not much liquid because its current assets are less than current liabilities but in 2000 its current assets have exceeded its current liabilities. wages. The salaries.32% in 1999. But the firm is using approx. Government of Pakistan increased it by 47% and Sunrays Textile Mill paid Rs. offer competitive price and on time delivery of its products. management worked hard to increase the exports. develops. They work for relationship marketing. containing all information about their companies and products. It is a very useful website.com. MARKETING AND SALES Industrial products need little advertisement.indus-group. OUTBOUND LOGESTICS Sunrays Textile Mill does not have to store finished inventory because the yarn is produced on order. unevenness etc. Ltd. SERVICES Sunrays Textile Mill acts promptly and replaces the order. Although it is very difficult. It connects all of their employees with each other. Lahore. In this way. It is used by them for check-in and check-out purpose. fiber strength. It is also a convenient way to enquire from them. The URL address of the web site is www. packed and shipped. They market their products through commission agents or Export Management Groups (EMG). To achieve maximum worker efficiency. they have developed online intranet system in their office. Human Resource: Sunrays Textile Mill recruits. The software is supplied by Cranum Software Pvt. . motivates and rewards employees. they have issued every employee a card containing bar code on it. they are also loyal to them. count variations. Technical manager and laboratory Incharge are responsible for the quality of yarn. strength. if it is not as per the specifications of the customer. For example. GM heads the quality control department. It has a very good relations with its customers. fiber fineness. Company has fully equipped quality control laboratory where quality is measured using different statistical technique. He.OPERATIONS Sunrays Textile Mill is very concerned of its yarn quality. The bar card has a unique number on it. They have developed their web site on internet to introduce their companies and market their products. Supporting Activities: Technology Development: To ensure best quality product and services. because there are many variables that deteriorate the yarn quality like moisture. fiber length. It is manufactured. trains. they have upgraded the technology that is useful for efficiency and effectiveness. they can access information instantly. that is why. as the export requires. is providing funds to textile sector for BMR. 20 million last year and replaced the old 1990 model machinery with the state-of-art latest technology (Swiss Reiter 2000 model). Structural Analysis . Sunrays Textile Mills Ltd employs approximately 700 employees and provides indirect employment to a great number of people. To solve the residential problems of the non-local employees and their families. The growth of every sector is very slow. In the developed countries.702 as taxes. Company has workers and employees not only from inside the surrounding areas but also from the far places.8 million bales.720. So.2. Government allowed the export of the surplus cotton after meeting the local demand. There is inconsistency in the Government policies.g. Govt. they are not concerned of the low demand or low profit etc. The company invested Rs. The companies themselves have to take care of this issue. TECHNOLOGICAL ENVIRONMENT Technology is one of the most important factor to achieve sustainable competitive advantage.264. the investors are reluctant to invest. The difficulty is because of the prolonged verification and authentication of refund documents. Company has its own residential colony.190 towards workers’ profit participation fund and paid Rs. they are concerned about the cost of operation and the cost of electricity that is high and causing high cost of production.PEST Analysis: POLITICAL ENVIRONMENT There is political instability in the country. E. But unfortunately. Any mistake can cause a serious penalty. But the interesting factor is that Sunrays Textile Mills is doing well due to all its production having exported. Unless BMR is done on a regular basis production quality as well as operational efficiency cannot be achieved as per international requirements. ECONOMIC ENVIRONMENT The economy of Pakistan is at recession. it is an incentive for the industry. BMR is required not only to replace old equipment but also to upgrade technology with the latest version. A major problem faced by the industry is refunds on exports. Government allowed addition in spinning capacity and improvement in the machinery through BMR. So the requirement of cotton has gone up to 9.12. On the average the plant and equipment in our textile industry is over 15 years old. all the economic activities are also slow. but. So. scientists recommended alternative measures to decrease or abolish the dangers to their environment but situation in Pakistan is somewhat different as there is no regulatory body to check pollution. the income tax and sales tax laws are very complex. Government withdrew 15% duty on cotton import. SOCIOCULTURAL ENVIRONMENT The environmental pollution is a growing concern and problem all over the world. Sunrays Textile Mill has contributed over Rs. In this regard. who started his textile business 40 years ago. Naveed Ahmed Graduate from USA in Accounting. Competitive Rivalry: Competitive rivalry is high in this industry. also supports this sector in shape of loans. India and Taiwan etc. Mr. which are very quality conscious. The company is exporting its yarn to the developed countries like USA and Japan. Company has good image and reputation in market. the competition between yarn producers on the other hand. He is responsible for strategic corporate planning. With this fact. the buyer can switch to any other product. Only in Pakistan. there are approximately 500 yarn producers. due to the competition among the suppliers. Indonesia. tax rebates etc. Threat of substitute product: There is a threat of substitute products like polyester/cotton (PC) and Polyester/Viscose (PV). Bargaining power of supplier: The supplier power is not much because there are many suppliers trying to sell the raw material to them. So. Qualified Human Resource: Sunrays Textile Mill has professional management. Irfan Ahmad. skilled technical staff and trained labor force. we can well imagine its repute. Management of Indus group includes Mian Mohammad Ahmed. assistant managers . the ginning factories gain advantage. B. Govt. Kashif Riaz has completed his MBA from Bahauddin Zakariyya University.Sc Textile from USA. Bargaining Power of Buyer: The power of buyer is high because on one hand. And globally there are so many other rivals like china. that Sunrays Textile Mill own. Shazad Ahmad MBA (Marketing) from USA. because there are many producers in the market.Threat of New Entrant: The textile industry is attractive business because there is a lot export potential. SWOT ANALYSIS STRENGTHS Goodwill: DERBY and LUCUS are Sunrays Textile Mills’ Brands that are known as quality yarn in national and international markets. The other management staff includes 24 personnel including managers. Riaz Ahmad . And it is considerably cheap as compared to electricity. OPPORTUNITIES Demand: Yarn and textile has a great demand all over the world. Few advantages are reduce in transaction cost. cost of goods sold was 82 % of the revenue.g. Backward integration: One of the great strength of Sunrays Textile Mill is that it has its own suppliers of ginned cotton. It their weakness because. Technology: The company invested Rs. there is no sales tax on exports and there are rebates on the import of raw material like cotton. It owns several ginning factory. so whatever is produced. 20 million this year and replaced the old 1990 model technology with the state of art latest technology (2000 Reiter Swiss Model). E. is sold. E. A textile unit of average size employs around 700 employees. The local textile industry is labor intensive. g. in the recent year 2001. THREATS High financial charger: . on time delivery of raw material etc. Government policies: The government’s policies are favorable to textile and related industries. The machineries imported under Balancing. A recent figure of total employees in this organization is approximately 700 including management staff and labor force. It is a major opportunity for the company to expand its operations and increase the market share. Cheap labor: Pakistan has one of the cheapest labor country in the world.and engineers in different sections of organization. gas is used instead of electricity. in other similar mills. WEAKNESSES High manufacturing cost: The main weakness is that the cost of production is very high. The main reason for this is the high price of cotton and electricity charges. Modernizing and Replacement (BMR) are exempted from duty. This will improve the productivity and quality of yarn and company will become able to charge better prices of yarn and compete in international market. by the local textile industry comprises 41% of its total operating cost. India.The financial cost in our country is very high as compare to other competing countries like china. There are approximately 503 yarn producers in Pakistan. . Interest paid on loans. Competitors: This a major threat for yarn producers. Interest rates in Pakistan are considerably higher than those of competing countries thus making our industry uncompetitive.