Financial Analysis

=============================================================== ========= FAZAL TEXTILE MILLS LTD - FINANCIALS =============================================================== =============== BALANCE SHEET FY'05 FY'06 FY'07 FY'08 =============================================================== =============== Property, plant and equipment 666,272 652,327 741,516 719,115 Operating fixed assets 3,670 250 914,782 Capital work in progress 669,942 652,327 741,766 1,633,897 Long term loans 4,121 2,729 15,695 13,929 Long term deposit 532 532 532 532 NON-CURRENT ASSETS 1,344,537 1,307,915 1,499,759 3,282,255 Stock in trade 687,619 484,255 329,953 601,284 Trade debts 235,954 649,618 646,461 841,740 Loans and advances 15,423 27,643 42,277 168,523 Trade deposits & short term prepayments 9,640 10,513 5,501 15,901 Cash and bank balances 3,498 2,007 1,514 14,552 CURRENT ASSETS 1,024,765 1,213,208 1,066,294 1,680,373 TOTAL ASSETS 1,699,360 1,868,796 1,824,287 3,328,731 Total Equity 712,688 745,838 709,908 719,948 Long term finance - 1,000,000 Deferred gratuity 13,458 25,095 28,338 29,032 Deferred taxation 77,075 61,506 54,110 50,445 NON CURRENT LIABILITIES 90,533 86,601 82,448 79,477 Trade and other payables 112,071 102,738 267,442 156,057 Accured markup 9,693 15,338 17,196 48,936 Short term borrowings 774,375 918,079 747,293 1,324,313 CURRENT LIABILITIES 896,139 1,036,357 1,031,931 1,529,306 -----------------------------------------------------------------------------INCOME STATEMENT FY'05 FY'06 FY'07 FY'08 -----------------------------------------------------------------------------Sales 1,642,382 2,027,303 2,263,195 2,444,146 Cost of Sales 1,480,091 1,851,733 2,142,018 2,304,242 Gross Profit 162,291 175,570 121,177 139,904 General & administrative expenses 29,059 38,060 35,630 31,903 Selling & distribution expenses 10,627 12,894 14,552 13,384 Other operating income (2,019) (3,622) (6,466) (3,826) Other operating charges 5,050 2,708 66 2,028 Operating profit 119,574 125,530 77,395 96,415 Financial cost 41,407 74,071 76,159 69,054 Profit before taxation 78,167 51,459 1,236 27,361 Tax 37,285 2,840 21,697 17,321 Profit/(Loss) after Taxation 40,882 48,619 (20,461) 10,040

EPS-basic and diluted (Rupees) 6.61 7.86 (3.31) 1.62 -----------------------------------------------------------------------------RATIO ANALYSIS -----------------------------------------------------------------------------Profitability FY'05 FY'06 FY'07 FY'08 -----------------------------------------------------------------------------Gross Profit Margin 0.10 0.09 0.05 0.06 Profit Margin 0.02 0.02 -0.01 0.00 ROA (RHS) 0.02 0.03 -0.01 0.00 ROE (RHS) 0.06 0.07 -0.03 0.01 -----------------------------------------------------------------------------Liquidity FY'05 FY'06 FY'07 FY'08 -----------------------------------------------------------------------------Current Ratio 1.14 1.17 1.03 1.10 Quick Ratio 0.33 0.67 0.68 0.68 Cash Ratio (RHS) 0.00 0.00 0.00 0.01 -----------------------------------------------------------------------------Asset Management FY'05 FY'06 FY'07 FY'08 -----------------------------------------------------------------------------DSO 52 117 104 126 ITO 170 95 56 95 Operating Cycle 222 212 160 221 Total assets turnover (RHS) 0.02 0.03 -0.01 0.00 Sales/ Equity 2.30 2.72 3.19 3.39 -----------------------------------------------------------------------------Debt Management FY'05 FY'06 FY'07 FY'08 -----------------------------------------------------------------------------Debt To Equity 1.38 1.51 1.57 2.23 Debt to Asset 0.58 0.60 0.61 0.48 Long term debt to equity 0.13 0.12 0.12 0.11 TIE (RHS) 2.89 1.69 1.02 1.40 -----------------------------------------------------------------------------Investor Expectations FY'05 FY'06 FY'07 FY'08 -----------------------------------------------------------------------------Market Value (RHS) 79.00 150.00 278.50 778.14 EPS 6.61 7.86 -3.31 1.62 P/E (RHS) 11.95 19.08 -84.14 480.33 Book Value 0.12 0.12 0.11 0.12

Textiles: FAZAL TEXTILES MILLS LIMITED - Analysis of Financial Statements Financial Year 2005 - Financial Year 2008 OVERVIEW (October 02 2009): Fazal Textiles Mills is one of the older mills of the country. It is located in Karachi and was taken over by the Yunus Brothers group in March 1987, when it had been closed down since 1984, due to heavy losses. The new management took prompt and comprehensive steps to revitalize the unit by discarding the old machinery and imported the latest machinery and installed it within a year. Presently, FZTM is producing yarn, knitted fabrics, bed sets and fitted sheets. Export sales are mainly to Far Eastern, European, the US, South American, North African and Middle East markets.

Industry Performance: In 2007, economy of the country took a downward turn due to the political crisis, affecting the inflationary rates and fiscal deficit and the recession in the US. The most affected sector was the textiles. All the companies, major players or small ones took a massive blow in that year. Fazal Textiles also took a blow in 2007, as its financial values were badly affected. But the company showed a remarkable progress in 2008, as in three quarters, its financial statements are quite positive. Today in Pakistan, we see that the entire textile sector is in a bad shape. Many mills have been forced to shut down due to the constantly increasing problems of high production costs, which make them uncompetitive in the global markets and locally as well, as today our local markets are flooded with foreign products. The government policies are also not of much helpful. In view of all these issues, Fazal Textiles is going through a hard time to avoid difficult situations. PROFITABILITY Gross sales of the company stood at Rs 2.58 billion in FY08 (FY07: 2.38 billion). The exports contributed Rs 1.91 billion and local sales Rs 672 million (FY07: exports Rs 1.81 billion, local sales Rs 575 million). Exports and local sales exhibited 6% and 17% growth respectively. The net sales in FY08 stood at Rs 2.4 billion (FY07: Rs 2.26 billion), an increase of 8%. The cost of goods sold also increased by 8%. The sales are growing at a declining rate as the increase in sales was by 23% in FY06, 12% in FY07 and 8% in FY08. The cost of goods sold followed a similar trend and hence the gross profit has remained in the band of Rs 120 million to Rs 180 million over the period studied. In FY08, the gross profit has shown improvement by 15% and stands at Rs 140 million (FY07: Rs 121 million). This is mainly due to decline in cost of goods sold from 16% in FY07 to 8% in FY08. The staff benefits worth Rs 9.782 million (FY07: Rs 9.64 million) were given

while the company earned an R&D subsidy worth Rs 2.326 million (FY07: Rs 1.549 million). The main cost drivers were salaries, power, and other operating expenses while the R&D subsidy neutralized the impact. Net income of Fazal Textiles, increased in FY06, but booked a loss of Rs 20 million in FY07. However, in FY08, the situation has changed and the company has made a profit of Rs 10 million. The graph also shows that the proportion of after tax income has declined considerably relative to gross profits. This is due to combination rising cost of production due to inflated costs of raw materials, increase in interest rates and operating expenses for the company. In FY08, the expenses and the finance cost have declined by 1% and 9% respectively which have significantly improved the bottom line of the company. The PAT registers a 149% increase. The profitability of the company has improved from FY07, but still, it is not up to the level of the prior years. The gross profit margin has increased from 5.35% in FY07 to 5.72% in F08. Net profit margin has improved from -0.90% in FY07 to 0.41% in FY08. The ROA has increased from -1.12% in FY07 to 0.30% in FY08. The total assets have increased by 82% in FY08. This is mainly due to a huge increase in operating fixed assets from Rs 250 thousand in FY07 to Rs 915 million in FY08. This is due to construction of a new factory building and development of land in FB Area. The ROE has increased from -2.88% in FY07 to 1.39% in FY08. The total equity has increased by 1%. This is primarily due to improvement in net profits by 149%. LIQUIDITY The liquidity of Fazal Textiles is commendable, as the ratios have remained high. The main reason for the strong liquidity of the company is that its current assets have always been on the rise, with only the exception of 2007, where it fell by 12%. The main driver was cash and bank balances and it showed an increase of 861% in FY08. The cash ratio proves that, as it has increased from 0.001 in FY07 to 0.01 in FY08. This component showed a declining trend in the past years but in FY08 it has shown a steep rise. The current liabilities have increased by 48% in FY08 with the driver being accrued markup as it has shown increase of 185%. In FY08, the current ratio increased to 1.10 (FY07: 1.03). The current ratio increased in 2006, but showed a steep decline in 2007. The company has managed to keep its head above the others even in the difficult year of 2007, when the entire textile industry as well as our economy took a downward plunge. In that year the current assets went down steeply, whereas the current liabilities were kept at almost the same level of FY06, which saved the ratio from going further down. The quick ratio has remained constant at 0.68. This is due to the offsetting impact between quick assets and current liabilities. The increase in quick assets (current assets minus inventory) and current liabilities was 0% in FY07 and 48% and 49% respectively in FY08. Hence the ratio remained constant despite huge increase in stock in trade of 82% in FY08. The company has shown an improved liquidity on the back of trade debts in the past few

years. Maintaining a high level of trade debts is not compatible with good asset management and indicates that the cash is tied up. In FY08, improvement in the current ratio is driven by cash. However, keeping surplus cash is also not in the interest of the company as it has an opportunity cost attached. The company must find a balance between these contradictory objectives. It must determine the optimum level of current assets keeping the debt and asset management in view. After that the company must maintain that optimum level consistently. Otherwise it will face liquidity difficulties. ASSET MANAGEMENT RATIO The Days Sales Outstanding (DSO) ratio has increased from 104 days in FY07 to 126 days in FY08. This is due to huge increase in trade debts by 30% in FY08 while net sales have increased by 8%. This shows that the company's credit policy needs further improvement, as the customers are not paying on time. The inventory turnover (ITO) ratio has increased from 56 days in FY07 to 95 days in FY08. The stock-in-trade has increased by a humungous amount of 82%, which shows that the company was not able to sell off a considerable proportion of goods it manufactured. The company produced more than the last year level but was not able to sell off proportionately which indicates erroneous sales forecast. The operating cycle has thus accumulated 60 additional days from FY07 and now stands at 221 days. The operating cycle analysis shows that the rosy picture created with high liquidity ratios does not hold up with the asset management analysis. Total asset turnover (TATO) has increased from -0.011 in FY07 to 0.03 in FY08. This is due to the company making a profit this year, as opposed to FY07 when it incurred a net loss. The company has also increased total assets due to additions in fixed operating assets. This dampened the TATO, which would otherwise have been higher. TATO was high in the initial years on back of high net profit and low total assets. Sales to equity (S/E) ratio has shown an inclining trend. S/E has increased from 3.19 in FY07 to 3.39 in FY08. This is due to an 8% increase in the net sales and 1% increase in the equity. Considering the gross profit margins and net profits the increase in this ratio does not substantially impact asset management or profitability in a positive manner. The sales are still insufficient to generate enough operating profit or cash flow to ensure and sustain liquidity. Also the company needs to increase its equity base to finance substantial growth in sales. DEBT MANAGEMENT The debt to asset ratio has decreased from 0.61 in FY07 to 0.48 in FY08. This is due to 82% rise in total assets while total debt increased by 44%. The debt to equity has increased from 1.57 in FY07 to 2.23 in FY08. The equity increased by just 1%. The longterm debt to equity ratio shows a declining trend from 0.12 in FY07 to 0.11 in FY08, due to decline in deferred taxation. Hence the debt management ratios are in contradiction with each other.

Fazal Textiles has been raising its borrowed amounts over the years. This has led to the constant rise in the debt to equity ratio. The loans were used to stay competitive in foreign markets and also to put some expansionary plans in action. In 2008 the company took massive loans to stay in production after losses faced in 2007, which has led to high debt ratio and which will raise the payables in the future. Fazal Textiles incurred increased loans over the years, especially in short-term borrowing and trade payables. The policy of the company was to keep the long-term loans as low as possible. Due to this we see a steady stream of short-term borrowing over the years. Over the years, Fazal Textiles has been facing increased finance costs due to increased interest rates over the years due to the tight monetary policy. As a result the company pays more interest on the same principal. Also the net income has been decreasing over the years, resulting in decreased ratio of times interest earned. TIE ratio has increased from 1.02 in FY07 to 1.40 in FY08. This is due to the company making a higher operating profit, which increased 25% owing to increase in gross profit and lower operating expenses. The financial cost also showed a 9% decline in FY08. This contributes to improvement in the ratio. The company seems to be able to finance interest expenses through operating profit/EBIT. INVESTOR EXPECTATIONS The earnings per share (EPS) of Fazal Textile has shown a volatile trend. The EPS has improved from minus Rs 3.31 per share to Rs 1.62 per share. The company has recovered and the positive EPS sends out positive signals to investors amid uncertainty in the textile industry as a whole. Many textile companies have incurred losses over consecutive years. However, in the current analysis of FZTM, only FY07 was the unfortunate year when the company incurred loss. Also in FY08 the company is seen to be recovering quickly from the setbacks it had in FY07. The EPS has translated into a favorable market price trend for the stock till FY08. The stock has begun to show a decline in FY09. The market price has shown a huge increase from Rs 278.50 per share in FY07 to Rs 778.14 per share in FY08. Consequently the P/E ratio shows an increase from minus 84.14 in FY07 to 480.33 in FY08. This can also indicate that the stock is overvalued which shows the subsequent decline in market value of the stock. Hence the P/E ratio indicating positive future expectations about the stock are reversed with the low market values of the stock in FY09. Overall, Fazal Textiles has shown some good trends over the years and promised the shareholders good profits. The economic events of FY07 also hurt the company, but so far in FY08 it is seen to be recovering quickly. It has shown good profitability, liquidity and debt management trends, but its fault lies in its large portions of cost of goods sold and asset management, which could hurt the net income of the company. Hence Fazal Textiles has to be careful in managing its costs in the future, to ensure that the shareholders get something back for keeping their confidence in the company shares. The company has given dividend of Rs 1.5 per share

this year due to better profitability of the company vis-a-vis last year. FUTURE OUTLOOK The company has entered into a joint agreement with Lucky Textile Mills Limited for opening a mall in Federal B. Area. The two companies intend to join plots and form a special purpose vehicle to establish the mall. This was also the special business of the company in the Annual General Meeting of FY08. This mall will be a source of additional revenue for the company and will contribute to the other income. The cotton crop estimate for the current season is 15 million of bales, which is quite encouraging for the local consumption. However, inflation, rising costs and mark-up rates can negatively impact the financial performance of the company. The company has also decided to shift its production facilities to Nooriabad on Super Highway to increase its production. Hence the company is expected to increase sales in terms of exports and domestic consumption.

COMPANY SNAPSHOT ============================================== Name of company FAZAL TEXTILE MILLS LTD ============================================== Nature of Business Textile Ticker FZTM Sales FY '07 PKR 2,263,195,000 Sales FY '08 PKR 2,444,146,000 Share price (avg.) PKR 355 Market Capitalization 2,196,563,565