NISHAT MILLS (Pvt.

) Ltd
Presents

Course: Advance Financial Management

Course Instructor: Sir Hamza Khalil
Date: April 28, 2016
Semester: Spring 2016

Group Members:
Anum Hanif 17505
Fahad Mohiuddin 16666
Sundus Farooqi 17966
Habiba Qasmi 17900
Waleed Masood 16597
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ACKNOWLEDGEMENT

Respected Sir,
We are thankful to ALLAH Almighty, for making our efforts worthy of consideration. We are
thankful to our course instructor, Sir. Hamza Khalil, whose assistance, guidance and support
from initial to final level enabled us to develop the understanding of the subject.
Advance Financial Management course was a valuable learning experience and your diligent
teaching style has actually given us the insight into the world of finance which is very deep and
still needs to be explored on our behalf.
We thank you for sharing your praiseworthy knowledge with us which enabled us to accomplish
this report.

Sincerely,
12345-

Anum Hanif
Fahad Mohiduddin
Habiba Qasmi
Sundus Farooqi
Waleed Masood

17505
16666
17900
17966
16597

TABLE OF CONTENT
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INTRODUCTION TO THE COMPANY

Business and Products
Governance of Nishat Mills Limited
HR & R Committee
INTRODUCTION TO THE REPORT
CHAPTER 2
Return on Assets:
Total Capitalization Ratio:
Current Ratio:
Working Capital:
Quick Ratio:
CHAPTER 5
1)

Term Finance Certificates

2)

Pakistan Investment Bonds

3)

GoP Ijara Sukuk

Distribution of Shares among Share Holders at Nishat Mills

CHAPTER 6
AVERAGE RATE OF RETURN
STANDARD DEVIATION
COEFFICIENT OF VARIATION
BETA
CHAPTER 7
Estimating Expected Return
Risks to our Projections
CHAPTER 10
WACC
RECOMMENDATIONS
References

INTRODUCTION TO THE COMPANY

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Nishat Mills Limited is the flagship company of Nishat Group. It was established in 1951. It is
one of the most modern, largest vertically integrated textile companies in Pakistan. Nishat Mills
Limited has 227,640 spindles, 789 Toyota air jet looms. The Company also has the most modern
textile dyeing and processing units, 2 stitching units for home textile, two stitching units for
garments and Power Generation facilities with a capacity of 120 MW. The Companys total
export for the year 2015 was Rs. 39.868 billion (US$ 393.683 million). Due to the application of
prudent management policies, consolidation of operations, a strong balance sheet and an
effective marketing strategy, the growth trend is expected to continue in the years to come. The
Company's production facilities comprise of spinning, weaving, processing, stitching and power
generation.
Business and Products

Spinning
Weaving
Processing
Home Textile
Garments
Power Generation

Governance of Nishat Mills Limited

1) Audit Committee
As on April 10, 2014

Mr. Khalid Qadeer Qureshi

Chairman/Member

Syed Zahid Hussain

Member

Ms. Nabiha Shahnawaz

3

Cheema

Member

HR & R Committee
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As on April 10, 2014

Mian Hassan Mansha

Chairman/Member

Mian Umer Mansha

Member

Mr. Khalid Qadeer Qureshi

Member

Ms. Nabeeha Shahnawaz Cheema

Member

2) Board of Directors

Mian Umer Mansha

Chief Executive Officer

Mian Hassan Mansha

Chairman

Mr. Khalid Qadeer Qureshi

Director

Mr. Saeed Ahmad Alvi

Director

Syed Zahid Hussain

Director (Nominee NIT)

Ms. Nabiha Shahnawaz Cheema

Director

Mr. Maqsood Ahmad

Director

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INTRODUCTION TO THE REPORT

This is the final term report for the course of Advance Financial Management. This complete
report is divided into five main parts as defined by our teacher. The directions for the complete
report has been followed according to our course book which is Financial Management, theory
and practice, 13nth edition by Eugene F. Brigham and Micheal C. Ehrhardt. The very first
section of this report is based on chapter 2 which is Financial Statements, Cash Flows, and
Taxes. The second section of the report is based on chapter 5 which is Bonds, Bond Valuation
and Interest Rates. The next section is focusing on chapter 6 of this book which is Risk, Return,
and the Capital Asset Pricing Model. The next section is based on chapter 7 which is Stocks,
Stock Valuation, and Stock Market Equilibrium. And the last chapter is chapter 10 which is The
Basics of Capital Budgeting Evaluating Cash Flows. All the theories, concepts and numerical are
effectively practiced on the company named as Nishat Mills Limited for a better in-depth
understanding and learning of the course. This gave us practical learning as how in actual the
finances of the companies are managed and practiced.

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CHAPTER 2
Financial Statements, Cash Flows, and Taxes
Return on Assets:
The return on assets ratio, often called the return on total assets, is a profitability ratio that
measures the net income produced by total assets during a period. ROA measures how efficiently
a company can manage its assets to produce profits during a period.
Formula
Return on assets ratio= Net income/Total assets
Year 1
Nishat mills Rs.5864511/50890047
=0.115(11.5%)

Year 2

Year 3

Rs.5866763/Rs.5228952

Rs.7929271/Rs.5173069

=0.112(11.22%)

=0.153(15.3%)

Nishat mills: Return on asset ratio of Nishat mills was 11.5% in 2012 which decreased to
11.22% in 2013 the reason for this decrease was increase in the cost of goods sold.in 2014 the
ROA increased to 15.3% because their profits were increased by 36%. .

Time Interest Earned Ratio:

Time interest earned is used to measure companys ability to meet its debt obligation and it also
shows that how many times a company can cover its interest charge on pretax basis. If the
company couldnt meet these obligations then company gets bankrupt.
Formula

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Time interest earned=NBIT Net profit before interest and tax/interest expense

Nishat mills

Year 1
7977974/3148288=

Year 2
8,112,962/2,113,096=

Year 3
11,009,168/2,155,637=

2.53.
3.8x
5.1x
A very high times interest ratio may be the result of the fact that the company is unnecessarily
careful about its debts and is not taking full advantage of the debt facilities
Nishat mills:
The time interest earned ratio of Nishat mills is 2.53 in 2012 which is good and in 2013 and
2014, the ratio increase with 3.58 and 5.1 because in year by year, the sales and profit is increase,
which increase the time interest earned ratio. The mills time interest earned ratio is good and it is
increasing day by day it is because of high sales growth.

Total Capitalization Ratio:

It measures the debt component of companys capital structure. The sum of both long term debt
and equity support the company growth and operation. It is used to describe the makeup of a
company's permanent or long-term capital, which consists of both long-term debt and
shareholders' equity. Low level of debt and high equity show the companys financial fitness
Formula
Total capitalization ratio=long term debt/long term debt + shareholder equity.

Nishat mills

Year 1

Year 2

Year 3

19309040/30869304

22,429,375/34288532

11,325,830/23953455=

= 0.65:1

0.47:1

0.62:1

Nishat mills:
The capitalization ratio of Nishat is increased in 2013. In 2012 it was 0.62 and in 2013 it increase
by 0.03
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And become 0.65 because they invest more in long term debt but then in 2014 it decrease and
reach at 0.47 which shows they invest less in long term debt and more in equity than from 2
years.
Current Ratio:
The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its
short-term liabilities with its current assets. The current ratio is an important measure of liquidity
because short-term liabilities are due within the next year.
Formula:
Current ratio = current assets/current liabilities

Company
Nishat mills

Year 1
18,405,780 / 27,777,240=

Year 2
17,936,483 / 18,000,989=

Year 3
16,859,466 /

0.66 or 0.7 times

0.99 or 1times

20,020,743= 0.84 times

Nishat mills : the company current ratio was 0.7 and in 2012 the companys current ratios is 0.8
and in 2013 it is 1.0 that means it has increased it shows that the company does not have enough
current assets to pay off its current liabilities with a margin of safety. The reason for increase in
current ratio from 2012 to 2013 was a decrease in current liabilities and in 2014 it again
decreased to 0.7 because of huge increase in trade and other payables.

Working Capital:
Indicates the cash generated by operations after allowing for cash payment of expenses and
operating liabilities.
Formula
Current Assets Current Liabilities
Calculation
Company

Year 1

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Year 2

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Year 3

Nishat

18,405,780 -

17,936,483 - 18,000,989= 16,859,466 -

27,777,240= -259371460 -64506

20,020,743= -3161277

It has a negative working capital

Quick Ratio:
The acid-test ratio is a strong indicator of whether a firm has sufficient short-term assets to cover
its immediate liabilities.
The asset test ratio is more conservative than the current ratio because it excludes inventory and
other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a
more liquid position.
Formula
Quick ratio= quick assets/current liabilities
Calculation
Nishat mills

Year 1
2671647/20020743

Year 2
2377497/18000989=

Year 3
1783093/27777240

=0.13:1

0.13:1

=0.06:1

Nishat mills:
The quick ratio of nestle in 2012 was 0.13 and in 2013 the quick ratio is same 0.13 but in 2014
the quick ratio goes to 0.06. The quick ratio is decreasing; the quick ratio below the 1 is not
good. This ratio is because the short term and long term investments are increased which
decrease this ratio

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CHAPTER 5
Bonds, Bond Valuation and Interest Rates
In this chapter of our AFM book we learned about bonds/stocks and there valuation and now we
will look that how this chapter applies practically to the company that we have selected which is
Nishat Mills Limited which comes in textile sector.
If we look at notes to the financial statements we come to know that company has issued three
types of bonds which are as follows:
1) Term Finance Certificates:
These are the debt instruments which is bought by Nishat Mills Limited as people have huge
amount of funds so it in invested in TFC issued by Bank Alfalah Bank and it appears in the
noncurrent assets as the long term investment and the maturity on such bonds appear in the
current assets as Nishat Mills Limited would get profit on such certificates. It is similar those
certificates which a retired individual invests like Behbood certificates of National Saving and
earns profit on it at a certain rate monthly or yearly. Nishat Mills Limited has bought 20,000 such
certificates and the par value of each is Rs. 5,000 and these TFC bear a maturity date of 2017
with a markup of KIBOR+2.5%.
2) Pakistan Investment Bonds:
These bonds are issued by Nishat Mills Limited on several occasions during 2006 and 2007 but
these are different as compare to TFCs as these are held by financial institutions on behalf of
Nishat Mills Limited and by looking at the financial statements we came to know that the interest
rate has been increasing slightly from 10.9% to 11.88% which shows that the bonds have better
pay off ratio.
3) GoP Ijara Sukuk:
These are the bonds issued by the company on 2012 which had a maturity in 2015. The principal
amount of this Sukuk is Rs. 500,000 with a markup of 7.84%, these instruments are held by
financial institutions on behalf of Nishat Mills Limited and the markup is revised semiannually.
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If we look at the balance sheet we can see that the long term investments in bonds have declined
from 68 billion Rs. to 53 billion Rs. the reason being that at maturity the bonds have been
matured and paid off their profit and have been disposed of simultaneously and if we look at the
current maturity of these investments we see that it has increased as the rate is increased over
rime. We also conclude that there are no such bonds which are subject to yield to call as all are
yielded at maturity.
There are two more things if we look at notes to the accounts number 25 where we see indemnity
and guarantees coming under the heading Contingencies and Commitments. We observe that
Nishat Mills Limited has issued indemnity bonds which include shares of joint venture
companies. So these indemnity bonds are redeemable after 5 years. The aim of this bond is to
fulfill any responsibility or duty or damage caused by the company which is in joint venture so
Nishat Mills Limited shall indemnify that loss. Then comes the corporate guarantees which are
also issued to the custom authorities and are similar to indemnity bonds and are redeemable after
issuance of certificate from respective authorities after clearance.

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Distribution of Shares among Share Holders at Nishat Mills

Sr.
No.

Categories of Shareholders

Shares Held

Percentage

Directors, Ceo, Their Spouse And Minor Children

88,669,538

25.22

Associated Companies, Undertakings And Related

Parties

31,548,378

8.97

NIT And ICP

85,203

0.02

Banks Development Financial Institutions, Non

banking

10,829,271

3.08

Financial Institutions

Insurance Companies

10,876,223

3.09

Modarabas and Mutual Funds

26,964,154

7.67

Share Holders Holding 10% and above

176,962,042

50.33

General Public
84,733,914

24.10

Local
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Foreign

59,500

0.02

Foreign Companies

86,415,632

24.58

Investment Companies

16,333

0.00

Joint Stock Companies

6,389,378

1.82

Provident / Pension Funds And Miscellaneous

5,012,324

1.43

Others

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CHAPTER 6
Risk, Return, and the Capital Asset Pricing Model
DATE CLOSIN RETUR
G RATE

N
(Ka)

(Ka-

KSE

RETUR

Kavg

INDE

N (X)

XY

(Y)
2015
2014

114.3
111.92

2013

94.21

2012
2011
2010

47.58

0 0.00%
0.83
0.01

34399
29239.

0
0.27

0
2.24E-

0
7.35E-

1.09

0.02

15
36156.

0.65

05
7.13E-

06
4.28E-

0.00

83
36228.

0.20

05
4.71E-

05
3.97E-

0.03

88
36222.

0.02

06
-2.72E-

06
3E-08

0.00

63
36084.

0.38

06
2.8E-

1.45E-

0.72%

05
0.0001

05
0.00006

24

87

0.24

50.34

1.58

43.12

-0.74

67

3.00

0.07
%

AVERAGE RATE OF RETURN

Kavg = Ka / n
= 3% / 19
= 0.005

STANDARD DEVIATION
= (Ka Kavg) / n
= 0.07% / 6
= 0.44

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COEFFICIENT OF VARIATION
C.V = / Kavg
= 0.44 / 0.2563
= 1.71

BETA
= nxy - x.y / nx - (x)
= 6*0.000124 (0.72%)(0.87%) / 6*0.003259 (0.72%)
= 1.25

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CHAPTER 7
Stocks, Stock Valuation. and Stock Market Equilibrium
The sales have shown a consistent inclining trend except a decline in 2012 mainly due to
abolition of the MFA agreement. The sales have increased by 12.15% in FY 08, 23.89% in FY
2013 and 32% in FY 15. CAPM gives an overview of the level of return that investors should
expect for bearing only systematic risk. Applying Nishat, we get annual expected return of about
6.25%.
Usually the 10-year PK government bond yield is used as a proxy for nominal risk free interest
rate. As of February 11, 2015, the 10-year PK Treasury bond yield was 2%. Here, we calculate it
as the arithmetic mean of monthly returns (again, based on the 5-year monthly data) and multiply
it by 12, which yields approximately annual 5.6% return.
Estimating Expected Return
Now that we have all the relevant data, we can estimate the expected return on Nishat, based on
equation (1), assuming that Nishat stockholders are compensated only for the systematic risk
they bear.
6.25% = 2% + 1.18 x (5.6%-2%)
Thus, based on CAPM, the expected annual return of Nishat is 6.25%. In reality, Nishat delivers
quite larger actual returns. The CAPM does not capture the total risk of an asset. Standard
deviation is a better estimator of the total risk.
In order to arrive at the target price of the bank, we have used P/BV target multiple approach
using an adaptation of the Gordon Growth Model. The adaptation of the Gordon Growth model
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uses the sustainable return on average equity (ROE), cost of equity (COE) and expected growth
in earnings (g) to calculate the target P/BV of the Bank using the formula:

P/BV = (ROE - g) / (COE - g)

This P/BV is then multiplied with the average BVPS over the forecasted period to arrive at the
target price of Nishat Mills. In our calculations, we have made the following assumptions in
order to arrive at the value of Nishat:
Sustainable ROE calculated as the average ROE of the forecasted period, represented by 13.0%.
Cost of Equity is derived using Capital Asset Pricing Model (Risk free rate=12.5%, risk premium
6%, Beta=1.20).
Terminal growth rate of 3.0%
Based on above assumptions, Nishats FY 15 target price comes to PKR 105.85 per share, a 2%
upside from its closing price of Oct 3009. Consequently, we have a HOLD stance on the scrip.
Risks to our Projections

Delay in economic recovery

Higher than expected deterioration in asset quality
Narrowing of NIMs beyond our expectations
Inability to reduce cost to income ratio

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CHAPTER 10
The Basics of Capital Budgeting Evaluating Cash Flows

Cash Flows
Discount

Year 0
(10,000,0
00)
21.7%

Rate
PV of Cash

(10,000,0

Flows
NPV

00)
650,262

Cash Flows
IRR

Cash Flow
DCF
NCDCF
Remaining
Period
Payback
Period

Year 0
(10,000,0
00)
23%

NPV
Year 2 Year 3 Year 4 Year 5 Year 6
1,159,1 2,194, 3,741, 5,322, 7,275,

Year 1
338,000

Year 7
9,671,75

81

968

683

959

152

21.7%

21.7%

21.7%

21.7%

21.7%

21.7%

21.7%

277,665

782,276

1,216,

1,704,

1,991,

2,235,

2,441,94

862

058

475

981

Year 1

IRR
Year 2 Year 3 Year 4 Year 5 Year 6
1,159,1 2,194, 3,741, 5,322, 7,275,

338,000

81

968

683

Year 7
9,671,75

959

152

Year 5
5,322,9

Year 6
7,275,1

Year 7
9,671,

Year 0
(10,000,0

Year 1
338,00

Payback Period
Year 2 Year 3 Year 4
1,159,1 2,194,9 3,741,6

00)
(10,000,0

0
277,66

81
782,27

68
1,216,8

83
1,704,0

59
1,991,4

52
2,235,9

758
2,441,

00)
(10,000,0

5
(9,722,

6
(8,940,

62
(7,723,1

58
(6,019,

75
(4,027,

81
(1,791,

945
650,26

00)

335)

059)

97)

139)

664)

683)

0.73
6.73

Profitability Index
1.07

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Analysis & Interpretation:

This business venture should be undertaken because of positive NPV of cash flows
obtained from this business.

The payback period is 6.73years, so by that time initial investment will be covered

Profitability index is 1.07 thus it indicates that business has high degree of acceptability

IRR of project is 23% which is greater than WACC (21.7%), hence, project should be
accepted
WACC
WACC

Taxes
Average of Tax
Total EBIT
Average of EBIT

15,994,300
2,284,900
47,052,651
6,721,807

Tax Rate

34%

ROE

30.94%

Debt
Equity
Total

Capital Structure
Debt
Equity
Total

4,000,000
6,000,000
10,000,000

Weightage( Wd)
0.4
0.6
1

Rd (Cost)
0.12
0.3094

Analysis & Interpretation:

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Tax Rate Return

34%
0.048
0.19

After Tax Return

0.031683674
0.1856
21.7%

Every company pays different taxes in proportion to its earnings before taxes. Therefore,
average tax amount has been computed by taking average of tax for 7 consecutive years.

Average of EBIT and taxes for 7 years is calculated and these two financial amounts are
used to compute a single average tax rate.

The resulting tax rate is 34%

Return on equity is obtained from the overall return of the portfolio of shares i.e. 30.94%

Weighted average cost of capital of this project is 21.7%

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RECOMMENDATIONS

Nishat Mills should focus towards understanding the changing needs of the
customer.

Nishat Mills in Pakistan should increase their branches

Nishat Mills should design and launch customized products

Nishat Mills should come up with online system only offers transfer payments from
one account to another easily for the customers overseas

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References
http://www.nishatmillsltd.com/nishat/financial-highlightes.htm
http://www.nishatmillsltd.com/nishat/governance.htm
http://www.nishatmillsltd.com/nishat/pdf/annual14.pdf
http://www.nishatmillsltd.com/nishat/pdf/annual13.pdf
http://www.nishatmillsltd.com/nishat/pdf/annual12.pdf

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