M.A.J.U.REPORT ON:

GULISTAN TEXTILE MILLS LIMITED

COURSE:

SECURITY ANALYSIS “B”

SUBMITTED TO:

SIR MOHAMMAD AHSAN

SUBMITTED BY:

SUFYAN ALI SP08-BB-0116

MALIK M. JAHNZAIB SP08-BB-0059

RAHEEL SADRUDDIN SP10-MM-0083

FAROOQUE AZAM SP08-BB-0032

1

First of all, We would like to say Alhamdulillah,

for giving us the strength to do this report.

Then we would like to thank our teacher

‘Mr. Mohammad Ahsan’

of the course ‘Security Analysis-B’

for guiding us when we were in difficulties and giving us a chance

to show our skills. Internet, books, computers and

all that as our source to complete this report.

TABLE OF CONTENTS:

2

Topic Page no.

1) Profile___________________________________________________________________042) Economic analysis_________________________________________________________04

i) Monetary policy------------------------------------------------------------04ii) Fiscal policy-----------------------------------------------------------------05iii) Economic indicators------------------------------------------------------05iv) By direction-----------------------------------------------------------------05v) Effects on stock price-----------------------------------------------------06

3) Company analysis_________________________________________________________06i) Earnings and fundamentals---------------------------------------------06ii) Data for the year 2010----------------------------------------------------07iii) KSE ticker 1----------------------------------------------------------------07iv) KSE ticker 2----------------------------------------------------------------08v) Key developments for Gulistan Textile Mills Limited-------------08

4) Industry analysis__________________________________________________________09i) Established capacity------------------------------------------------------09ii) Contribution to exports--------------------------------------------------09iii) Contribution to GDP and employment-------------------------------10iv) Organizations in the industry------------------------------------------10v) Opportunities available--------------------------------------------------10

5) Financial analysis_________________________________________________________10

i) Credit Statistics------------------------------------------------------------10ii) Profitability ----------------------------------------------------------------11iii) Cash Flow ------------------------------------------------------------------11iv) Capital Structure ---------------------------------------------------------11

6) Unknown factors__________________________________________________________127) Positive signs and opportunities_____________________________________________13

i) Close to historical average-----------------------------------------------13ii) Foreign Inflows------------------------------------------------------------14

8) Future perspects__________________________________________________________14

GULISTAN TEXTILE MILLS LIMITED

3

PROFILE:Gulistan Textile Mills Limited (GTML) is in the business of producing yarn over the decades, with the commencement of its first unit in 1967. Following the program of continuous reinvestment, its original rated capacity of 12,500 spindles has gradually expanded to 108,552 spindles. The yarn is produced in a wide range of counts both carded and combed in 100% cotton as well as polyester cotton, Lycra, Melange and dyed cotton yarn, and is being sold both in local and export markets. GTML is the largest company, in terms of size, of the Gulistan Group. Gulistan group is one of the oldest textile groups of Pakistan, with five spinning units and a weaving unit. The group concerns continue to control the majority shareholding in GTML, with the balance held by financial institutions and individuals. While effectively family managed, the company is run in an efficient manner. The strategy of continuous balancing, modernization, replacement and expansion (BMR&E) has kept the company competitive despite the changing market dynamics.

ECONOMIC ANALYSIS:

MONETARY POLICY:

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.[1] The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy.Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.

FISCAL POLICY:

Fiscal policy is the use of government spending and Taxation to influence the economy. When the government decides on the goods and services it purchases, the transfer payments it distributes, or the taxes it collects, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises their disposable income. Discussions of fiscal policy, however, generally focus on the effect of changes in the government budget on the overall economy. Although changes in taxes or spending that are “revenue neutral” may be construed as fiscal policy—and may affect the aggregate level of output by changing the incentives that firms or individuals face—the term “fiscal policy” is usually used to describe the effect on the aggregate economy of the overall levels of spending and taxation, and more particularly, the gap between them.

4

Fiscal policy is said to be tight or contractionary when revenue is higher than spending (i.e., the government budget is in surplus) and loose or expansionary when spending is higher than revenue (i.e., the budget is in deficit). Often, the focus is not on the level of the deficit, but on the change in the deficit. Thus, a reduction of the deficit from $200 billion to $100 billion is said to be contractionary fiscal policy, even though the budget is still in deficit.

ECONOMIC INDICATORS:

An indicator is anything that can be used to predict future financial or economic trends. For example, the social and economic statistics published by accredited sources such as U.S. government departments are indicators. Popular indicators include unemployment rates, housing starts, inflationary indexes and consumer confidence. Official indicators must meet certain set criteria; there are three categories of indicators, classified according to the types of predictions they make.

Leading - These types of indicators signal future events. Think of how the amber traffic light indicates the coming of the red light. In the world of finance, leading indicators work the same way but are less accurate than the street light. Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate trends in the economy (even though they aren't always right).

Lagging - A lagging indicator is one that follows an event. Back to our traffic light example: the amber light is a lagging indicator for the green light because amber trails green. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly.

Coincident - These indicators occur at approximately the same time as the conditions they signify. In our traffic light example, the green light would be a coincidental indicator of the associated pedestrian walk signal. Rather than predicting future events, these types of indicators change at the same time as the economy or stock market. Personal income is a coincidental indicator for the economy: high personal income rates will coincide with a strong economy.

BY DIRECTION:

There are also three terms that describe an economic indicator's direction relative to the direction of the general economy:

Procyclic indicators move in the same direction as the general economy: they increase when the economy is doing well; decrease when it is doing badly. Gross domestic product (GDP) is a procyclic indicator. Countercyclic indicators move in the opposite direction to the general economy. The unemployment rate is countercyclic: it rises when the economy is decreasing.

5

Acyclic indicators are those with little or no correlation to the business cycle: they may rise or fall when the general economy is doing well, and may rise or fall when it is not doing well.

EFFECTS IN STOCK PRICE:Clearly, changes in the federal funds rate affect the behavior of consumers and business, but the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock's price, take the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices. If a company is seen as cutting back on its growth spending or is making less profit - either through higher debt expenses or less revenue from consumers - then the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company's stock. If enough companies experience a decline in their stock prices, the whole market, or the indexes that many people equate with the market, will go down. Investing in stocks can be viewed as too risky compared to other investments. When the Fed raises the federal funds rate, newly offered government securities, such Treasury bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the "risk-free" rate of return goes up, making these investments more desirable. When people invest in stocks, they need to be compensated for taking on the additional risk involved in such an investment, or a premium above the risk-free rate. The desired return for investing in stocks is the sum of the risk-free rate and the risk premium. Of course, different people have different risk premiums, depending on their own tolerance for risk and the company they are buying. However, in general, as the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential return remains the same or becomes lower, investors might feel that stocks have become too risky, and will put their money elsewhere. 

EARNINGS FUNDAMENTALS

Shares (Millions) 18.984

Price/Earnings (Trailing) 17.780

Market Cap (Millions) 379.677

Relative P/E 1.783 ROE 2.357

Dividend Yield (ttm) 5.000

Relative Dividend Yield 0.997

Beta vs. KSE100 0.619

6

COMPANY ANALYSIS:

DATA FOR THE YEAR 2010:

PAID-UP CAPITAL(IN MILLION PKR) 189.839 FACE VALE 10NUMBER OF SHARES(IN MILLION PKR) 18.984 EQUITY(IN MILLION PKR) 2,223.771 TOTAL ASSETS(IN MILLION PKR) 9,522.359 SALES/TOTAL INCOME(IN MILLIONPKR) 7,280.609 BANK/FINANCIAL CHARGES(IN MILLION PKR) 876.279 PROFIT BEFORE TAXATION(IN MILLIONPKR) 311.728 TAXATION(IN MILLION PKR) 88.775 PROFIT AFTER TAXATION(IN MILLION PKR) 222.954 CASH DIVIDEND(%) 10.00 STOCK DIVIDEND(%) 0.00 TOTAL DIVIDEND(%) 10.00 NUMBER OF SHARE HOLDERS 850

7

8

KEY DEVELOPMENTS FOR GULISTAN TEXTILE MILLS LTD Gulistan Textile Mills Ltd. Reports Unaudited Earnings Results for the Third Quarter and Nine Months Period Ended March 31, 2011

Gulistan Textile Mills Ltd. reported unaudited earnings results for the third quarter and nine months period ended March 31, 2011. For the period, the company reported profit before taxation of PKR 550,477,230 against PKR 144,207,781 for the same period of previous year. Net cash used in operating activities was PKR 809,325,728 against net cash generated from operating activities of PKR 155,237,170. Fixed capital expenditure was PKR 82,154,797 against PKR 50,750,355 a year ago. Net sales were PKR 7,261,680,062 compared to PKR 5,265,474,656 a year ago. Profit after taxation was PKR 449,131,173 or PKR 6.22 per share, compared to PKR 112,895,120 or PKR 3.00 per share, a year ago. For the quarter, the company’s net sales were PKR 2,737,069,384 compared to PKR 1,964,868,298 a year ago. Profit before tax was PKR 132,592,850 compared to PKR 69,068,841 a year ago. Profit after taxation was PKR 118,030,657 or PKR 23.66 per share, compared to PKR 56,934,114 or PKR 5.95 per share, a year ago.

INDUSTRY ANALYSIS:Pakistan's textile sector export in March 2011 exhibited robust growth, augmenting by 44 percent, while the food group posted a 56.4 percent increase compared to the same month in the last fiscal year. Sources stated that the country's export of textile and clothing, which are major export sectors and possess 50 percent share in total export, stood at $1,249 million in March, 2011 in contrast with $867.253 million during the same month in 2010. Besides, export of food, manufacturing and petroleum grew by 56.4 percent, 21.3 percent and 13.9 percent respectively. Pakistan's exports continued to strengthen, as evident from the latest trade data. Figures revealed that exports during March, 2011 stood at $2.5 billion, 41.1 percent higher than that of March last year. Cumulative exports, in July-March 2011, aggregated to $17.8 billion as against $14.1 billion in the corresponding period of last year, an increase of 26.5 percent. Export figures, for July-March, depicted a similar picture. The textile sector was the major driver of exports. Knitwear and cotton cloth were top export products, as their export grew by 32.7 percent and 28.6 percent respectively. Bed wear, cotton yarn and readymade garments were items that, each, crossed the $1.0 billion mark during the nine months of the fiscal year 2010-11, while export of rice (other varieties) underwent a slender decline. However, growth of Basmati rice stayed positive. Export of chemicals, towels and petroleum products grew by 21 percent, 17.3 percent and 18.1percent respectively.

9

The textile industry is one of the most important sectors of Pakistan. It contributes significantly to the country's GDP, exports as well as employment. It is, in fact, the backbone of the Pakistani economy.

Established capacity

The textile industry of Pakistan has a total established spinning capacity of 1550 million kgs of yarn, weaving capacity of 4368 million square metres of fabric and finishing capacity of 4000 million square metres. The industry has a production capacity of 670 million units of garments, 400 million units of knitwear and 53 million kgs of towels.The industry has a total of 1221 units engaged in ginning and 442 units engaged in spinning. There are around 124 large units that undertake weaving and 425 small units. There are around 20600 power looms in operation in the industry. The industry also houses around 10 large finishing units and 625 small units.

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.

Contribution to exports

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.

Contribution to GDP and employment

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. However, the proportion of skilled labor is very less as compared to that of unskilled labor.

Organisations in the industry

All Pakistan Textile Mills Association is the chief organization that determines the rules and regulations in the Pakistan textile industry.

Opportunities available

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.

Due to shortage of cotton in the world, both local and international prices went up sharplyresulting in higher prices of yarn and grey cloth. Simultaneously the energy prices wereincreased and overall inflation went up to 13% which resulted in higher cost in everysector of production. The total cost could not be passed on to the final consumer due tothe lingering international recession and therefore the value added sector was underconstant pressure to increase prices. The government has supported the value added sector by imposing export quota on yarn so as to rein in the increase in yarn prices.

10

FINANCIAL ANALYSIS:(Most latest data available)

(PKR millions)

30-Jun-05 30-Sep-04 30-Sep-03

Credit Statistics:

EBITDA 345.41 385.55 416.24

EBITDA / Net Interest (x) 1.92 1.95 1.86

Net Debt / EBITDA (x) 8.00 6.06 4.28

Current Ratio (x) 0.98 1.01 1.01

Quick Ratio (x) 0.38 0.40 0.56

Profitability

Turnover 2,426.79 3,539.18 3,056.81

EBIT 438.34 513.13 537.18

Net Income 54.42 21.36 29.52

Gross Margin (%) 11.98 8.18 11.04

Return on Equity (ROE) (%) 5.72 2.36 3.31

Return on Assets (ROA) (%) 1.47 1.45 0.99

Cash Flow

Cash Generated by Operations (6.76) (305.00) 429.40

Working Capital Changes (337.91) (651.74) 31.11

11

Net Cash from Operating Activities (152.89) (522.47) 162.59

Net Finance Charges Paid (136.71) (196.36) (239.13)

Taxation Paid (9.42) (21.11) (27.68)

Dividends Paid (9.46) (12.63) (10.49)

Capital Expenditure (270.44) (67.26) (159.42)

Others (4.66) (3.42) (1.20)

Net Debt Decrease/ (Increase) (427.42) (552.89) 6.65

Capital Structure

Short Term Debt 1,884.11 1,554.42 888.33

Long Term Debt 942.36 841.25 965.07

Total Debt 2,826.46 2,395.67 1,853.40

Less: Cash & Bank Balances 63.04 59.67 70.29

Net Debt 2,763.42 2,336.00 1,783.12

Total Equity 961.64 916.69 895.33

Total Debt/Equity (%) 293.92 261.34 207.01

Net Debt/ Equity (%) 287.37 254.83 199.16

Equity/Total Assets (%) 23.57 25.39 29.83

UNKNOWN FACTORS:Textile sector’s credit demand has increased steeply by 110 percent to Rs 177 billion in first half of the fiscal year 2010-11 compared with corresponding period of previous fiscal year. The State Bank of Pakistan (SBP) in its recent report said more than half of private sector credit went to the textile sector reflecting higher input prices, especially that of raw cotton.

Private demand for credit picked up with outstanding stock of loans increased by 51 percent to Rs 208.8 billion in July to February compared with same period last fiscal year. The credit to private sector has surged substantially with an increase in seasonal demand for working capital and trade related loans. In

12

addition to textiles, the impact of rising input prices on credit demand was also visible in other industries such as rice with Rs 22 billion; edible oil Rs 22 billion with and cement with Rs 6.3 billion in the same period.

NPLs to loan (infection) ratios for the textile and agri-business recorded improvement over the start of the fiscal year, as well as the previous quarter, SBP said. The improvement in the ratio for the textile sector is attributed to an increase in advances to sector during Q2 FY11. In addition, improvement in textile exporters’ margins on account of increase in export prices also enhanced their ability to retire some of their loans. On the other hand, the improvement in the ratio for agri-business reflects better repayment capacity following the rise in agricultural incomes due to the increase produce prices (e.g. cotton, sugarcane).

In contrast to textiles and agri-business, the infection ratio deteriorated for the auto sector primarily due to net retirement.

On the other hand, Gross Non-Performing Loans (NPLs) increased by Rs 58 billion to reach Rs 517.9 billion by end-Dec 2010, compared with an increase of Rs 34.1 billion in the same period last year. Not surprisingly, over one-third of this increase in NPLs came from the textile and energy sectors.

POSITIVE SIGNS AND OPPORTUNITIES:Investors got a return of around seven per cent on the Karachi Stock Exchange (KSE) in the first nine months of the calendar year 2010, enabling the bourse to secure a place among top five regional markets, says an analyst.

This came despite a host of challenges on the political and economic fronts like political uncertainty, imposition of new taxes, high inflation, delay in introduction of a leverage product and massive economic losses caused by floods.

The Karachi bourse gave a return of 6.7 per cent (4.3 per cent in US dollars) for the first nine months (January-September) of the current calendar year, beating the MSCI World Index and bigger and emerging markets like China, Taiwan and Brazil. It also left behind Vietnam and Bahrain markets, KhurramSchehzad, Research Head at InvestCap, said in his research report.

When considered in the context of quarter-to-quarter performance, the KSE yielded a return of three per cent in the first quarter (July-September) of 2010-11 and kept a place among top 10 regional equities.

13

In September, the benchmark KSE-100 index only inched up two per cent month-on-month at a time when many of the regional peers performed well. However, it did not provide a true picture for the month, due to shortened trade timings because of Ramazan and Eid holidays, Schehzad said.

Close to historical average

Schehzad said the KSE-100 chased its decade-average quarterly return of 3.4 per cent in the July-September quarter despite the imposition of capital gains tax this time around. Market capitalisation stood at $32.1 billion at the end of September, slightly up by 0.5 per cent quarter-on-quarter but down by 1.6 per cent when compared to September last year.

Keeping the historical trend in mind, the fourth quarter of the financial year is expected to be better for the bourse as clarity about revised budgetary estimates emerges along with expected introduction of the leverage product.

The analyst said the most concerning factor to highlight since the start of FY11 has been gradual thinning of market volumes. However, interestingly, average volumes in September improved by 7.5 per cent to 61 million shares per day compared to the previous month despite market having been more on cash, mainly owing to the recent approval of the much-awaited leverage product by the Securities and Exchange Commission.

However, compared to the same month the previous year, volumes recorded a massive 74 per cent decline in September. Compared to the previous quarter, the volumes dropped 53 per cent in July-September 2010, while average traded value declined by a significant 76 per cent in the first quarter compared to the same period last year.

“This is believed to be partly due to the imposition and limited clarity as yet on taxation issues like capital gains tax and turnover tax. Moreover, delay in the leverage product’s approval alongside unfortunate series of floods, and the second jack-up in the discount rate this fiscal year also took away the remaining market breathing,” Schehzad said.

Foreign Inflows:

The analyst said continuous inflow of foreign funds merit praise, providing continuous support to the overall market index despite economic slowdown. During the nine months, net inflow stood at a much improved $377 million against last year’s outflow of $20 million. A major reason for foreign flows, which account for about 30 per cent of the market free-float, is the deepest discount on equities.

FUTURE PERSPECTS: Areas of concern include fragile security situation, energy shortage in the country and phenomenal increase in raw material cost of our export products without the proportionate increase in selling prices. Government is in process of preparing the budget of the next fiscal year and intends to implement the new VAT regime which will also do away with zero rating for the textile sector. If the zero rating is withdrawn it will adversely impact the liquidity with consequent increase in finance cost. If the government intends to go-ahead with the new VAT regime then it is imperative to ensure that VAT regime is uniformly implemented in the whole value added chain otherwise the organized sector will suffer tremendously.

14