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Service Report PDF
Service Report PDF
Administration, Karachi
Prepared by:
Contents
Appendix A ..................................................................................................................... 12
Appendix B ..................................................................................................................... 13
Appendix C ..................................................................................................................... 14
Appendix D ......................................................................................................................17
Appendix E ..................................................................................................................... 18
Appendix F...................................................................................................................... 19
Appendix G ..................................................................................................................... 21
Appendix H ..................................................................................................................... 23
References ...................................................................................................................... 24
1
Service Industries Limited
Company started with only manufacturing handbags and some other sports goods. Within years their
business flourished remarkably and they were supplying their products to every corner of India at the
time of Partition. In 1954, shoe manufacturing plant was installed at industrial area in Gulberg,
Lahore. Later management shifted the factory from Lahore to Gujrat.
SIL has annual revenues of about PKR 15 billion and is the largest manufacturer of footwear, tyres &
tubes for two-wheelers, and has been the largest footwear exporter of the country for the last 10
years. The company employs more than 8,600 people in its facilities located in Gujrat and Muridke
and exports its products in many destinations around the world.
The production side of the company today is restructured into Service Industries Limited (SIL) which
has world-class shoes, tyres, tubes and rubber production facilities in Gujrat and Muridke.
Retail side of the company, Service Sales Corporation (Pvt.) Ltd. (SSC) is a leading shoes retailer in
Pakistan with more than 450 retail outlets and roughly 2500 independent dealers. However in 2011,
SSC became an independent group after the restructuring of the Servis Group.
Footwear
Servis cater to the daily footwear needs of all the members of the family. With its multi-brand
approach, constant innovation in design and up-to-date style trends, Servis has products for all age
groups and personal tastes. Though Servis is a leader in footwear industry in Pakistan with a market
share of 7% but informal shoes Servis is lagging behind Bata. In past, Servis has more focus on sports
and casual footwear.
Annual revenues of footwear division exceed USD 83 Million of which 45% come from exports
majorly to EU countries Germany, France & Italy. In house manufacturing covers all aspects of shoe
manufacturing value chain from model designing, cutting, stitching to lasting (injection) & finishing
and downstream activities such as marketing. Present capacity is more than 40,000 pairs of shoes
every day.
Hush Puppies
2
Service Industries Limited
Bata
Stylo
Borjan
Tyre
Service Industries Ltd entered into tyre & tube business in 1970 with specialized in tyres & tubes for
Motorcycle and Bicycle of different kinds. Manufacturing of motorcycle tyres & tubes was started in
1990. SIL is major supplier of tyres & tubes to Japanese motorcycles manufacturers like HONDA,
YAMAHA and other local motorcycle assemblers in Pakistan.
Under Code of Corporate Governance the company seems to fully comply with its requirements, e.g.
nomination of at-least one Independent Director which was made necessary in CCG 2012. Financial
reporting is as per the standard prescribed. Directors are not part of more than 7 listed company
boards. Formation and structure of Audit Committee, HR committee etc. is also as per the code.
Service Group ensures that any material / price sensitive information is disseminated among all
market participants at once through the stock exchanges. Financial Reports are duly published on
the website as well.
3
Service Industries Limited
Service Industries Limited strives to be a good corporate. Corporate Social Responsibility (CSR) of
SIL is classified into the following categories;
Corporate Philanthropy
o Health Care facilities to communities where they operate
o Housing facility aims to provide shelter to the homeless senior citizens
o Schools
Community Investment
o SIL also donates to other organizations, entities and NGOs
Other areas environmental protection, industrial relation etc.
3 Shareholders Analysis
Major shareholders of SIL comprise of family of the founding members who also belong to Board of
Directors with 44.72% shareholding as discussed earlier. We may expect very little buying or selling
of shares in this part of directors. Other portion of institutional shareholders comprise of NIT,
Insurance Companies, Banks, Mutual Funds which comprise of 25.95% shareholding and around
22.81% belongs to public.
0.07%
4.82%
0.01% NIT and ICP
44.72% 1.69% 7.44%
Insurance Companies
18.43%
Associated Companies, Undertakings and
Related Parties
Others
General Public
22.81%
Directors, Chief Executive Officer, and their
spouses and minor children
4
Service Industries Limited
14
Millions
12
10
0
2014 2013 2012 2011
Directors, Chief Executive Officer, and their spouses and minor children
General Public
Modarbas and Mutual Funds
Banks, Development Financial Institutions, Non Banking Financial Institutions
Others
Associated Companies, Undertakings and Related Parties
Insurance Companies
NIT and ICP
5
Service Industries Limited
14
Millions 12
10
0
2014 2013 2012
Moreover, if we see the trend of number of shareholders for past three years in Appendix B, we do
not see any drastic changes in the number of shareholders in each category except in:
This is also evident from the volume traded in Karachi Stock Exchange is very low for SIL. So major
trading that occur is in general public, insurance companies and some financial institutions category.
We also observe some trading of shares by directors in the financial reports but that is very limited.
An interesting observation from the trading in shares by Executive Directors follow same pattern.
The three executive directors and the chairman sell or buy shares in equal quantity as observed
through financial reports.
6
Service Industries Limited
The marginal investors in the SIL is little complicated to identify as the firm has significant
institutional holdings and large insider holdings. In such scenarios most of the time the large insider
is the founder or original owner for the firm, and often, this investor continues to be involved in the
top management of firm as the case of SIL. However, from the pattern discussed earlier, here may be
Modarbas and Mutual Funds and some financial institutions trade on stock on regular basis and can
be marginal investors. Trading in other categories of shareholders seems very limited. It must be
noted here that insiders also trade occasionally in the stocks of SIL, so the the leading stockholder
will influence the final decision.
The R squared of the regression provides an estimate of the proportion of the risk (variance) of a firm
that can be attributed to market risk. In case of SIL market specific risk is about 5.09%, while the
94.91% is attributed to firm specific risk which is a very high number and must be diversified.
4
Levered Beta
3.5
3
2.5
2
1.5
1
0.5
0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Debt Ratio
7
Service Industries Limited
During the analysis period of 2010 2014, the expected return would be 19.08% per annum for
investing in SIL stocks (see Appendix C). The company outperformed the market by 17.54% annually.
The cost of equity for the firm based on market value is about 19.08%, whereas the cost of debt after
tax is 9.02%. With debt to equity ratio of 0.2882 (28.82%) based on market value of debt and equity
the cost of capital for SIL is 16.83%. This may be taken as a hurdle rate when company invest in
various projects with new or innovative product range selection to maximize the firm value.
SIL has optimum debt ratio of 20% which much near to its current debt ratio as per our calculation
(see Appendix G). Company tries to get the maximum advantage of tax benefit from keeping debt at
optimum level. However, company may lose its flexibility in business with increase of debt. In
general global average of shoe companies have debt ratio of about 9% (Damodaran). Such companies
retain their profits to allow flexibility during any unforeseen situations or financial crisis.
8
Service Industries Limited
Furthermore, SIL stocks are not held by huge number of individual investors and most of it is held by
family members who actively participate in running day to day operations, so more debt will not add
discipline to management.
Looking towards cost of capital schedule in figures below and detail values and calculation in
Appendix G, SIL may keep its debt ratio in between 10% to 30% without increasing cost of capital not
more than 1%. However current debt level of SIL at market value is PKR 3.05 billion which is PKR
0.324 billion above optimum cost of capital level at debt ratio of 20%. Moreover, less debt will allow
flexibility to firm and minimal level of risk in bankruptcy cost due to its nature of business and
products.
9
Service Industries Limited
6 Dividend Policy
Service Industries as a public listed company return its excess income to shareholders in the form of
cash dividends half yearly and sometimes only annually. Dividends during past 10 years of SIL in
figure below clearly shows that company tends to maintain or increase its dividends from previous
years and tends to follow earnings pattern. However, the rate at which earnings are growing (trend of
EPS), dividends are not growing (trend of dividends) with the same rate which illustrates that
company retain a good portion of its earnings for new projects and for bad times. Moreover, we did
not observe any stock buy back by the company from its retained earnings. While comparing
dividend payouts with global shoe companies, average dividend payout for SIL from the graph
mentioned below is around 38.69% and average of 88 global shoe companies dividend payout is
around 43.36% (refer Damodaran 2016 data).
10
Service Industries Limited
90
78.63
80
70 64.28
60 54.94
51.49
50
40 36.03 37.50
28.32 27.28
30 25.00
20.00 17.50
20 13.42 12.50
10.59
8.13 7.50 7.50
10 4.50
3.00 7.50
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
During analysis period of 5 years SIL increased its reserves by PKR 1.264 billion which is 80%
increased in comparision to reserves level of 2010. Keeping in view the SIL business where
continious innovation and marketing is required it is necessary to retain earnings to cover for bad
times and for new projects. However, surplus cash that exceeds the optimum capital ratio should be
return to shareholders in the form of cash dividends. Reason for cash dividends against capital gain
is due to the fact that the number of shareholders are limited and might not change very frequently,
so they may be more interested in cash dividends rather than capital gain on the shares held to invest
elsewhere.
3,000 2,844
Millions
2,500 2,327
1,893 1,900
2,000
1,580
1,500
1,000
500
-
2010 2011 2012 2013 2014
Reserves
11
Service Industries Limited
Appendix A
Director Category Shareholding in Servis
Board of Directors
Chaudhry Ahmed Javed Non-Executive Director 2,009,936 16.7094%
(Chairman)
Mr. Omar Saeed Executive Director 995,896 8.2793%
(Chief Executive)
Mr. M Ijaz Butt Non-Executive Director 40,069 0.3331%
Shares held by family member -> 477,218 3.9673%
Mr. Arif Saeed Executive Director 999,545 8.3096%
Shares held by family member -> 94,937 0.7892%
Mr. Hassan Javed Executive Director 758,015 6.3017%
Mr. Riaz Ahmed Independent Director 4,000 0.0333%
Mr. Shaukat Ellahi Shaikh Non-Executive Director
Mr. Muhammad Amin Non-Executive Director
Mr. Manzoor Ahmed (NIT Nominee) Non-Executive Director
Advisor
Ch. Ahmad Saeed 610,460 5.0750%
Chief Financial Officer
Mr. Jawwad Faisal
Company Secretary
Mr. Waheed Ashraf
Audit Committee
Mr. Manzoor Ahmed Non-Executive Director
(Chairman) (NIT Nominee)
Mr. Riaz Ahmed Independent Director 4,000 0.0333%
(Member)
Mr. Muhammad Amin Non-Executive Directors
(Member)
Human Resource Committee
Mr. Riaz Ahmed Independent Director
(Chairman)
Mr. Arif Saeed Executive Director 999,545 8.3096%
(Member) 94,937 0.7892%
Mr. Muhammad Amin Non-Executive Director
(Member)
Auditors
M/s. S. M. Masood & Co.
Chartered Accountants
Legal Advisor
M/s. Bokhari Aziz & Karim
2-A, block-G, Gulberg-II, Lahore.
12
Service Industries Limited
Appendix B
2014 2013 2012
Categories of Shareholders
No. of Shares % of No. of Shares % of No. of Shares % of
ShHdr Held Total ShHdr Held Total ShHdr Held Total
Associated Companies,
Undertakings and Related 3 580,138 4.82% 1 10,144 0.08% 2 44,214 0.37%
Parties
Modarbas and Mutual Funds 11 2,217,365 18.43% 4 1,823,439 15.16% 5 1,836,539 15.27%
General Public 1,254 2,743,401 22.81% 1,288 2,971,615 24.70% 1,361 2,812,241 23.38%
13
Service Industries Limited
Appendix C
Calculation of Expected Return using CAPM Model for Service Industries Limited.
Expected Return = Riskfree Rate+ Beta * (Expected Return on the Market Portfolio Riskfree Rate)
Pakistan Government Bond 10 year was quoted at 9.01% p.a. on February 25th, 2016. This can be
considered as Risk Free return in Pakistan.
b. Risk Premium
Pakistan sovereign bonds rating from Moodys and historical risk premium for AAA rated country is
detailed below:
Scale up the default spread by 50% to gauge the additional risk in stock market, so
c. Beta
Performing regression of stock returns (Rj) against market returns KSE-100 index (Rm) for period of
5Y from Jan 2010 to Dec 2014 with monthly return data (refer Appendix H for data).
Rj = a + b * Rm
14
Service Industries Limited
a = 1.6626%
so, b ranges between -0.0801 to 1.2638 with 95% confidence;0.2551 to 0.9286 with 68% confidence
since,
Rf = 9.01% p.a.
a Rf * (1-b)
1.6626% > 0.7508 * (1-0.5918) = 0.3065%
15
Service Industries Limited
Service did 1.3561% better than market, per month, between 2010 and 2014.
16
Service Industries Limited
Appendix D
Measure of Operating Leverage
u = 0.3508
17
Service Industries Limited
Appendix E
An interest coverage ratio for Service Industries Limited.
000 Rs.
Year 2014 2013 2012 2011 2010
Financial Charges 331,581 306,329 322,151 237,695 177,727
EBIT 1,276,029 1,053,734 514,572 772,314 665,659
A synthetic rating (from table below) for Service Industries Limited based on Interest Coverage Ratio of
3.176 found to be Ba2/BB, for which default spread is 4.25%.
A pre-tax cost of debt for your firm = Risk free Rate + Default Spread = 9.01 + 4.25 = 13.26%
Taking latest corporate tax rate of 32%, an after-tax cost of debt for Service Industries Limited would be:
After-tax cost of debt = Pre-tax cost of debt (1 tax rate) = 13.26 * (1 0.32) = 9.017%
18
Service Industries Limited
Appendix F
Debt to Equity Ratio based on book value found to be 1.09 as per table below from Financial Statements.
Breakup of Interest Bearing Long Term Liabilities including Current Portion with maturity is detailed
below:
19
Service Industries Limited
1
1
(1 + )
=
+
(1 + )
1
1
(1 + 0.1326)2.372
= 331,581,000
0.1326
3,238,032,000.00
+ = 3,049,461,367.45
(1 + 0.1326)2.372
Cost of Equity = Risk free rate + Beta * Risk Premium = 9.01 + 0.5918 * 17.01 = 19.08%
Market Value of equity = Price of stock * No. of shares = 879.5 * 12,028,789 = 10,579,319,925.50
* Price of Service Industries Limited stock on February 25th, 2016 = Rs. 879.5
Cost of Capital (Based on market value) = 19.08 * 0.7762 + 9.017 * 0.2238 = 16.83%
Cost of Capital (Based on book value) = 19.08 * 0.5006 + 9.017 * 0.4994 = 14.05%
20
Service Industries Limited
Appendix G
Capital Structure
Since,
L = u (1+ (1-0.32)*(D/E))
Cost of Equity = Risk free rate + Beta * Risk Premium = 9.01 + L * 17.01
Year 2014
Revenues 16,495,123,000
EBITDA 1,517,495,000
Depreciation & Amortization 241,466,000
EBIT 1,276,029,000
Financial Charges 331,581,000
21
Service Industries Limited
Interest After
Debt to Interest Bond Spread Rate on Tax
Debt in PKR Interest Expense Tax Rate
Capital Coverage Rating a Debt Cost of
a + Rf Debt
0% - Aaa/AAA 0.75% 9.76% 32.00% 6.64%
-
10% 180,717,639.94 7.061 A2/A 1.25% 10.26% 32.00% 6.98%
1,362,878,129.30
20% 2,725,756,258.59 361,435,279.89 3.530 Ba1/BB+ 3.25% 12.26% 32.00% 8.34%
30% 4,088,634,387.89 542,152,919.83 2.354 B2/B 6.50% 15.51% 32.00% 10.55%
40% 5,451,512,517.18 722,870,559.78 1.765 B3/B- 7.50% 16.51% 32.00% 11.23%
50% 6,814,390,646.48 903,588,199.72 1.412 Caa/CCC 9.00% 18.01% 32.00% 12.25%
60% 8,177,268,775.77 1,084,305,839.67 1.177 Ca2/CC 12.00% 21.01% 32.00% 14.29%
70% 9,540,146,905.07 1,265,023,479.61 1.009 Ca2/CC 12.00% 21.01% 32.00% 14.29%
80% 10,903,025,034.36 1,445,741,119.56 0.883 Ca2/CC 12.00% 21.01% 28.24% 15.08%
90% 12,265,903,163.66 1,626,458,759.50 0.785 C2/C 16.00% 25.01% 25.11% 18.73%
100% 13,628,781,292.95 1,807,176,399.45 0.706 C2/C 16.00% 25.01% 22.59% 19.36%
As long as interest expenses are less than PKR 1,276,029,000, interest expenses remain fully tax-
deductible and earn the 32% tax benefit. At 70% debt ratio, the interest expenses are PKR
1,265,023,479.61 and the tax benefit is therefore 32% of this amount.
At 80% debt ratio, however, the interest expenses increased to PKR 1,445,741,119.56, which is greater
than the EBIT of PKR 1,276,029,000. We consider the tax benefit on the interest expenses up to this
amount:
Maximum Tax Benefit = EBIT * Marginal Tax Rate = 1,276,029,000 * 32% = 408,329,280
Value = Expected Cash flow to the firm next year / (Cost of capital g)
22
Service Industries Limited
Appendix H
Monthly Return Data of KSE100 Index and SIL Stock from Jan 2010 to Dec 2014
Date KSE100 Return SRVI Return Date KSE100 Return SRVI Return
08-01-2010 9776.21 - 271.88 - 24-01-2013 17056.36 0.67% 173.17 3.86%
29-01-2010 9614.19 -1.66% 278 2.25% 22-02-2013 18074.27 5.97% 168.6 -2.64%
26-02-2010 9657.79 0.45% 326.32 17.38% 29-03-2013 18043.31 -0.17% 167.7 -0.53%
26-03-2010 10137.93 4.97% 344.01 5.42% 26-04-2013 18917.71 4.85% 220.66 31.58%
30-04-2010 10428.12 2.86% 293.36 -14.72% 31-05-2013 21823.05 15.36% 247 11.94%
28-05-2010 9521.15 -8.70% 208.03 -29.09% 28-06-2013 21005.69 -3.75% 260.99 5.66%
25-06-2010 9796.85 2.90% 212.67 2.23% 26-07-2013 23497.07 11.86% 253.1 -3.02%
30-07-2010 10519.02 7.37% 220.33 3.60% 30-08-2013 22160.85 -5.69% 311.17 22.94%
27-08-2010 9598.71 -8.75% 205.1 -6.91% 27-09-2013 22387.31 1.02% 296.53 -4.70%
24-09-2010 9909.45 3.24% 183 -10.78% 25-10-2013 22445.59 0.26% 309.14 4.25%
29-10-2010 10598.4 6.95% 207.95 13.63% 29-11-2013 24302.19 8.27% 350.89 13.51%
26-11-2010 11145.02 5.16% 229.59 10.41% 27-12-2013 25258.05 3.93% 545.92 55.58%
31-12-2010 12022.46 7.87% 240.04 4.55% 31-01-2014 26784.34 6.04% 473.46 -13.27%
28-01-2011 12462.7 3.66% 230.09 -4.15% 28-02-2014 25783.28 -3.74% 470.46 -0.63%
25-02-2011 11223.52 -9.94% 187.99 -18.30% 28-03-2014 27116.13 5.17% 487.25 3.57%
25-03-2011 11552.13 2.93% 195.81 4.16% 25-04-2014 28850.08 6.39% 550.5 12.98%
29-04-2011 12057.54 4.38% 172.34 -11.99% 30-05-2014 29737.69 3.08% 632.34 14.87%
27-05-2011 12225.52 1.39% 177.39 2.93% 27-06-2014 29343.76 -1.32% 495 -21.72%
24-06-2011 12464.26 1.95% 179.61 1.25% 28-07-2014 30314.07 3.31% 578.1 16.79%
29-07-2011 12190.37 -2.20% 192.11 6.96% 29-08-2014 28567.74 -5.76% 662.57 14.61%
30-08-2011 11070.58 -9.19% 191.92 -0.10% 26-09-2014 29705.65 3.98% 841.87 27.06%
30-09-2011 11761.97 6.25% 198.83 3.60% 31-10-2014 30376.53 2.26% 1016.8 20.78%
28-10-2011 11561.67 -1.70% 205.1 3.15% 28-11-2014 31197.98 2.70% 989.53 -2.68%
25-11-2011 11648.14 0.75% 201.87 -1.57% 26-12-2014 31993.01 2.55% 960 -2.98%
30-12-2011 11347.66 -2.58% 194.99 -3.41%
27-01-2012 11960.22 5.40% 209.95 7.67%
10-02-2012 12231.6 2.27% 202 -3.79%
30-03-2012 13761.76 12.51% 188.03 -6.92%
27-04-2012 14042.77 2.04% 171.76 -8.65%
25-05-2012 13925.06 -0.84% 166.11 -3.29%
29-06-2012 13801.41 -0.89% 165.92 -0.11%
27-07-2012 14526.41 5.25% 169.88 2.39%
31-08-2012 15391.58 5.96% 175.33 3.21%
28-09-2012 15444.82 0.35% 187.1 6.71%
25-10-2012 15812.72 2.38% 162.95 -12.91%
30-11-2012 16573.86 4.81% 168 3.10%
28-12-2012 16943.19 2.23% 166.73 -0.76%
23
Service Industries Limited
References
http://www.servisgroup.com/
http://www.sscbrands.com/
http://www.tradingeconomics.com/pakistan/government-bond-yield
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
http://www.investing.com/rates-bonds/pakistan-10-year-bond-yield-historical-data
http://dps.psx.com.pk/
24