Sukkur IBA

University
Financial Management

Submitted To
Dr. Pervaiz Memon

Submitted By
Safi Ullah

Suresh Kumar

Faizan Ahmed

BBA-7 (B)

Shadab Textile Mills Ltd.

Dated:10/07/2021
Introduction
Shadab textile mills was founded on August 19th 1979, came into
existence as a Public Limited Company and got the certification to start
business on Nov 18TH 1979. Shahdab Textile Mills Ltd. is occupied with
matter of assembling, selling, purchasing, and managing in Yarn, all
things considered. The organization recorded on Stock Exchanges in
1985. The settled-up Rs.166.000 Million is capital of Shahdab Textile
partitioned into Rs.16.6 Million normal portions of Rs.10/ - each. The
organization put up a turning plant in the region of Shahkot, Sheikhupura
district within the region of Punjab and started manufacturing in the
month of February 1982. Plants machinery are of great and famous
quality. Being project introduced under "PAYE" Scheme the organization
had sent out an enormous amount of its manufacture to meet the
prerequisite of reimbursements of apparatus credit and has procured a
decent standing in the Industrial business sectors for its quality items.
The limit of the task is Appx. 16.500 million Kgs. of 20/s Yarn. The limit
of the unit has expanded from 14400 axles to 33600 shafts by
introducing 19200 extra axles with fundamental back cycle hardware
during the year 2001, 2002,2004 and 2014. The administration is
growing the limit of the unit by introducing extra axles with important
back cycle apparatus and BMR the current offices to make the
undertaking more practical and to rival the other turning units outfitted
with the most recent technology.
Proforma Financial Statements
Proforma financial statements are prepared on some assumptions and
hypothetical situation which might not be as accurate as in reality. It
used internally to make good decisions and the external use is for the
investors who might view the effect of business. The proforma financial
statements use the past data to look forward the future years of
business. Mainly the proforma are used to speculate about the business
in future. In following sections, we have made certain assumptions for
growth and based on that the speculated or future forecasted financial
statements are created.

Growth Assumptions
The following method has been used to calculate growth:

Years 2015 2016 2017 2018 2019 2020 Avg:

Growth
Sales 1,852.80 1,861.58 2,042.32 2,271.53 2,813.43 2,290.54  
Growth   0.47% 9.71% 11.22% 23.86% -18.59% 5%
Percentage

The following growth assumptions for the upcoming years are as follows
based on the past performance of the company.

Growth 2021 2022 2023 2024 2025

rates
5% 5% 5% 5% 5%

 Demand for Textile is raising by 2.5% around the world. Share of

the Pakistan Textile is expected to be 3.78%. As per international
  exports reports Pakistan has opportunity in the exports of textile
during the period of 2020 to 2025.
 The tax rate is taken as 31% based on the current corporate tax
rate of Pakistan.
 For the next coming 5 years current assets and current liabilities
are taken as constant.
 The unleveraged beta is taken as 1 for finding out the leveraged
beta.
 Corporate Valuation model has been used for finding the free cash
flows.
 Due to COVID-19 Textile companies are subsided by deferring
electricity bills and loan payment. Moreover, the government of
Pakistan is also favoring the exports-oriented companies and the
textile is one of the major export commodities of Pakistan.
 Textile Policy draft of 2020-2025 claims that Pakistan's export of
textile will be increased to $25.9 billion by 2025. And they have
goal to reach $50 billion textile exports in next 10 years.
 Government of Pakistan is also providing facilities to the farmers,
as the textile production is very costly. It seems a positive stimulus
for the more production of textile.

Therefore, looking at the above reasons for the industrial growth of

textile, we have assumed the growth of our company from 3% to 6%
during the first four years of 2021 to 2024. For the year 2025, as this
year growth is assumed to be constant (with the assumption that it
prevails for the long run) is average of the four years growth.
 SHAHDAB TEXTILE MILLS1 LIMITED3
INCOME! STATEMENT$
FOR4 THE` YEAR ENDED` JUNE 30
(Rupees in thousands)

  2020 2021 2022 2023 2024 2025

Net Sales 2,290,540 2,412,747 2,541,474 2,677,070 2,819,899 2,970,350
Cost of Sales 2160400
2,275,663 2,397,077 2,524,968 2,659,683 2,801,585
GROSS PROFIT 130140 137,083 144,397 152,101 160,216 168,764

Administratives 73267 73267 73267 73267 73267 73267

and generali
expenseso
Selling* and 5470

distributions 5,761.84 6,069.25 6,393.07 6,734.16 7,093.44

expensesq
  78737 79028.8 79336.3 79660.1 80001.2 80360.4
OPERATING 51403 54,145 57,034 60,077 63,282 66,658

PROFIT
Finance costs 10644 11,211.89 11,810.08 12,440.18 13,103.90 13,803.04

Other charges 4975 5,240 5,520 5,814 6,124 6,451

  35784 37,693.2 39,704.2 41,822.6 44,053.9 46,404.3

Other income 27552 29,022.0 30,570.4 32,201.4 33,919.5 35,729.2
PROFIT BEFORE 63336 66,715.2 70,274.6 74,024.0 77,973.4 82,133.5

TAXATION
Taxation(31%) 19634.16 20,681.7 21,785.1 22,947.4 24,171.8 25,461.4
PROFIT AFTER 43701.84 46,033.5 48,489.5 51,076.6 53,801.6 56,672.1

TAXATION
5-Years Proforma Financial Statements
Following are the proforma financial statements based on the growth
rate that we have assumed based on past data and industry overview.

Proforma Income Statement

All the amounts are in thousands, in Pakistani rupees. Accounts which

are not affected by the sales growth directly are carry on their other
concerned rates as of year 2020, for instance financing cost is increased
with Rd. Taxation has been at the rate 31% (i.e., corporate tax rate of
Pakistan). All accounts are titled as same as were in previous financial
statements of the company.

Proforma Balance` Sheet``

SHADAB` TEXTILE` MILLS LIMITED`
BALANCE` SHEET
AS AT JUNE` 30
  (RUPEES IN THOUSAND)
   
ASSETS 2020 2021 2022 2023 2024 2025
           
NON` - CURRENT``            
ASSETS``
Property`, plant` and 374,019 374,019 374,019 374,019 374,019 374,019
equipment`
Right of use asset` 14,993 14,993 14,993 14,993 14,993 14,993
Long` term` deposits` 2,434 2,434 2,434 2,434 2,434 2,434
Total Non- Current 391,446 391,446 391,446 391,446 391,446 391,446
Assets
CURRENT` ASSETS`

Short term Investments 236,000 248591.32 261854.42 275825.15 290541.26 306042.51

Stores`, spares` and 64,430 67867.54 71488.48 75302.60 79320.23 83552.20
loose` tools
Stock` in trade` 224,545 236525.16 249144.49 262437.11 276438.93 291187.78
Trade` debts` 116,616 122837.82 129391.59 136295.02 143566.78 151226.50
Loans` and advances` 11,113 11705.91 12330.46 12988.33 13681.29 14411.23
Trade` deposits` and 72,450 76315.43 80387.09 84675.98 89193.70 93952.46
prepayments`
Other receivables` 8,060 8490.03 8942.99 9420.13 9922.72 10452.13
Cash` and bank`` 251,798 265232.19 279383.13 294289.07 309990.28 326529.21
balances`
Total Current Assets 985,012 1,037,565.4 1,092,922 1,151,233 1,212,655 1,277,354
TOTAL ASSETS 1,376,458 1,522,885 1,712,460 1,935,623 2,212,657 2,572,610
LIABILITIES    

NON` - CURRENT`
LIABILITIES``
Lease` liabilities` 1,262 1,262 1,262 1,262 1,262 1,262
Deferred` liabilities` 32,899 32,899 32,899 32,899 32,899 32,899
34,161 34,161 34,161 34,161 34,161 34,161
CURRENT`
LIABILITIES`
Trade` and other` 248,737 262008 275987 290712 306222 322560
payables`
Unclaimed` dividend` 654 654 654 654 654 654
Accrued` mark-up` 775 816 860 906 954 1005
Line of Credit 34198 13386 27486 42339 57984 74464
Sponsors` loan` 160,600 160600 160600 160600 160600 160600
Short` term` borrowings 37,478 37478 37478 37478 37478 37478
Current` portion` of 5,091 5091 5091 5091 5091 5091
long term` liabilities
Provision` for taxation` 34,358 34358 34358 34358 34358 34358
Total Liabilities 487,693 548,552 576,674 606,298 637,502 670,370

EQUITY

SHARE` CAPITAL`
AND RESERVES`
Issued`, subscribed` and 166,000 166,000 166,000 166,000 166,000 166,000
paid-up` share capital`
Capital` reserves 204,000 204,000 204,000 204,000 204,000 204,000
Revenue` reserves 484,604 510459.10 537693.64 566381.23 596599.38 628429.77
TOTAL EQUITY & 854,604 880,459.1 907,693.6 936,381.2 966,599.4 998,429.8
LIABILITIES
1,376,458 1,429,011 1,484,368 1,542,680 1,604,101 1,668,801

As the company is going have install one new plant as stated in financial
statement of 2020 in director's statement, we have expected the Net
PP&E to increase by 30% in every year their after. Moreover, now
company is more focused to growth rather than maintenance only.
Retained Earnings are added to the revenue reserves of the titled
account and one additional account is tilted i.e., Line of Credit for clarity
to make reader understand. Depreciation is not shown as titled account
as it was not in previous statements of the company.

Corporate Valuation Model for Free cash Flows

Free Cash Flows
Free Cash Flows      
2021 2022 2023 2024 2025
EBIT 69,483 77,334 83,358 88,840 95,933
Depreciation Shield 39,424 51,251 66,627 86,615 112,599
108,907 128,586 149,98 175,455 208,532
5
(Change in NWC) 22,993 29,367 22,533 20,505 26,528
(Change in CAPEX) 52,427 50,320 65,416 85,040 110,553
Free Cash Flows 33,488 48,899 62,037 69,910 71,451

Working Capital

Current Assets 985,012 1,019,233 1,062,941 1,096,477 1,126,994 1,166,476

Current Liabilities 487,693 498,921 513,262 524,265 534,278 547,232
NWC 497,319 520,312 549,679 572,212 592,716 619,244
Change in NWC 22,993 29,367 22,533 20,505 26,528

Capital Expenditure
Net PP&E at the end 301,42
of the previous Year 6 374,019 486,225 632,092 821,720 1,068,236
Net PP&E at the end 374,01 486,225 632,092 821,720 1,068,236 1,388,706
of the Current Year 9
Depreciation 42713. 55526.9 72184.9 93840.4 121992.5 158590.3
0
115,30 167,733 218,052 283,468 368,508 479,061
6
52,427 50,320 65,416 85,040 110,553
Change
WACC
Weight of debt 37.9% rd 9.894%
weight of equity 62.1% r 9.55%
    T 31%
WACC 8.59%    

Rd is weighted average of all the loans taken by the company respective

to their rates. The calculations are done by excel sheet. All are
mentioned in Excel Sheet in Rd calculations. Cost of equity is calculated
with CAPAM approach. Beta of the company is calculated by 5 years
daily return of Shadab Textiles and KSE 100 index's slope (i.e., 0.1907).
Market rate is calculated with 10-years monthly return data of KSE-100
index. Risk free rate is taken of Pakistan Investment bonds return of 10
years.

Discounted Cash Flows

FCF_2 FCF_2 FCF_2 FCF_2 FCF_2 Horizo
021`/ 022`/ 022`/ 022`/ 022`/ n
(1+W (1+W (1+W (1+W (1+W Value/
ACC)^ ACC)^ ACC)^ ACC)^ ACC)^ (1+WA
1` 2` 2` 2` 2` CC)^5
41468 48448 50278 47322 11227 30838.
.67 .77 .61 .18 68.83 67

Firm Value and Value of Equity

Value of the Firm 1341125.73
(Value of Debt) 521,854.00
Value of the Equity 819,271.73
Intrinsic Value
Per Share Price 60.10 Current Price Rs. 29.7

Share is undervalued as per our calculations and assumptions; therefore, we are

recommending to "Buy" the share of the company. As its intrinsic value is greater
than its current market price. Due to the underpriced value, it will give more return in
future. Purchasing the shares of SHDT will give more profit in future as the share
price is underpriced. So, we would recommend Buying the stock of this company.

Optimal Capital Structure

Debt Equity Beta (L) Re Rd WAAC

0% 100% 0.13306 9.08% 0.00% 9.078%

20% 80% 0.15668 9.27% 8.00% 8.551%
30% 70% 0.17355 9.41% 9.00% 8.501%
40% 60% 0.19604 9.59% 10.00% 8.593%
60% 40% 0.27477 10.23% 12.00% 9.202%
80% 20% 0.51095 12.14% 14.00% 10.380%

Unlevered Beta = 0.13305973 and Rd = 9.89%

The optimal capital structure for the company is 30% debt and 70%
equity. Its current capital structure is 62% equity and 38% debt financing.

Dividend Policy
Looking at the previous financial data of the company, before 2015
company had followed constant dividend policy. In these recent five
years it has faced high factions in its cashflows. Similarly, its dividends
are also fluctuated and not following any of the pattern.

Looking at the current situation of the economy and ahead opportunities

for the company we have designed Constant Dividend Policy for the
firm company will pay 15% of the net income into dividends and
remaining will be retained earnings which will reinvested into the
company's operations. Company is also more focused to the growth
therefore we have maintained its 85% retention ratio, from the next five
years.

Working Capital Decision

Working Capital Policy

As Per 2020
Revenue (Sales) 2,290,540
Current Assets 985,012
  43.00%

Firm is following the moderate working capital policy, as it is avoiding

high risk and earning moderate profit margins on its additional
investment in current assets.

Short-term financing has been done through the Line of Credit facility, as
it is defined by its financial statements. Other than this there are
sponsors loans been provided to them on the personal guarantee of the
directors.

Conclusion
The different calculations and analyzation of Shahdab Textiles, it seems
that the company is doing well in its operations and core business
activities. The company seems to be growing and having good financial
edge, so the value of the firms is increasing. The company is trying to
maximize its profit so that it is considering the benefits of all its
stockholders. We conclude that the investors should in this company for
long run return as the firm value is underpriced and the firm can earn
more profits in future.