Corporate Finance

SUBMITTED BY:

Asad Aziz

Muhammad Kamil

Sidra Mustafa

Zainab Khanum

MBA (1.5) E

Dated: 19-05-2017

Department of Management Sciences

Bahria University

Islamabad.
Q. Who is the CEO of the company? How long has he or she been CEO?

MIAN UMER MANSHA is CEO of Nishat Mills and He has been serving on the Board of
Directors of various listed companies for more than 18 years.

Q. If it is a family run company, is the CEO part of the family? If not, what career path did the
CEO take to get to the top? (Did he or she come from within the organization or from outside?)

It is family run company Mian Mohammad Mansha is the Chairman of “Nishat Group” - the
biggest industrial and financial conglomerate of Pakistan. This group was founded in 1948 by
Mansha's father Mian Mohammad and his three brothers and MIAN UMER MANSHA also
serves on the Board of Adamjee Insurance Company Limited, MCB Bank Limited, Adamjee
Life Assurance Company Limited, Nishat Dairy (Private) Limited, Nishat Hotels and Properties
Limited, Nishat (Aziz Avenue) Hotels and Properties Limited, Nishat (Raiwind) Hotels and
Properties Limited, Nishat (Gulberg) Hotels and Properties Limited, Nishat Developers (Private)
Limited, Nishat Agriculture Farming (Private) Limited and Nishat Farms Supplies (Private)
Limited.

Board of Directors

MIAN HASSAN MANSHA

Mian Hassan Mansha has been serving on the Board of various listed companies for several
years. He also serves on the Board of Nishat Power Limited, Security General Insurance
Company Limited, Lalpir Power Limited, Pakgen Power Limited, Nishat Hotels and Properties
Limited, Nishat (Aziz Avenue) Hotels and Properties Limited, Nishat (Raiwind) Hotels and
Properties Limited, Nishat (Gulberg) Hotels and Properties Limited, Nishat Hospitality (Private)
Limited, Nishat Dairy (Private) Limited, Pakistan Aviators and Aviation (Private) Limited,
Nishat Automobiles (Private) Limited, Nishat Real Estate Development Company (Private)
Limited, Nishat Agriculture Farming (Private) Limited and Nishat Farms Supplies (Private)
Limited.

SYED ZAHID HUSSAIN

Syed Zahid Hussain is a seasoned professional in Pakistan’s corporate world. He possesses

multi-faceted talents and has attained exemplary accomplishments. He has in-depth knowledge
of a wide range of subjects and has extensively diversified experience and exposure in senior
positions. He has earned B.Sc, LLB and MA in International Relations. He has a vast experience
of working as Chairman/Chief Executive/ Director of various state owned enterprises and listed
companies. He has also served as the High Commissioner/ Ambassador of Pakistan based in
Kenya, with accredited assignments of Ambassadorship in Tanzania, Uganda, Rwanda, Krundse,
Ethiopia and Eritrea. He is a fellow member of the Institute of Management, England,
International Biographical Center, the USA and the Institute of Marketing Management, Karachi.
MR. KHALID QADEER QURESHI

Mr. Khalid Qadeer Qureshi is a fellow member of the Institute of Chartered Accountants of
Pakistan. He has over 43 years of rich professional experience. He also serves on the Board of
D.G. Khan Cement Company Limited, Nishat Power Limited, Lalpir Power Limited, Pakgen
Power Limited, Nishat Paper Products Company Limited and Nishat Commodities (Private)
Limited.

MS. NABIHA SHAHNAWAZ CHEEMA

Ms. Nabiha Shahnawaz Cheema is a fellow member of the Institute of Chartered Accountants of
Pakistan and she is a Certified Director by completing the Director’s Training Program from
ICAP. She has more than 15 years of professional experience. She also serves on the Board of
Security General Insurance Company Limited, D.G. Khan Cement Company Limited and Nishat
Hospitality (Private) Limited.

MR. MAQSOOD

Mr. Maqsood Ahmad holds a Masters degree and a rich professional experience of over 23 years
in the textile industry, especially in the spinning business. He is a Certified Director by
completing the Director’s Training Program from ICAP. He is actively involved in the strategic
decisions relating to the operations of the Company.
MR. GHAZANFAR HUSSAIN MIRZA

Mr. Ghazanfar Hussain Mirza has a Bachelor degree in Mechanical Engineering from NED
University of Engineering & Technology. Mr. Mirza has 35 years of experience in business
development and business & corporate management in engineering, technical and multinational
environment. He has served as Managing Director of Group Companies of Wartsila Corporation
(Finland) in Pakistan and Saudi Arabia. He also serves on the Board of Nishat Power Limited
and holds the office of Chief Executive Officer of Pakgen Power Limited.

Share Voting Structure

Are there differences in voting rights across shares?

each member shall have such number of votes as is equal to the product of the number of voting
shares held by him and the number of Directors to be elected.
 Financial Market Concerns

How many analysts follow the firm?

The origins of Riaz Ahmad & Company (RACO) stretch back as far as 1956 and, through
successful growth, the firm today is a strong and independent practice with four offices in
Pakistan and a member of "Nexia International". Nexia International is a worldwide network of
independent auditors, business advisers and consultants

How much trading volume is there on this stock?

Free float shares are 163,574,530 out of total outstanding shares of 351,599,848 as at 30
September 2016 which makes up 46.52%

Societal Constraints (web search newspaper reports, environmental assessments,

competition commission reports etc.

Environment Protection The company is committed and focused to reduce impact of its
activities on natural environment by regularly investing in such technologies which minimize
effect of environmental pollution. A proposal in under consideration for the acquisition of a
new waste water treatment plant which will increase existing capacity for treatment of waste
water by 200 cubic meters per hour at production facilities of Dyeing and Home

Textile Segments. In our Garments Segments, we have implemented Green Building

technologies like Heat, Ventilation and Air Conditioning (HVAC) system and double glazed
glass. In an effort to promote culture of environmental protection, Company’s ode of conduct
requires employees to use the Company’s facilities and processes in an environmentally
sustainable way.

Energy Conservation

Apart from making efforts to generate energy from cheap and efficient sources, the Company
is also engaged in finding and exploiting the ways to conserve energy. During the current
year, we have performed more replacements of conventionallighting source with LED and T5
lights. The Company has also planned an investment in 1.2 MW solar panels which is
expected to becomeoperational in October 2016.

Waste Recycling

We make heavy investment in waste recycling technologies which is another way to conserve
environment. We believe small initiatives have big impact on environment such as purchase
of chemicals in reusable Intermediate Bulk Containers instead of small packing and
purchase of chemicals in concentrated form which reduces packing and transportation and
helps to reduce carbon footprints of the Company. We are also planning to purchase a water
recyclingplant which will process neutralized water after receiving from Effluent

Water Treatment Plant. This water will be used for gardening and in washrooms.
Occupational Safety and Health

Our sustainable growth is an evidence of our commitment towards health and safety of our
workers which is also the key requirement of stringent Health and Safety Standards imposed
by the foreign buyers. We carry out regular health and safety awareness programs, periodic
arrangements for medical camps for Malaria and Typhoid vaccination and routine
fumigation for insecticide to prevent dengue and other diseases. The Company has also
provided firefighting equipment’s and vehicles at all of its manufacturing facilities. Likewise,
dispensaries and ambulances are kept in standby mode to meet any emergency at mills.

Equal Opportunity Employer

Equal treatment of all employees and maintenance of discrimination free environment are
also the main features of code of conduct for employees. The Company recognizes the role of
people with diverse and multicultural background in inspiring creativity in its operations
which are being carried

Stockholder Analysis

How many stockholders does the company have?

Company have 11578 stockholders

What percent of the stock is held by institutional investors?

18.98%
 Insider Holdings

Does the company have listings in foreign markets? (If you can, estimate the percent of the
stock held by non-domestic investors?

Estimating Historical Risk Parameters

Beta:1.42
What is the most recent rating for the firm?

According to PACRA nishat mills scored AA rating in credit rating firm

What is the default spread and interest rate associated with this rating?

According to financial statement company interest coverage ratio is 6.47 times and spread
associated with this rating is 1.10 and interest rate associated with this 5.5 to

If your company has bonds outstanding, estimate the yield to maturity on a long term
bond? Why might this be different from the rate estimated in the last step?

Company has no outstanding bonds in recent year .

Does it have any recent borrowings? If yes, what interest rate did the company pay on
these borrowing?

Loan obtained by Nishat Linen Trading LLC - Subsidiary Company from a bank for purchase of
vehicle was settled on 40th installment whereas it was repayable in 60 monthly installments at an
interest rate of 8.72% per annum.
5.4 Loan has been obtained by Nishat International FZE - Subsidiary Company from a bank for
purchase
of a vehicle at an interest rate of 6.57% per annum repayable in 48 monthly installments.
5.5 Long term loans and long term musharika from Habib Bank Limited are secured against first
pari passu hypothecation charge of Rupees 4,000 million on present and future fixed assets of the
Holding Company excluding specific and exclusive charges.

These represent long term security deposits received by Nishat Linen (Private) Limited -
Subsidiary Company

Can you estimate a ìsyntheticî rating? If yes, what interest rate would correspond to this rating?)

Estimating Cost of Capital

What is the market value of equity?

What are the weights of debt and equity?

The Company’s Strategy, which was unchanged from last year, was to maintain a gearing ratio
of 60% debt and 40% equity

Measuring Investment Returns

What is the return on equity earned by the firm?

Return on equity increased due to increase in return on assets from 3.90% in the corresponding
last year to 4.62% in the current year. The main reason for increase in return on asset is increase
in profitability due to effective cost management strategies and better returns from value added
segments. However, asset turnover decreased from 0.51 time to 0.45 time due to decrease in
sales and increase in fair value gains which are included in total assets. Total assets to
shareholders’ equity ratio decreased from 1.40 times to 1.35 times due to increase in equity as a
result of improved profitability. This indicates less reliance on debt for financing assets of the
Company

What is the return on capital earned by the firm?

Are there any trends in the accounting returns, and if so, what do they tell you about
future projects?

Power Generation The Company invested in many projects in Power Division during the
financial year 2014-15 to achieve key strategic objective of cost efficiency. Three tri fuel and
highly efficient Wartsila Generators were commissioned at Bhikki, Ferozewatwan and Lahore. A
22 ton Coal Fired Steam Boiler to meet the enhanced steam requirements of Weaving Division at
Bhikki has been commissioned. This boiler generates low cost steam as compared to the steam
generated on furnace oil and rice husk based boilers. The 9 MW extension of coal fired power
plant is in progress and will be completed soon. In addition to electricity, it will also produce 25
tons of steam per hour.information Technology is the backbone of our business operations and
precursor to the growth of our Company. A robust and integrated IT system has enabled us to
operate our manufacturing facilities and offices on nine different locations in Pakistan. Our IT
Segment not only managed existing IT infrastructure but also carried out many hardware and
software projects during the year. We have successfully implemented a very advanced Radio
Frequency Identification (RFID) System in Garments Segment which will help to increase
productivity and efficiency of the Segment. Besides installation of physical hardware, in-house
developed software programs have been implemented in the newly completed projects of
Spinning and Weaving Segments.

Economic Value Added

Compute the book value of equity invested in this company and compute the
equity economic value added. What, if anything, does this tell you about this
company?

Book value of equity invested in this company is 234.93. Sales of value added
segments improved in the second quarter and recorded an increase by Rs. 1,234
million as compared to sales of first quarter of the financial year 2015-16. The main
focus of business strategy of the Company, to promote value added products,
benefitted the Segment in terms of increased profitability and addition of new
customer portfolio in Europe, America and Australia. High value digital printing
articles created demand of the Company’s productsbeyond expectations. Therefore,the
Company intends to make

Capital Structure Choices

Benefits of Debt

What marginal tax rate does this firm face and how does this measure up to the marginal tax
rates of other firms? Are there other tax deductions that this company has (like depreciation) to
reduce the tax bite?

Marginal tax rate for nishat mills is 25% and according to statement company faced loss on sale
of property and others items mention on statement which reduce tax bite
Does this company have high free cash flows (for eg. EBITDA/Firm Value)? Has it taken
and does it continue to have good investment projects? How responsive are managers to
stockholders?

In 2016, Nishat Mills Ltd increased its cash reserves by 827.10%, or 2.75bn. The company
earned 10.42bn from its operations for a Cash Flow Margin of 14.96%. In addition the company
used 986.39m on investing activities and also paid 6.68bn in financing cash flows.
 Costs of Debt

How high are the current cash flows of the firm (to service the debt) and how stable are
these cash flows? (Look at the variability in the operating income over time)

Optimal Capital Structure

What is the current cost of capital for the firm?

What happens to the cost of capital as the debt ratio is changed?

A firm has control over its capital structure, targeting an optimal capital structure. As more debt
is issued, the cost of debt increases, and as more equity is issued, the cost of equity increases.

What will happen to the firm value if the firm moves to its optimal?

Company value will increase if company using optimal capital structure in which they in order to
provide returns for shareholders and benefits for other stakeholders and to maintain an optimal
capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure,
the Group may adjust the amount of dividends paid to shareholders, issue new shares or sell
assets to reduce debt. Consistent with others in the industry and the requirements of the lenders,
the Group monitors the capital structure on the basis of gearing ratio

What will happen to the stock price if the firm moves to the optimal, and stockholders are
rational?

Stock price will increase if company is using optimal capital structure because if stockholder get
maximum profit and dividend on their shares and so company market share will increase ,
 Financing Type

How sensitive has this firm's value been to changes in macro economic variables such as interest
rates, currency movements, inflation and the economy?

The Company’s interest rate risk arises from long term financing, short term borrowings, term
deposit receipts, bank balances in saving accounts and loans and advances to subsidiary
companies. Financial instruments at variable rates expose the Company to cash flow interest
rate risk. Financial instruments at fixed rate expose the Company to fair value interest rate risk

How sensitive has this firm's operating income been to changes in the same variables?

When currency rate is increased then company’s material bought from foreign will increase their
price and operating cost will increase so company have to increase their product cost order to
compensate their loss

What do the answers to the last 3 questions tell you about the kind of financing that this
firm should use?

Company should do short term financing as we all know the current market condition of Pakistan
as interest rate increasing in every year so company should do short term financing
 Dividend Policy

Historical Dividend Policy

How much has this company paid in dividends over the last few years?

How much stock has this company bought back over the last few years?

In last 3 year company did not bought back its own stock but in 2010 company buy its 50%
shares to acquire thermal plants .

1. Firm Characteristics

How easily can the firm convey information to financial markets? In other words, how
necessary is it for them to use dividend policy as a signal?

73.2 71.89 65.95 130.49 141.7 138.4 124

The firm’s share price is currently 124 PKR which is 60% higher than same time last year. The
firm can easily convey information to the financial markets as it belongs to the Fatima group of
Companies a big name in Pakistan. However, it is still necessary for them to use dividends as a
signal to keep their investors interested and engaged in their company.
Who is the average stockholder in this firm?

How well can this firm forecast its future financing needs? How valuable is preserving
flexibility to this firm?

The performance of the firm over the past five years, the firm has performed quite well even
despite the prevalent economic crises in the country. This shows that the firm can forecast its
future financing needs well, and make arrangements well in advance to navigate the situation.
The firm is mostly a family owned business as evident from shareholdings, however the
company does believe in preserving flexibility in order to facilitate future growth.

Are there any significant bond covenants that you know of on the firm's dividend policy?

No such bond covenants on the firm’s dividend policy was revealed during years

How does this firm compare with other firms in the sector in terms of dividend policy?

The firm compares favorably with other firms in the industry in terms of dividends.
 Affordable Dividends

o What were the free cash flows to equity that this firm had over the last few
years?

How much cash did the firm actually return to its owners over the last few years?

1,573,781000 were paid in 2016 and 1,400,449 were paid in 2015 as according to report highest
dividend paid in last 6 years

Dividend of 0.5 per share was announced in 2016, but it is yet to be paid. As for the years 2012,
and 2011 the values entered are the prices of shares offered in specie dividends.

What is the current cash balance for this firm?

The current cash and bank balance of the firm as per its financial statement is 2,115,168000

How well have the managers of the firm picked investments, historically? (Look at the
investment return section)

Return on investment is increase over last 5 year and it increases 9 % to 11 % and manager is
picking good project in last 5 year
Is there any reason to believe that future investments of this firm will be different from the
historical record

Due to the arrival of CPEC and china investing in our country so in business strategy will
different in Pakistan will increase along with the economy so there is reason to believe that the
future investments of this firm will be better than the historical record.

Changing Dividend Policy

Given the relationship between dividends and free cash flows to equity, and the trust you
have in the management of this firm, would you change this firm's dividend policy.

Nishat Mills Ltd increased its cash reserves by 827.10%, or 2.75bn. The company earned
10.42bn from its operations for a Cash Flow Margin of 14.96%. In addition the company used
986.39m on investing activities and also paid 6.68bn in financing cash flows.

1,573,781000 (2016)1,400,449 (2015) (1,400,445)(2014) company changing its dividend policy

in last year so according to current situation of pakistan company stay its dividend policy

Relative to the sector to which this firm belongs, does it pay too much or too little in
dividends?

Reliance weaving mills is paying a reasonable dividend. The data available on secondary sources
on the subject was limited, but the companies that we found were either paying no dividends or
lesser dividends that reliance weaving mills
Relative to the rest of the firms in the market, does it pay too much or too little in
dividends?

Company is paying reasonable dividend as compared to others firms Year on year, growth in
dividends per share increased 11.11% while earnings per share excluding extraordinary items fell
by -9.72%. The positive trend in dividend payments is noteworthy since very few companies in
the Apparel/Accessories industry pay a dividend. Additionally, when measured on a five year
annualized basis, both dividend per share and earnings per share growth ranked in-line with the
industry average relative to its peers

Growth Pattern Choice

How fast have this company's earnings grown historically?

Year on year, growth in dividends per share increased 11.11% while earnings per share
excluding extraordinary items fell by -9.72%. The positive trend in dividend payments is
noteworthy since very few companies in the Apparel/Accessories industry pay a dividend.
Additionally, when measured on a five year annualized basis, both dividend per share and
earnings per share growth ranked in-line with the industry average relative to its peers. And
income is increasing as compared to last years

How fast do analysts expect this company's earnings to grow in the future?

Due to CPEC and the declining energy crises, the income is expected to grow in future at a
reasonable rate.

What do the fundamentals suggest about earnings growth at this company?

Improvement in profitability is also reflected in the increase in EPS of the Company which has
increased from Rs. 11.13 per share in the last year to Rs. 14.00 per share in the current year. The
earnings per share of the Company have remained at remarkable level over the last five years.so
it means company”s earning will grow more in future

If there is anticipated high growth, what are the barriers to entry that will allow this high
growth to continue? For how long?

As we all know current situation of Pakistan like energy crises and terrorism, political condition
that barrier will come in growth rate.
Inventory Valuation and analysis:

According to statement company’s inventory turnover is increasing in last years

Is it managing the inventory in line with peer group companies?

The company is managing its inventory in line with peer group companies.

How much of company’s cash flow is influenced by inventory size and value?

If we compared inventory turnover ratio and Gross profit so we see greater the turnover the
greater the company profit and vice varsa

How sensitive is inventory to changes in the different seasons or other assumptions?

Its textile company so its inventory is not highly sensitive to different seasons or other
assumptions.

In what aspect of corporate finance (investment, financing or dividend policy) does this
firm lag? (You can build on the intrinsic analysis that you have done so far, or use industry
averages)

According to report company ROA decreasing in last years so company should work on
investment and in last years company is generating negative cash flow in investing activities