cib report.docx

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2. Introduction

The Pakistan textile industry

Contributions The burning IssueMore than 60 %to the countrys total exports Energy crisis faced by the Textile sector of Pakistan

Approximately 46%to the total output Fake Hopes by the Govt. to industrialist

The sum of total exports 9.6 bill ion Gas and electricity shortage results in shut down

38% workforce employed Unemployed labors increase the poverty rate

2.1. Significance of the study

Provides information to guide the planners, government policy makers to implementpolicies and make decisions to deal with the current problems that textile sector iscounter.

Highlights the main problematic areas and their impact.2.2. Aim of the Study:

The aim of this study is to focus on the issues arising from the energy crisis in the textile industry

and how these issues have decreased the performance of textile sector, what measures need to be

adopted by the industry and by the Government as well to remove the obstacles in the countrys

largest export contributor industry.

2.3. Research Objectives:

To analyze the the impact of energy crisis and challenges in the way for textile industry,causing a negative growth.

Address the problems, issues and identify key areas to increase efficiency.2.4. Research Questions:

Which factor contributes more to the negative growth in the textile sector?

What is the impact of energy crisis on the textile industry?

2.5. Delimitations of the Study:

Because of lack of time and limitation of professional guidance, we have not concentrated on one

particular region of Pakistan; this report is based on the overall situation in the textile sector of

the whole country and not only one geographical region.


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3. Literature Review

3.1. Concepts and definitions:

Textile Industry:

The textile industry includes every business involved in growing or producing fibres, like sheep

farmers and cotton growers, those who make the fibre into thread; those who make the threadinto cloth; and those who dye, bleach and finish the cloth. The textile industry also includes

chemical companies that make synthetic fibres and all the resultant products. (ask.com)

Energy Crisis:

An energy crisis occurs when a country has a great need for fuel, gas or electricity but does not

have enough of either (or both) to provide for its citizens, and as a result, energy becomes veryexpensive or not available to everyone. (energy crisis, 2011)

3.2. Theoretical Reflections:

Electricity is important for any industri al activity or for any sector but i ts availabil ity in

Pakistan is l imi ted due to the scared resour ces. The texti le sector consumes around 38 percent

of electr ici ty in chemical processing, 34 percent in spinning, 23 percent in weaving and 5

percent f or miscell aneous purposes. ByAhmed Aliya, 2012 (Senior R&D Officer)

The summer has arrived with the unrelenting heat and humidity causing misery for the

mil li ons who have to suff er the unscheduled power breakdowns and load shedding. The texti le

industry of Pakistan whi ch constitutes 60% total exports of the country conti nues to suf fer

despite assurances by politicians and bureaucrats.(Pakistan Textile Journal, 2012)

According to Khan and Khan (2012):Everyone agrees: energy, especial ly electr icity, is the

villain of Pakistans industrial production. The total generation of electricity, using all

available resour ces, stands at 10,000-11,000 MW (megawatts) against a nationwide demand of

14,500 MW a day(mehmood, 2013)

Although Pakistans history shows that textile sector was expanding since 1947 but since 2007

it i s contracting. Following reasons contri buted to the contraction of this sector:

1)Load shedding of the electricity

2)Increase in the prices of oil and gas3)Increased prices of raw material4)Lack of new technology and transportation facilities

5)Political instability


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3.3. Literature Gap:

The literature on this sector has focused on the impact of financial crisis, electricity crisis and

interest rate on textile industry of Pakistan, growth trend of Pakistan Textile industry and

identified the variables of energy crisis but no one has measured the impact of energy crisis on

the performance of textile sector of Pakistan. This research will fill this gap by taking whole

textile industry into consideration. The purpose of this paper is to analyze the impact of crucial

energy crisis on the performance of textile sector of Pakistan.

3.4. Evidence from the Literature:

Khan & Khan (2010) mentioned in his study that the textile sector of Pakistan is facing new

challenges. Great decline has occurred in growth rate of industry. This decline can be identified

from below table:

Trend of Textile Industry During 2005-2010

2005-06 11.23%2006-07 8.40%

2007-08 4.05%

2008-09 -0.70%

2009-10 -1078%

(Source: Economic Survey of Pakistan State bank of Pakistan)

3.5. Critical Analysis the Literature:

High cost of production due to several factors:

Energy Crisis Hike in electricity tariff Increase in interest rate Devaluation of Pakistani rupee Increasing cost of inputs, Political instability Removal of subsidy & internal disputes

The power, electricity and gas shortages have been an unsolved mystery in Pakistan. As a

consequence of load shedding the textile production capacity of various sub-sectors has beenreduced by up to 30%, huge losses have been incurred due to electricity load shedding and the

instant rise in the Electricity tariff. Because of the gas shortage recently 60 to 70 %of the

industry had been affected and was unable to accept export orders coming in from around the

globe.


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4. Proposed theoretical/conceptual

framework

After assessing the literature review, defining the problem and setting the objectives, research

needs to establish theoretical frame work. The theoretical framework comprises on the

followings:

Inventory of Variables:

Dependent Variable:

Return on Asset (ROA) Return on Equity (ROE) Net Profit Margin (NPM) Debt Equity Ratio Financial Expense Ratio

Current Ratio Asset Turnover Ratio Inventory Turnover Ratio Dividend Current Ratio Earnings Per Share

Independent Variables:

Energy CrisisModerating Variable:

Economic Growth

Figure 1: Theoretical Framework

Energy

Crisis

Return on Asset

Return on Equity

Net Profit Margin

Debt Equity Ratio

Financial Expense Ratio

Current Ratio

Asset Turnover Ratio

Inventory Turnover Ratio

Dividend Current Ratio

Earnings per Share

Economic

growth


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5. Proposed Research Methodology

5.1. Sample Selection:

Due to time constraints, the sampling size is consisting of respondents that are known as major

groups of textile industry.

5.2. Population Frame:

The population of this study is executives of all textile companies & mills of different textile

zone and areas of Pakistan as well as government bodies from whom we could easily obtain our

required data for research.

5.3. Unit of Analysis:

The entity that is being analysed in this research report is the Textile Industry of Pakistan.

5.4. Type of Study:

This research is descriptive in nature because, already many studies have been conducted and

large information about situation at hand on when, how this research issues have been solved in

the past but some points may need more illustration about the impact of energy crisis on thegrowth of textile sector.

5.5. Time Horizon:

For getting real insight of the phenomenon under study, we have collected secondary data from

two reliable sources. (1) The annual reports of textile sector from FY 2005-2010 and (2) Thefinancial statement analysis report of State Bank of Pakistan (SBP).

5.6. Researchers Strength:

This research is based on the past historical secondary data which gives the research anauthenticity based on facts and figures.

However as this is solely based on secondary data, therefore results may differ from those based

on primary data.

5.7. Hypothesis:

H1: The performance of textile sector has declined after energy crisis.


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5.8. Data Analysis and Results:

The performance of textile sector is evaluated through horizontal ratio analysis from 2005 to

2010. Major accounting ratios covering multiple aspects of performance are taken intoconsideration. These include; liquidity ratios, Asset Management Ratios, Profitability ratios and

Debt Management Ratios.

Horizontal Comparison of accounting ratios

Table 1: Return on Assets

Years 2005 2006 2007 2008 2009 2010

Return on Assets 3.71 2.76 2.35 1.33 -0.81 4.89

Source: (Financial sector analysis of the whole textile sector by SBP, 2005-2010)

The above chart and table depicts the ROA of the textile sector before the energy crisis period

was 3.71% in 2005 and 2.76% in 2006. Moreover during the energy crisis period in 2007 itdecreased to 2.35 and the trend continued in the post crisis period. A striking decline occurred in

the FY 2009 that completely converted this profit into losses. This up and down trend of

confirms that the profitability of textile sector has been affected to a large extent by the energy

crisis.

-2

-1

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010

Return on Assets


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Table 2: Return on Equity

Years 2005 2006 2007 2008 2009 2010

Return on Equity 11.32 7.97 6.47 3.83 -2.56 14.64


In the pre-crisis period, the ROE was 11.32% in 2005 and 7.97% in 2006.Whereas, during

energy crisis period it declined to 6.47% and after that the return converted into losses (-2.56) in

2009. After this it stabilizes again in 2010. This trend of profits and losses indicate profitabilityof the sector was better before the energy crisis.

-4

-2

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008 2009 2010

Return on Equity


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Table 3: Net Profit Margin

Years 2005 2006 2007 2008 2009 2010

Net profit Margin 4.78 3.35 2.94 1.66 -0.97 5.67


The NPM (Net profit on sales) before the energy crisis was 4.78% in FY 2005 and 3.35% in

2006, during the crisis period in 2007 it was 2.94. However it started declining dramatically inpost crisis period, 1.66% in 2008 and finally converted into losses in the year 2009 (-0.97%). The

industry started stabilizing in the year 2010 and again converted into the profit. This decliningand rising trend of NPM shows that the profitability decreased in the post crisis period and

confirms the impact of energy crises on the sector.

-2

-1

0

1

2

3

4

5

6

7

2005 2006 2007 2008 2009 2010

Net Profit Margin


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Table 4: Debt Equity Ratio

Years 2005 2006 2007 2008 2009 2010

Debt equity ratio 2 1.8 1.71 2.08 2.25 1.79


Debt equity ratio shows a declining trend in the pre-crisis period. In 2005 the debt was 2% of the

equity in 2006 it declined to 1.8% of equity. However if we observe the post crisis period we seea rising trend of debt from 1.71% in 2007 to 2.25% in 2009 after it again reduced to 1.79% in the

year 2010 which is marked as the stabilizing year for that sector.

0

0.5

1

1.5

2

2.5

2005 2006 2007 2008 2009 2010

Debt Equity Ratio


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Table 5: Financial Expenses as % of Sales

Years 2005 2006 2007 2008 2009 2010

Financial expenses as

% of sales

3.46 5.44 6.32 7.47 8.9 6.53


Table no 5 shows the increasing trend of financial expenses ratio as % of sales from 2005 to 2009.However it stabilized in the year 2010.

0

1

2

3

4

5

6

7

8

9

10

2005 2006 2007 2008 2009 2010

Financial Expenses as % of Sales


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Table 6: Current Ratio

Years 2005 2006 2007 2008 2009 2010

Current ratio 1.06 1.08 1.1 1.11 0.86 0.93


The current ratio helps us in identifying the liquidity position of the textile sector. It is observed

from the above table that the industry had the liquidity of Rs.1.06 for the payment of Rs.1 debt in

2006. Although it shows increasing trend before the energy crisis but in the post crisis periodmarks the decline in the liquidity position as compare to the pre-crisis period. Moreover it is not

still recovered in the year 2010.

0

0.2

0.4

0.6

0.8

1

1.2

2005 2006 2007 2008 2009 2010

Current Ratio


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Table 7: Total Assets Turnover Ratio

Years 2005 2006 2007 2008 2009 2010

Total Assets

turnover ratio

0.71 0.76 0.75 0.77 0.78 0.84


The pre-crisis period shows the increasing trend in asset turnover ratio which decreased to 0.75in 2007. Later on, the post crisis period represents again rising trend.

0.6

0.65

0.7

0.75

0.8

0.85

2005 2006 2007 2008 2009 2010

Total Assets Turnover Ratio


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Table 8: Inventory Turnover Ratio

Years 2005 2006 2007 2008 2009 2010

Inventory

turnover ratio

2.87 3.76 4.04 3.44 3.9 4.55


Above table and graph shows that inventory turnover ratio was increasing before energy crisisperiod; 2.87% in 2005, 3.76% in 2006 and 4.04 in 2007. But after the energy crisis period, it

dramatically decreased to 3.44 in 2008 and again that is sector recovered its inventory turnoverto 4.55% in 2010.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2005 2006 2007 2008 2009 2010

Inventory Turnover Ratio


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Table 9: Dividend Cover Ratio

Years 2005 2006 2007 2008 2009 2010

Dividend Cover ratio 3.88 4.37 4.39 -5.83 -4.77 5.14


Dividend coverage ratio shows that it increased in the pre-crisis period from 3.88% in 2005 to

4.37% in 2006. However it remains stable during the crisis period in 2007. Point to be noted here

is that there is gigantic downturn in the dividend ratio. In 2008 it decreased to -5.83% andshowed slight improvement in 2009. Moreover, it increased to 5.14% in 2010.

-8

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010

Dividend Cover Ratio


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Table 10: Earnings per Share

Years 2005 2006 2007 2008 2009 2010

Earnings per share 2.94 1.85 1.26 -2.15 -1.51 4.91


The above table shows the pattern of earning per share; the EPS was Rs. 2.94 in 2005, Rs. 1.85

in 2006 and Rs. 1.26 in 2007. It converted into losses in the post crisis period; Rs. -2.51 loss per

share in 2008 and Rs. -1.51 in 2009.in 2010 the loss converted in to profit Rs.4.91 in 2010 whichis highest in the of the past six years performance.

Table 11: Overall results of the Study

Years 2005 2006 2007 2008 2009 2010

Return on assets 3.71 2.76 2.35 1.33 -0.81 4.89

Return on equity 11.32 7.97 6.47 3.83 -2.56 14.64

Net profit margin 4.78 3.35 2.94 1.66 -0.97 5.67

Debt equity ratio 2 1.8 1.71 2.08 2.25 1.79

Financial expenses as % of sales 3.46 5.44 6.32 7.47 8.9 6.53

Current ratio 1.06 1.08 1.1 1.11 0.86 0.93

Assets turnover ratio 0.71 0.76 0.75 0.77 0.78 0.84

Inventory Turnover ratio 2.87 3.76 4.04 3.44 3.9 4.55

Dividend cover ratio 3.88 4.37 4.39 -5.83 -4.77 5.14

Earnings per share 2.94 1.85 1.26 -2.15 -1.51 4.91


-3

-2

-1

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010

Earnings per Share


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5.8.1. Objective:

The objective of this study is to compare the performance of the textile sector of Pakistan before

and after the energy crisis.

5.8.2. Hypotheses:H0: The performance of textile sector has not declined after energy crisis.

H1:The performance of textile sector has declined after energy crisis.

5.8.3. Result:

After analyzing all major accounting ratios, it is concluded that performance of textile sector has

declined after energy crisis. Moreover, the energy crisis severely affected profitability, liquidity,

expenses and debt management ability of the textile sector.

5.8.4. Status:

H1:PROVED

Hence H1Accepted

5.9. Proposed Data Analysis Techniques:

Data is gathered and arranged in tabular form. The data collected is horizontal. This data is

analyzed using charts.


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6. Conclusions and Recommendations

This study fills the gap in literature by examining the impact of energy crisis on the performance

of textile sector of Pakistan. The study covers a six year period from 2005 to 2010; divided into atwo year pre-crisis period and a three year post-crisis period. The trend of all the major

accounting ratios reveal that whole textile sector has faced severe losses due to the extensiveenergy crises in the FY 2007 and afterwards. We concluded that hypothesis The performance of

textile sector hasbeen declined after energy crisis is accepted because figures of liquidity ratios,

asset management ratios, debt management ratios and profitability ratios shows huge declineafter energy crisis.

The findings of this research will probably help the top management of textile sector in making

important decisions and in contingency planning for unexpected events. Moreover, it willprovide an insight into activities which require consideration for improving the performance of

the textile sector. Further research can be conducted to analyze the impact of energy crises onthe exports of textile and its effect on trade balance of the country.


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7. References

Abbas, F. R. (2012). Impact of Financial Crisis on Textile Sector of Pakistan. Information Management

and Business Review, 4(7), 409-410.

ask.com. (n.d.). Retrieved from http://www.ask.com/question/what-is-the-definition-of-textile-industry

energy crisis. (2011). Retrieved from http://wiki.answers.com/Q/What_is_energy_crisis

Mani, M. A. (2012). Retrieved from http://dawn.com/2011/07/03/energy-crisis-leaves-pakistan-textiles-

in-tatters/

mehmood, A. (2013). daily times. Retrieved from

http://dailytimes.com.pk/default.asp?page=2011%5C01%5C10%5Cstory_10-1-2011_pg3_6

Pakistan Textile Journal. (2012). Retrieved from http://www.ptj.com.pk/Web-2012/05-2012/Editorial.htm

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