Strategic Financial Analysis and Design Report

TehreemSuhail (14986)
Syed Muhammad Saif Ali Jafri (12818)
Suman Sohail (15082)
Maira Razi (15052)

Submitted To: Sir Faisal Dhedhi

Course: Strategic Financial Analysis and Design
 FIT FREEKS 2017

Contents
LETTER OF ACKNOWLEDGEMENT................................................................................................................3
INVESTMENT PLAN:.....................................................................................................................................4
INTRODUCTION:..........................................................................................................................................5
PROJECT DESCRIPTION................................................................................................................................5
Product Description:................................................................................................................................5
COMPETITOR ANALYSIS...............................................................................................................................6
COSTING:.....................................................................................................................................................7
CAPITAL STRUCTURE:...................................................................................................................................7
Production Schedule:...............................................................................................................................8
Cost of Goods Sold:..................................................................................................................................9
INCOME STATEMENT.................................................................................................................................10
BALANCE SHEET:........................................................................................................................................11
FINANCIAL RATIOS:....................................................................................................................................12
LIQUIDITY RATIO:...................................................................................................................................13
PROFITABILITY RATIO:............................................................................................................................13
LEVERAGE RATIO:...................................................................................................................................14
INVESTMENT RATIOS.............................................................................................................................14
EFFICIENCY RATIO:.................................................................................................................................15
STOCK PORTFOLIO:....................................................................................................................................15
SWOT ANALYSIS:........................................................................................................................................19
Strengths........................................................................................................................................19
Weakness.......................................................................................................................................19
Opportunities.................................................................................................................................19
Threats...........................................................................................................................................19

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LETTER OF ACKNOWLEDGEMENT

It is a matter of great satisfaction that all our efforts ended with this thorough report based on
Project appraisal. Here, we would like to state that firstly, it was a blessing of The Almighty
Allah that we completed this report without any barriers and shortcomings in between. Secondly,
this report came to a successful end due to the joint efforts and cooperation of all group members
who worked hard to make it better.

We would like to thank Mr. Faisal Dhehdi whose guidance and teaching backed us all the way
while preparing this report. His teachings are something, which we will always carry with us
ahead and make the most use of it wherever possible.

Regards,

Tehreem Suhail
Syed Muhammad Saif Ali Jafri
Suman Sohail
Maira Razi

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INVESTMENT PLAN:

We are making a Total Investment of Rs. 5,000,000 (5 mn) in our project. 70% would be our
Equity which is Rs. 3,500,000 (3.5 mn) and 30% would be financed by Debt which amounts to
Rs. 1,500,000 (1.5 mn). We have obtained this debt on 11.14% yearly cost of debt. We have
invested Rs. 2,000,000 million of our total investment in Stocks and rest of the capital in
business venture.

For Business Venture we planned to start a retail business of Rs. 3,000,000 million that supplies
the best gym apparels and fitness equipment. The remaining Rs. 2,000,000 we plan to invest in 4
companies listed in Karachi Stock Exchange (KSE).

The sectors that we chose to invest are the Steel, Textile and the Power Industry. The reasons to
invest are even discussed further. We have invested equal amount of Rs. 500,000 in all the 4
companies.

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INTRODUCTION:

FIT FREEKS (Pvt) Limited

Mian Mureed Hussain Sreet Mohallah
Muslim Colony, Kotli Behram
Airport Road Sialkot- Pakistan
0335-2208898

Brand name: Fit Freeks

Domain: fitfreeks.com (already bought)

Description: A retail brand that serves every single need of people aspiring to lead a fit life style.

Tag line: "Aspire. Perspire. Inspire."

PROJECT DESCRIPTION

Product Description:

1) Apparel & footwear (Sweat Pants, Sweat Shirts, Tanks Top, Track Pants, Shorts etc)

2) Equipment (Knee Straps, Elbow Straps, Belts, Caps, Gym Sacks/Kit Bags etc)

Segments will be rolled out in the order mentioned above. Which means all emphasis will
initially be on stocking a good range of apparel starting with essential gym clothing like Sweat
Shirts, Sweat Pants, Shorts and Tank Tops.

Initial operations will be through social media and off line and once we have some momentum
(and multiple items to display) we will begin work on the website.

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While the business gains momentum, we plan to enter into discussion with big gyms like Club-
M, Life Style, and Body Core etc. We will provide the fitness trainers at these gyms with our
products and discuss with the gym owners if they wish to stock our merchandize which includes
apparel and equipment.

COMPETITOR ANALYSIS

The gym apparel and equipment industry, which is aimed at a niche market, currently operational
in Pakistan is in its early stages. The people who are adopting a healthy life style usually
purchase general sports apparel like trousers which are mediocre copies of brands like Adidas,
Nike and Under Armour. Many of the manufacturers in the industry who are either situated in
Sialkot or Lahore usually emphasize on the export market as they do not see an upside/return in
the local market currently. However, the situation can be changed 5-10 years from now when the
awareness increases.

We chose to opt for this business as several apparel businesses have not tapped the gym market,
where people crave for comfortable gym apparel like fleece sweat pants which provides ease in
squats, dead weight lift because of its softness. Moreover, if we notice, adoption of a healthy
lifestyle is increasing on a global level.

Many businesses in this industry are online, and offer their products by marketing through social
media platforms like Facebook, Instagram or through a website.

Competitors In Pakistan:

- Jacked Nutrition (Primarily provides supplements, has a limited variety of gym apparel
like t-shirts and tank tops)
- Well.pk (Supplements)
- Wellness Company (Supplements)
- The Supplement House (Supplements)
- ON
- GNC

In Pakistan, if we notice, there was not a noticeable want for having apparel and equipment by
the people who went to gyms, healthy clubs or even a jogging track. However, the trend seems to
change now as people get attracted to clothing which enhances the feel of a healthy lifestyle
while working out in the gym. Thus, we still think that there is just a meager percentage of
businesses in Pakistan (listed above) who have tapped this market, therefore complete demand is
not yet met. These businesses either provide low quality or charge so high prices that it is not
affordable for everyone.
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COSTING:

COST OF PROJECT (Rs.)

Assembly Machinery 1,000,000
Tools and Equipment 140,000
Land & Factory Overheads 250,000
Total Startup Expenses (Project) 3,000,000
Long term investment 2,000,000
Total Investment 5,000,000
Cash in Hand 1,000,000

CAPITAL STRUCTURE:

INVESTMENT
Investment from Equity 3,500,000 70%

Investment from Debt 1,500,000 30%

Total 5,000,000 100%

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Production Schedule:
Products Forecasted production units
Apparel:
Sweat Pants
- Design 1 350 385
- Design 2 350 385
Total Sweat Pants Sold 700 770

Tank Top
- Design 1 500 550
- Design 2 500 550
Total Tank Tops Sold 1000 1100

Shorts 350 385

Sweat Shirt 400 440

Equipment:
- Knee Straps 200 230
- Elbow Straps 200 230
- Belts 200 230
- Caps 200 230
- Gym Sacks/Kit Bags 200 230
Total Equipments Sold 1000 1150
Total Units Sold 3450 3845

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Cost of Goods Sold:

Products Forecasted COGS
Apparel: Year 1 Year 2
Sweat Pants
- Design 1 133,875 147,263
- Design 2 133,875 147,263

Tank Top
- Design 1 135,000 148,500
- Design 2 135,000 148,500

Shorts 37,950 41,525

Sweat Shirt 89,700 98,150

Equipment:
- Knee Straps 10,200 11,700
- Elbow Straps 10,200 11,700
- Belts 23,800 27,300
- Caps 8,500 9,750
- Gym Sacks/Kit Bags 5,780 6,630
TOTAL 723,880 798,280

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INCOME STATEMENT
Income Statement
VALUE IN Rs. '000
Year 1 Year 2
Sales 1548.7 1708.23
Less Cost of Sales 723.88 798.3
Gross Margin 824.82 909.95
Less Expenses
Salaries 550 605
Promotions expenses 100 95
Administrative expenses 5 5.5
Deprecation 100 100
Utilities 70 77

Office rent 50 55

Insurance expense 8 8.8

Miscellaneous 10 11
Expansion (Construction) - 35
Total Operating Expenses 893 992.3
Add Other income 565.8 622.3
less EBIT 497.6 539.99
Interest charges on:
less DFI loans 167 167
EBT 330.5 372.89
less Tax (30%) 99.14 111.87
Net Profit 231.3 261.0

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BALANCE SHEET:
BALANCE SHEET (Rupees 000's)
ASSETS YEAR1 YEAR2
CURRENT ASSETS:
Cash 1,000 466
A/C receivables 619 683
Inventory 113 125
Short Term Investment 566 154

Office Supplies 402 486

TOTAL CURRENT ASSETS 2,700 1,914

FIXED ASSETS
Assembly machine 1,000 1,000
Less: Depreciation 150 150
tools and equipment 140 140
Less: Depreciation 47 47
Long term Investment 2,000 2,566
NET FIXED ASSETS 2,943 3,509

TOTAL ASSETS 5,643 5,423

Liabilities & Equity YEAR1 YEAR2

Current Liabilities:
Accounts Payable 217 239
Accruals 185 222
Total Current Liabilities 402 461

Long term debts:

DFI Loan 1,500 1,200

Paid-up capital 3,500 3,500

Net profit 231 261

TOTAL LIABILITIES & EQUITY 5,634 5,423

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FINANCIAL RATIOS:

Year 1 Year 2

Liquidity Ratios

Current Ratio 6.71 4.15

Quick Ratio 6.43 3.88

Debt Management

Total debt to total assets 27% 22%

Times Interest Earned (TIE) 2.98 3.23

Profitability Ratios

Gross Profit Margin on Sales 53.26% 53.27%

Operating Profit Margin 32.13% 31.61%

Net profit Margin 14.94% 15.28%

Other Investment Ratios

Return on Total Assets (ROA) 8.82% 9.96%

Return on Equity (ROE) 6.20% 6.94%

Efficiency Ratios

Accounts Receivable turnover 2.5 2.5

Accounts Receivable turnover in days 146 146

Inventory Turnover 6.43 6.40

Inventory Turnover in days 57 57

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LIQUIDITY RATIO:

Liquidity ratios measure a company's ability to pay debt obligations. In general, a higher
liquidity ratio indicates that a company is more liquid and has better coverage of outstanding
debts.

Current Ratio: Current ratio tells us how much assets we have to pay off our current
liability. We have 6.71X assets to pay off our current liability for the year 1 and 4.15X
assets for the year 2. The main reason of our declining ratio is our cash on hand declines
as we compare both the years and our liability increases.

Quick Ratio: This ratio tells about the companys liquidity position in depth. For the year
1 our ratio is 6.43X and year 2 it is 3.88X. Our quick ratio for the year 1 is higher than
the year 2 because in year2 our current assets are declining. The larger the Quick ratio,
the better for the company. In future, we need to focus on our liquidity position.

PROFITABILITY RATIO:

Like every firm we are also concerned with our profitability. One of the most frequently used
tools of Financial Ratio analysis is Profitability Ratios which are used to determine a company's
bottom line and its return to its investors. Profitability measures are important to company
managers and owners equally. Here we are also assessing our business's ability to generate
earnings as compared to its expenses and other relevant costs incurred during a specific period of
time. For most of these ratios, having a higher value relative to our competitor's ratio or the same
ratio from a previous period is indicative that the company is doing well.

Gross Profit Margin: The gross profit margin looks at cost of goods sold as a percentage of
sales. This ratio looks at, how well our company controls the cost of its inventory and the
manufacturing of its products and subsequently pass on the costs to its customers. The larger
the gross profit margin, the better for the company. We have a gross profit margin of 53.26%
in both the years which means our cost of goods sold is almost 46.74% of our sales. Which is
quite high and in future we look forward to reduce this cost and increase profitability.

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Operating Profit Margin: The operating profit margin looks at EBIT as a percentage of
sales. The operating profit margin ratio is a measure of overall operating efficiency,
incorporating all of the expenses of ordinary, daily business activity. It is much more
complete and accurate indicator of a companys performance than gross margin since its
accounts for not only the cost of goods sold but also the other important components of
operating income. Our operating profit margin is 32.13% for the year 1 and 53.27% for the
year2. Hence, there is a constant trend that we are following. This indicates that we are
spending a major part of sales in operating expenses.

Net Profit Margin: The Net Profit margin measures profitability after consideration of all
expenses including taxes, interest, and depreciation. Our net profit margin is 14.94% for the
year1 and 15.28% for the year 2 which should be improved in future.

LEVERAGE RATIO:
Leverage ratio is used to calculate the financial leverage of a company to get an idea of the
company's methods of financing or to measure its ability to meet financial obligations. A
companys leverage relates to how much debt it has on its balance sheet and it is another measure
of its financial health. Generally the more debt a company has the more risky it is

Debt to Total Assets: This is a measurement of how much assets we have financed through
debt. Our debt to total assets ratio for the year 1 is 27% and 22% for the year 2. We have
improved our debt position in year 2 as compared to year 1.

Interest Coverage Ratio: The interest coverage ratio measures a companys ability to meet its
interest obligation with income earned from the firms primary source of business. Higher
coverage ratios are better. We have a coverage ratio of 2.98X for the year 1 and 3.23X for the
year 2. As it is more, its better for the business.

INVESTMENT RATIOS
Investment ratios measure the percentage of profit made out of invested amount.

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Return on Equity: Return on Equity is the amount of net income returned as a percentage
of total equity. Return on equity measures a company's profitability by revealing how
much profit a company generates with the money invested. We have a return on equity of
6.2% for the year 1 and 6.94% for the year 2. This indicates that we are not able to
generate very high income from our invested equity.
Return on Assets: Return on assets indicates how much profit we are getting from our
investment on assets. It is always in percentage and higher the better for the company.
Our ratio for the year 1 is 8.82% and in year 2, 9.96%. Our return is increasing in year 2
as we compare with year 1.

EFFICIENCY RATIO:
The efficiency ratio is typically used to analyze how well a company uses its assets and
liabilities internally. An efficiency ratio can calculate the turnover of receivables, the repayment
of liabilities, the quantity and usage of equity, and the general use of inventory and machinery.

Account Receivable Turnover: The receivables turnover ratio is an activity ratio

measuring how efficiently a firm uses its assets. For both the years, our ratio remains
constant that is 2.5. Although this ratio is higher the better. Our company is using its
assets efficiently.
Accounts Receivable turnover in day: it tells us the credit policy of the company in how
many days we receive our receivables. In our 2 years analysis our days remains same that
is 146days. In future, we need to improve this conversion cycle.
Inventory turnover: Inventory turnover is a ratio showing how many times a
company's inventory is sold and replaced over a period of time. For the both of the years
our ratio remains constant that is 6.4X.
Inventory turnover in days: it tells us in how many days our inventory sells in the
market. How fast and efficient our company works. In our case we are getting the same
ratio for the 2 years that is 57days.

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STOCK PORTFOLIO:

We are investing in stocks of 4 companies which are as follows:

i. Hub Power Co Ltd

ii. Aisha Steel Mills Ltd
iii. Nishat Mills Limited
iv. International Steel Ltd

Investment Investment Price Dividen Absolute

(Rs.) # Shares P0 Weight age P1 Change d Return Return (Rs.)
HUB
C 500,000 4,066 122.96 25% 133.48 10.52 1.5 9.8% 48,878

ASL 500,000 29,886 16.73 25% 25.68 8.95 0 53.5% 267,484

NML 500,000 3,322 150.53 25% 166.39 15.86 5 13.9% 69,289

ISL 500,000 5,126 97.55 25% 131.44 33.89 1.25 36.0% 180,113

Total 2,000,000 100% 565,763

Hub Power Co Ltd

Power sector always have a positive impact due to rupee devaluation and in 2013 dollar
appreciated as compared to the dollar rupee parity. Therefore the profitability of Hub Power
increased. The Company is also investing USD 20 million in Sindh Engro Coal Mining
Company Limited (SECMC), a joint venture between Engro Powergen, Thal Limited, HBL,
CMEC, Government of Sindh and the Company to develop a coal mine at Thar which has the
seventh largest reserves of coal in the world. Companys earnings per share is Rs.10.29,
whereas the it is making a net profit of Rs. 11,903 million. They have declared As Hubco
expands its investments in the energy sector; a minimum of Rs. 1.5 per share would be paid
on quarterly basis. After considering the financial performance and cash flow requirements,
the Company would adjust the dividend in the third quarter of the financial year so that
shareholders can receive the dividend sooner.

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HUBC
Po 122.96
P1 133.48
D1 1.5

We are investing Rs. 500,000 in these stocks; it would give us a return of 9.8%.

Aisha Steel Mills Ltd

Aisha Steel Mills Limited (ASML) is a state-of-the-art cold rolling complex with a
nameplate capacity of 220,000 metric tons per year. ASML is one of the largest private sector
investments in the value added flat-rolled steel industry in Pakistan. Companys sales were
9.63 billion Pakistan Rupees in 2016.Companys current ratio was 0.61. As the company is
expanding its operation due to which its debt to equity ratio is quite high. Due to large
financial subsidiaries, Aisha Steel Mills doesnt pay dividend however this ratio will improve
going forward and the company will start pay dividend.

ASL
Po 16.73
P1 25.68
D1 0

We are investing Rs. 500,000 in these stocks; it would give us a return of 53.5%.

Nishat Mills Limited

Financial performance of the Company was exceptional during the current year as compared to
that of corresponding last year despite of limited demand due to global economic slowdown and
cutthroat competition. Profit after tax of the Company increased from Rs. 3,912 million in
financial year 2014-15 to Rs. 4,923 million in financial year 2015-16 which is a remarkable
increase of 25.85%. The main reasons for this marked increase in profitability are improvement
in the performance of value added business, use of the optimal fuel mix and achievement of cost
efficiencies due to better cost controls. A glance over EBITDA to sales ratio for the last five
years reveals that it is the highest for financial year 2015-16 and has increased to 18.62% in the

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current year. Contribution from the investment portfolio of the Company towards profitability
was substantial and dividend income increased by Rs. 753.221 million (25.56%) in the current
year as compared to dividend income of the last year. A review of last five years shows a steady
and an impressive growth in dividend income at 13.04% per annum. Companys earnings per
share is Rs.14.00 and Dividend payout ratio is 35.71%.

NML
Po 150.53
P1 166.39
D1 5

We are investing Rs. 500,000 in these stocks; it would give us a return of 13.9%.

International Steel Ltd

ISL is one of the largest private investor in the value-added flat-rolled and coated steel industry
in the country. The $165 million investment, with equity contributions from Sumitomo
Corporation, JFE-Japan, and International Finance Corporation. This 500,000 tons per annum
steel complex produces Cold Rolled, Galvanized and Color Coated Steel from hot rolled coils.
ISL's current production mix comprises of 100,000 tons of Cold-Rolled Product,350,000 tons of
Hot-Dip Galvanized and 50,000 MT of Color Coated Steel, which are offered in coil or sheet
form. In 2016 company has paid dividend of Rs. 543,101,000

ISL
Po 97.55
P1 131.44
D1 1.25

We are investing Rs. 500,000 in these stocks; it would give us a return of 36%

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SWOT ANALYSIS:

Strengths
- Professional athlete endorsements.
- Industry expert contact.
- Strong Partnerships.
- Expandable building space.
- Location

Weakness
- New brand in established market.

- Dependent upon outsourcing for production.

- Formal distribution channels being created from scratch.

Opportunities
- Recruit other athletes to endorse inexpensively.

- Demos at various events and competitions. Forming distribution and marketing

relationships.

- Creating a new brand with fresh design.

Threats
- Competition.

- Modest funding.

- Manufacturers' ability to perform.

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