ABSTRACT

After completing his MBA degree from LUMS, a

prestigious university in Pakistan, Akbar Ali
landed his dream job, working as a credit officer in
one of the largest corporate banks in Pakistan. In
winter 2015, he was given his first assignment to
sit in on a meeting with Mr Hamid Zaman, CEO of
Sefam, a Lahore based company, and the head of
the credit division. Sefam was seeking to convert
its substantial short term debt into a more
attractively priced long-term facility and was
requesting a PKR 500 million facility for a period
of 5 years. Akbar had been asked to review the
application and provide a recommendation as to
whether the application should be processed
further, based on audited financial statements
provided by the company

SEFAM (PVT) LTD Submitted By

Jaweria Rasool – 63680
A Credit Evaluation Nasir Hussain – 63691
Syeda Mayra Zaidi – 64387
Sheeba Sulaiman – 63182
Shiza Waqar - 62990

Submitted To:
Sir Abdus Salam Shiekh
Sefam (Private) Limited: A Credit Evaluation

Required:
Introduction:
Sefam (Private Limited):
Sefam Pvt Ltd is Pakistan's largest fashion house and fashion retailer. The company prides itself
on being the pioneers of branded fashion retail in Pakistan currently operating in excess of 400
points of sales globally a majority of which are in Pakistan with the rest in Europe, Middle East,
North America and Asia.
Hamid Zaman and his sister founded Sefam in 1985 with the intention of producing and selling
embroidered fabrics that were on par with the finest in the world. Mr. Zaman first began his career
working for Ali Embroidery Mills (AEM), a business that belonged to his father but went under
after regional upheaval sharply reduced demand for their goods. The brother-and-sister team
secured enough equity to resume operations at AEM using AEM's abandoned assets because they
were determined to restore the family's embroidered cloth business, but this time with a clear goal
to focus on quality.
Production began after some initial hiccups, but when they had trouble finding customers, they
made the decision to start their own retail business, Sefam. The name "Bareeze," which was a
translation of the Persian word "barsa," which means "barkat," was used by Sefam to open its first
store (blessing or prosperity). In 1985, the business's first store debuted in a place specifically
selected to pit its goods against the cheap imported fabric that was widely accessible.
Early Operations:
For the first two years, Sefam operated with goods produced with a single overhauled machine.
They started with low-cost designs, but AEM eventually acquired sophisticated embroidery
machines, thus increasing the variety of designs and their quality. Once the designs and quality
were improved, the product was selling at two to four times the price of other available options,
but margins were not very good as the cost of production was high and maintaining good quality
meant limited production by AEM

Competitors:
Embroidered fabric is a niche market, but by the early 1990s Bareeze faced some mild competition;
however, none of these competitors were able to establish themselves. Despite no significant
advertising on its part in its earlier days, Bareeze was clearly a price setter with no serious
competition due to its distinctive quality. This was still true in 2015, especially as the flagship
Bareeze brand had stayed out of the cut-throat lawn sector. The Company did, however, face
competition with its other brands
 ChenOne is a subsidiary of Chenab Limited,
a member of the Faislabad-based Chenab
Group. The group is one of the largest
exporters of home textile products from
Pakistan. In 1997, ChenOne opened its first
branch in Islamabad, and like Sefam, it offers
a complete range of products (fashion clothing
and footwear, bed linen, kitchen accessories
and furniture) under one roof. The company
has recently branched out into real estate
development.5 The chain has thirty-plus
stores located across Pakistan and the Middle
East
Khaadi first opened its doors in 1998 in
Karachi, offering its customers kurtas and
loose fabric made from handwoven fabric.
Khaadi, which means ‘hand-woven’, has
stayed true to its name and continues to
produce a fusion of styles to complement both
the East and the West, while still using hand-
woven fabrics on select products. Khaadi
offers prêt, unstitched fabric, Eastern wear for
men, women and children, Khaas (featuring
exclusive and limited-edition pieces),
accessories and Home (featuring furniture,
bedding and bath items). Khaadi has built
more than forty stores in Pakistan as well as
stores in the United Arab Emirates, Saudi
Arabia, Canada, Mexico, America, Australia,
Malaysia and the United Kingdom

At Ideas by Gul Ahmed, we find a similar
variety of products including prêt wear,
unstitched fabric, accessories and home items.
The chain has expanded up to sixty stores
across Pakistan since its inception in 2003.
The group began trading in textiles in the early
1900s and entered the field of manufacturing
with the establishment of Gul Ahmed Textile
Mills Ltd (GTM). Gul Ahmed is a composite
unit, making everything from cotton yarn to
finished products. It is a vertically integrated
operation, with everything from
manufacturing, across all stages, to retail
under one umbrella. The company was listed
on the Karachi Stock Exchange in 1972
The Alkaram group was founded in 1986
with a vision to be a provider of innovative
textile solutions worldwide. They are one of
the few vertically integrated operations in
Pakistan offering a diversified range of
products. Building on the strength of Alkaram
Textiles, the retail arm Alkaram Studio was
created for customers to experience the depth,
range and creativity of the Alkaram product
portfolio—from fashion fabrics and apparel to
kids’ clothing, home textiles and homeware
needs.

Diminishing Profitability:
The company had funded its growth primarily through retention of profits (retained earnings
comprised 67 per cent of total equity on 30 June 2015) and a series of equity injections over the
years with the largest (PKR 243 million) and the most recent one in 2014. The last dividend
distribution was in 2011. Despite restricting dividends, the company found itself having to resort
to long-term borrowings, albeit interest-free and from its own directors or their associates. There
had also been a consistent rising trend in short-term borrowings since 2012. After the acquisition
of land in 2014, which cost PKR 115 million, the company was planning a capital expansion
project to enhance its offices to cater to the increased size of the business. Despite revenue growth,
the company faced diminishing profitability, and a detailed analysis was required to assess the
feasibility of extending long-term credit.
Details of some of Short Term and Long Term Loans are given below:
Short Term & Long Term Loan
2015 2014

Running finance (a) 1,378,123,815 330,551,621

Morabaha finance (b) 134,169,294 186,817,275
Bank over drawn (c) 478,131,423 388,935,824
1,990,424,532 906,304,720

(a) This facility has been obtained from various banks against aggregate sanctioned limit
of Rs. 1,982 million (2014: Rs. 730 million). It carries markup ranging from 1 months
KIBOR plus 1.5% to 3 months KIBOR plus 1.75% and LIBOR plus 2%. (2014: 1 month KIBOR
plus
1.5% to 3 months KIBOR plus 1.75% and LIBOR plus 2%). The principal
portion
of these facilities is payable on demand and mark up on quarterly basis. These running
finance facilities are secured by first pari passu charged over the current assets of
Rs. 1,433 million, equitable mortgage over the land and building and shops in the name
of the company, charge on the stocks, personal guarantees of the directors of the company
and cross corporate guarantee of an associated undertaking - Sarena Industries and
Embroidery Mills (Private) Limited.

(b) This facility has been obtained from various banks against aggregate sanctioned limit of
Rs. 450 million (2014: Rs. 230 million). It carries markup ranging from 3 months KIBOR
plus
1.25% to 1.75% (2014: 3 months KIBOR plus 1.5% to 1.75%) per annum. This facility is
secured by first pari pasu charged over the current assets of Rs. 468 million with
25% margin, title of imported goods amounting to Rs. 30 million and personal guarantees
of the directors of the company

(c) This overdrawn balance is due to issuance of cheques near the balance sheet date. However
Bank statements show favourable balances of Rs. 8,125,040 (2014: 59,335,066).

Long Term Loan –Unsecured

Following represents loan from directors of the company. No portion of the loan is considered as a current liability
as management is of the view that no portion of the loan is payable in the next currency of the financial year.
 2015 2014
Long term Loan - unsecured
- From directors 15,621,585 10,621,584
- From associate of the directors - -
15,621,585 10,621,584

Trade and Other Payables

2015 2014
Creditors 544,668,232 573,580,615
Accrued Expenses 120,820,921 106,013,694
Advances from customers 64,408,090 64,271,363
Advance from sale of building 100,000,000
Income tax deducted at source 22,289,170 20,537,598
Sales tax 80,035,737 38,837,110
Workers' profit participation fund 643,076 21,784,197
Workers' welfare fund 125,461 8,062,023
Provident fund payable 15,427,500 29,902,725
948,418,187 862,989,325

21. Contingencies and Commitments Contingencies

Counter corporate guarantee given to the associated undertaking Sarena Industries and Embroidery Mills (Private) Limite
different banks against the working capital finance limit.

Commitments
Commitments against irrevocable letter of credit amounting to Rs. 287.880 million (2014: Rs. 166.501 million)
 Ratio Analysis of “Statement of Financial Position Y 2011 to 2015” and “Income Statement Data 2011 to 2015”

2015 2014 2013 2012 2011 Short Formulas

Profit Margin -1.15% 2.23% 3.99% 3.87% 5.21% PF = Income / Sales
Profitability
Return on Assets -1.90% 4.29% 8.90% 8.33% 11.91% ROA = Income / Assets
Ratios
Return on Equity -4.90% 8.30% 15.35% 14.40% 19.54% ROE = Income / Equity
Current Ratio 1.24 1.63 1.87 1.83 1.92 CR = Assets / Lib
Liquidity Quick Ratio 42.43% 56.42% 47.06% 48.98% 43.35% QR = Quick Asset (asset-inventory)/ Lib
Ratios Average Days Receivable 11 10 8 7 4 ADR = ACR/Sales*365
Average Days Inventory 109 91 ADI = Closing Stock / COGS * 365
Asset Asset Turnover 166.14% 192.12% 223.21% 214.93% 228.73% AT= Sales / Assets
Management Fixed Asset Turnover 528.66% 622.24% 689.02% 718.25% 703.77% FAT = Sales / Non-Current Assets
Debt/Equity Ratio 157.40% 93.65% 72.55% 72.93% 64.07% D/E R = Lib / Equity
Long-Term Leverage 257.40% 193.65% 172.55% 172.93% 164.07% Leverage = Assets / Equity
Solvency Ratio Long Term Debt/Equity 14.55% 11.42% 10.12% 6.78% 6.36% Long Term D/E = non current Lib / equity
Times Interest Earned 24.11% 440.37% 712.69% 1495.63% 1119.20% TIE = EBITDA / Interest Exp
Exhibit-1

Profitability Ratios:

Profit Margin Return on Assets Return on Equity

6.00% 5.21% 14.00% 11.91% 25.00%
19.54%
12.00% 20.00%
5.00% 3.99% 3.87% 8.90% 8.33% 15.35% 14.40%
10.00%
4.00% 15.00%
8.00%
8.30%
3.00% 2.23% 6.00% 4.29% 10.00%
2.00% 4.00% 5.00%
1.00% 2.00%
0.00% -4.90%
0.00% 0.00% -1.90%
-1.15% 2015 2014 2013 2012 2011
-2.00% 2015 2014 2013 2012 2011 -5.00%
-1.00% 2015 2014 2013 2012 2011
-4.00% -10.00%
-2.00%
As it can be seen from above table and graphical representations, that the Profit Margin Ratio has
consistently dropped since year 2011 till year 2014 and later on it has fallen negative in the year
2015 i.e. from 5.21% in 2011 to -1.15% in year 2015.
Same is for the Return on Assets (RoA) which tells how much a company is getting in return on
its investments. This has also dropped from 11.91% in year 2011 to a negative ratio of -1.90% in
2015.
Similarly, Return on Equity (RoE) has also fallen to a negative ratio of -4.90% in year 2015
Therefore, we can say that Sefam (Pvt) Ltd is NOT performing well in terms of its Profitability
(with respect to investments and sales as well).

Liquidity Ratios:

Current Ratio Quick Ratio

56.42%
2.50 60.00% 47.06% 48.98%
1.87 1.83 1.92 43.35%
1.63 50.00% 42.43%
2.00
1.24 40.00%
1.50
30.00%
1.00
20.00%
0.50 10.00%
0.00 0.00%
2015 2014 2013 2012 2011 2015 2014 2013 2012 2011

The Liquidity Ratios comprising Current Ratio, Quick Ratio, Average Days Receivable and
Average Days Inventory were calculated for Sefam Pvt Ltd as can be seen in the Exhibit-1 and
Graphs produced above.
Although the Ratios show healthy signs (or not so bad condition) and are improving in terms of
Assets Vs Liabilities of the company under evaluation in this study, however these are helpful
when determining the short-terms loans or Liabilities. Here the Current ratio is going towards the
stable or acceptable benchmark of 1.0 whereas Quick Ratio shows a stable or on a consistent Path.
But in order to determine the Long Term Liability such as a Bank Loan, we need to dig deeper and
compare the proceeding ratios given in next paras to decide about the fate of credit facility.

Assets Management Ratios:

Asset Turnover Fixed Asset Turnover

250.00% 223.21% 214.93% 228.73% 800.00% 689.02% 718.25% 703.77%
192.12% 622.24%
200.00% 166.14% 528.66%
600.00%
150.00%
400.00%
100.00%

50.00%
200.00%

0.00% 0.00%
2015 2014 2013 2012 2011 2015 2014 2013 2012 2011
The first ratio analysis in Assets Management Ratio is called the “Fixed Asset Turnover” which
tells for example how much sale is being generated on an investment. In year 2011, it was 228.73%
which has now dropped down to 166%.14% in year 2015. Likewise, Fixed Asset Turnover (Real
Investment) done on property plant, equipment, machinery etc has also gone down to 528.66%
from 703%. The data shows both the ratios have fallen down and sales is not effective for Sefam
Pvt Ltd.

Long Term Solvency Ratios:

Debt/Equity Ratio Leverage

200.00% 300.00% 257.40%
157.40%
250.00% 193.65%
150.00%
172.55% 172.93% 164.07%
93.65% 200.00%
100.00% 72.55% 72.93% 64.07% 150.00%
100.00%
50.00%
50.00%
0.00% 0.00%
2015 2014 2013 2012 2011 2015 2014 2013 2012 2011

Long Term Debt/Equity

14.55%
16.00%
14.00% 11.42%
12.00% 10.12%
10.00%
6.78% 6.36%
8.00%
6.00%
4.00%
2.00%
0.00%
2015 2014 2013 2012 2011

The rising bars in all of the graphs above can be much of a concern for any Credit Evaluator the
“Long-term solvency ratios” are designed to measure the ability of a business to meet its financial
obligations in the medium and longer term. Examples include Gearing, the Debt ratio and Interest
cover. Also known as financial stability ratios.
The Debt to Equity Ratio of Sefam Pvt Ltd has raised from 64.07% in year 2011 to 157.40% in
the year 2015. A rising debt-to-equity ratio implies higher interest expenses, and beyond a certain
point, it may affect a company's credit rating, making it more expensive to raise more debt.
Special Considerations:
However, there are key points that should be considered when using solvency and liquidity ratios.
This includes using both sets of ratios—liquidity and solvency—to get the complete picture of a
company's financial health; making this assessment on the basis of just one set of ratios may
provide a misleading depiction of its finances. We have seen above in Liquidity Ratios which
showed a relatively stable position of the company in consideration.
As well, it's necessary to compare apples to apples. These ratios vary widely from industry to
industry. A comparison of financial ratios for two or more companies would only be meaningful
if they operate in the same industry. We are aware that Sefam Pvt Ltd is also playing a competitive
role along with its rivals.
Finally, it's necessary to evaluate trends. Analyzing the trend of these ratios over time will enable
us to see if the company's position is improving or deteriorating. By paying particular attention to
negative outliers to check if they are the result of a one-time event or indicate a worsening of the
company's fundamentals (Vertical and Horizontal analysis of Balance Sheet and Income Statement
as uploaded on LMS separately) we cannot say that Sefam Pvt Ltd is performing worst but still it
is Risky to extend its Credit facility for a longer run

Decision:
Akbar was not sure how to evaluate Mr Zaman’s comment that the credit facility was just a cost
management measure and that the company was growing every year and was in great shape.
Sefam had shown consistent growth in terms of year-on-year revenues, but the net income had
fluctuated over the past 5 years, falling by 33 per cent in 2014 and suffered the first-ever loss of
over PKR 100 million in 2015.
Akbar knew that the garment industry was highly competitive, with other bigger players operating
with similar business strategies based on quality, customer service and price.
He had been provided with audited financial statements from 2011 to 2015 (refer to Exhibits 3–7
for extracted financial data) all of which had received a clean opinion from the auditors.
However, he knew that the decision to extend credit would need to take into consideration multiple
financial and non-financial factors. For which our group has carried out various Ratio Analysis
and taken into consideration the notes to the financial statements.
Based on their financial statements and analysis carried out by our group we have concluded that
Sefam Pvt Ltd does not have a sustainable profit over the years which is why their Debt/Equity
ratio is not in a favorable state which indicates that it will not be feasible for Sefam to pay off any
further long-term credits.
Extending their loan facility is not a favorable option for banks and investors. In our opinion, Loan
facility should not be extended further, Sefam Pvt Ltd may lead to a bankruptcy in near future
as they are facing major losses and are also unable to sustain their position in the market along
with their competitors.