Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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CHAPTER#1 INTRODUCTION
1.1 Background of the Study This study examines two booming industries of Pakistan (i.e., Tobacco and Textile) by employing two major tools (i.e., Fundamental and Technical analysis) which mainly carried out in Stock Market. Fundamental analysis is the process of looking at a business by examining key ratios of a business to determine its financial health and gives an investor idea about the value of its stock. Investors mainly make use of fundamental analysis alone or in combination with technical analysis for evaluating and taking decision regarding stocks for investments. Thus this study brings into consideration both fundamental and technical analysis for facilitating investors to follow stocks more closely in the tobacco and textile industry of Pakistan. Industry analysis can be of immense help to an investor. When a particular industry is booming, not only the leaders but even the laggards also benefit. For example, textile and tobacco are two of the most important and investor focused industries of Pakistan. It contributes significantly to the country's GDP, exports as well as employment. It is, in fact, the backbone of the Pakistani economy. Consequently, our study focuses both tobacco and textile sectors for fundamental equity traders while keeping in view factors such as earnings, earnings growth or valuation ratios to select securities. 1.2 Objectives of the Study The main objectives of this study are as follows;     To assess short and long term prospects (i.e., actual / expected profitability) of the issuing companies in tobacco and textile industry of Pakistan. To determine the current worth and, more importantly, how the market values the stock. To facilitate investors, creditors and regulatory authorities regarding their allocation of resources. To differentiate between financial healthy and troubled companies in tobacco and textile industry of Pakistan

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1.3 Significance of the Study The study of tobacco and textile sector is therefore important because these are the two growing industries and play a role of backbone for the Pakistan’s economy. Tobacco sector is therefore importance because this industry contributes 4.4% of the total GDP of Pakistan. It is one of the biggest tax payer industry which approximately contributes 6% to 7% tax to Government of Pakistan. This industry is one of the biggest resource of employment and it employees over one million people directly or indirectly. We can’t deny from the importance of textile sector. This is the biggest industry in Pakistan, and about 160 companies of textile are listed in Karachi stock exchange. This sector contributes 38% of total manufacturing and 8% of GDP. Textile sector is also one of the biggest source of employment and employees almost 40% of industry work force. One of the significant reason for the study of these industries is that the investors are more focused toward these sectors. Which motivate us to do fundamental and technical analysis of these two sectors. 1.4 Organization of the Study The study has been organized chapter wise. Following chapter is regarding the introduction of the tobacco and textile sector and also discusses the objective and significance of project. In Chapter 2 we discuss the overall view of tobacco and textile industry. Moreover, Chapter 3 discusses the methodology thoroughly regarding fundamental and technical analysis. Further, Chapter 4 discusses the Data analysis and interpretation. Finally, Chapter 5 provides conclusion and recommendation

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CHAPTER # 2 Over view of tobacco and textile sector 2.1 Tobacco sector 2.1.1 Background:
Tobacco smoking is a practice which has changed little since American natives first stuffed the tobacco they cultivated in the hills of what is today modern Mexico into hollow reeds. As the practice spread through the Americas, different cultures wrapped their tobacco in vegetable leaves or corn husks, or put it in pipes for smoking. Spanish explorers enjoyed smoking and returned to the Old World with cigars (tobacco wrapped in tobacco leaves). In the beginning of the 16th century, beggars in Seville, Spain developed the first paper-rolled cigarettes when they collected discarded cigar butts, shredded them, and rolled them in scraps of paper. Although the Spanish elite first dismissed them as recycled garbage, these cigarillos, or little cigars, eventually gained popularity during the 18th century. Cigarette smoking spread to Italy and Portugal, and eventually the rest of Europe and into Asia. History of tobacco industry in Pakistan: Before partition, no tobacco was grown in this part (now constituting Pakistan) as could be considered suitable for cigarette manufacture. It was after considerable efforts that production of flue-cured Virginia tobacco was first tried in low Indus basic; then its production moved northwards to the Punjab plains and finally the movement was towards the Khyber pukhtunkhwa Province at altitude comparable with old tobacco belt of USA in North Carolina, South Carolina and Georgia. During the fifties, Pakistan used to import tobacco for meeting the demand of its cigarettes industry. However, cultivation of flue-cured Virginia was started on experimental basis over about 20 acres in 1948. And, self-sufficiency in tobacco for use in low brand cigarettes was attained during 1969 through 1971, but the country used to import large quantities of good quality tobacco for use in superior brands of cigarettes.

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With a view, to reducing dependence on the import of good quality tobacco leaf, the Pakistan Tobacco Board, in collaboration with the tobacco companies, intensified research and development activities and explored the soil and climatic conditions in the sub mountain areas of Mansehra, Buner, Swat and Dir districts to meet the quality requirements of cigarettes for domestic use. The local oriental types of tobaccos are cultivated in the plains of Khyber pukhtunkhwa and, to some extent, in the provinces of Punjab, Sindh and Balochistan Punjab is, however, famous for the production of dark air cured and hookah type tobaccos.

As regards cigarettes, Pakistan produces both national and international brands, which are popular in Afghanistan, Gulf countries and Central Asian Republics. The production of cigarettes on two shift basis is 52 billion pieces per annum whereas the capacity utilization of the factories is upto 126 billion pieces on three shift basis. Therefore, sufficient surplus stocks of cigarettes of various brands can be produced, provided export markets are available. Quality of tobacco and price are the principal determining factors in its trade at the international level, in which a number of countries are involved. In Pakistan, almost all the tobacco consumed by the tobacco companies for cigarettes manufacture is produced in the country except for a nominal quantity which is imported for blending in superior most brands. 2.1.2 Raw material: The most important component of cigarettes is tobacco, which grows in two varieties: Nicotiana tabacum, or cultivated tobacco, and Nicotiana rustica, or wild tobacco. Native to the western hemisphere, the plant is now widely grown in countries such as China, India, Brazil, the former Soviet Union, Turkey, and the U.S. About one third of the tobacco cultivated in the U.S. is exported. North Carolina is the leading domestic grower, followed by Kentucky, South Carolina, Tennessee; Virginia, and Georgia, all of which have favorable soil and climates for tobacco growing. The plant does best in light and sandy loam soils that drain well and permit good aeration. The tobacco plant requires a frost-free growing season of 100-130 days; thus, it tends to be cultivated within 50 degrees latitude of the equator. Cigarette rolling papers use seed flax mixed with paper pulp to produce a thin, flammable paper. The filters are made of synthetic, cotton-like fibers that catch particles as they are drawn

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through the length of the cigarette. The finished cigarettes are packaged in hard or soft cardboard boxes and wrapped in protective cellophane. 2.1.3 Types of tobacco: The most important component of cigarettes is tobacco, which grows in two varieties: Nicotiana tabacum, or cultivated tobacco, and Nicotiana rusica, or wild tobacco. Although transplanting machines are available, the vast majority of the world's tobacco plants are still planted by hand. Alternative cigarettes, including menthol, filter-tipped and low-tar cigarettes. Menthol cigarettes smell and taste "cooler" because they are flavored with a substance found in mint oil, although they pose the same health risks. Filters help block some materials from entering the body, but their effectiveness varies from brand to brand, and even low-tar cigarettes expose the body to potentially harmful levels of tar. Recently, manufacturers have sought to reduce the amount of nicotine in cigarettes as well

2.1.4 The manufacturing process:
Growing the tobacco Tobacco is initially grown in outdoor frames called seedbeds. In warm regions, the frames are covered with mulch or a cotton top sheet; in cooler regions, glass or plastic shields are installed to protect the plants. After 8-10 weeks, when the seedlings are almost 10 inches (25 cm) tall, they are transplanted to the fields. Although transplanting machines are available, the vast majority of the world's tobacco plants are still planted manually. As the plants grow, the heads are broken off by hand so the leaves will grow fuller, a process called topping. The plants stay in the field 90-120 days before they are harvested.

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Harvesting the tobacco Tobacco plants are harvested by one of two methods, priming or stalk-cutting. In the priming method, the leaves are gathered and brought to a curing bam as they ripen. In the stalkcutting method, the entire plant is cut and the plants are allowed to wilt in the field before being taken to the curing barn.

Curing the leaf Next, the leaves are carefully, gradually dried in a specially constructed barn by air curing, flue curing, or fire curing. Air curing uses natural weather conditions to dry tobacco.

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Stalks are hung in a barn with ventilators that can be opened and closed to control temperature and humidity. Artificial heat is used only during cold or excessively humid weather. The stalks are hung for four to eight weeks. Flue curing is done in small, tightly constructed barns that are artificially heated. The heat comes from flues (metal pipes) that are attached to furnaces. Open oil and gas burners are sometimes used, but this method is problematic because smoke can-not come in direct contact with the tobacco. Flue curing takes about four to six days. Fire curing dries tobacco with low-burning wood fires whose smoke comes in direct contact with the leaves, thus producing a smoky flavor and aroma. The tobacco is allowed to dry naturally in the barn for three to five days before it is fire-dried for 3-40 days. Moistening and stripping Unless humid weather conditions eliminate the need, the brittle, cured tobacco leaves must be conditioned in moistening chambers so they do not break when they are handled. After moistening, the tobacco is stripped. During this process, the leaves are sprayed with additional moisture as a precaution against cracking or breaking. Sorting and auctioning After the leaves are moistened and stripped, they are sorted into grades based on size, color, and quality, and tied in bundles for shipment. The farmers then bring the tobacco to warehouses, where it is placed in baskets, weighed, graded once again by a government inspector and, finally, auctioned to cigarette manufacturers. Conditioning, aging, and blending After they have purchased and transported the material to their factories, manufacturers treat and age the tobacco to enhance its flavor. First, the manufacturer

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redries the tobacco. This involves completely drying the leaves by air and then adding a uniform amount of moisture. Packed into barrels called hogsheads, the tobacco is then aged for one to three years, during which period it develops its flavor and aroma. After it is aged, the tobacco leaves are again moistened and the stalks and other wastes removed. Leaves from different types of tobacco are mixed to create a particular flavor. Making the cigarettes After blending, the tobacco leaves are pressed into cakes and mechanically shredded. Materials such as fruit juices or menthol are added to give additional flavor. The final shredded tobacco is then dispersed over a continuous roll of cigarette paper. A machine rolls the shredded tobacco into the paper and cuts it to the desired length. A device then grabs each cigarette and fastens a filter in one end. Modern cigarette machines can produce 25-30 cigarettes a second. Packaging The final stage of cigarette manufacture is packaging. The completed cigarettes are packed 20 to a package. The hard or soft packs are mechanically sealed in cellophane and handplaced in cartons.

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2.2 Textile Industry of Pakistan
2.2.1 An overview: Textile industry in the world is pretty much diversified. There are several countries who have a share in this industry like China, Pakistan, Turkey, South Korea, Indonesia, Bangladesh, Mexico, India, United States etc. Although textile sector is in bad condition due to the recession but still its growth rate is about 3% per annum. Pakistan is the fourth largest cotton producer in the world. Because of its plentiful, indigenous cotton supply, the textile industry is central to the Pakistani economy and is both a source of employment and a source of exports. Pakistan's industrialization began in the 1950s with the textile industry at its center. Today, textiles account for 38 percent of total manufacturing and 8 percent of GDP. The textile industry employs almost 40 percent of the industrial workforce. Despite the critical role textiles play in the economy, most textile manufacturers are cottage or small-scale industries. Pakistan relies on outside engineering and manufacturing expertise and must purchase most of its equipment abroad. Recognizing the importance of the textile industry to the nation's economy, the Pakistani government began taking steps in 2005 to rebuild the competitiveness of this critical industry. The Pakistani textile industry depends on domestic agriculture to supply its raw materials, thus the success of the cotton crop is critical to the health of the textile industry. Cotton accounts for 14 percent of land under cultivation in Pakistan. Pakistan has suffered from a number of cotton failures over the years, beginning in the early 1990s. These crop failures drove up the price of cotton, and this coupled with a market recession and tightened finance regulations led to a weakened textile industry. The spinning sector is where the majority of Pakistan's textile industry is concentrated. Over the years, spinning expanded while weaving declined. The rapid expansion of the spinning sector was hastened by access to cheap raw materials---cotton---and cheap labor. This sector's profitability was furthered by a protectionist fiscal policy and export subsidies. In keeping with increased spinning capacity, cotton production has increased tremendously. The textile industry's weaving sector is comprised of towels, bedding and hosiery and has been adversely affected by

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tariffs and inflation over the years. The garment sector has undergone considerable modernization and has developed great export potential. In 2005, the Pakistani government created a special textile sub-committee in order to formulate a new textile strategies and policy in the hopes of revamping the textile industry. The sub-committee submitted a report entitled "Textiles Vision 2005" which included a number of recommendations including improved product quality, equipment upgrade, developing human resources, aggressive targeting of new markets and development of high-powered leadership for the textile sector. Cotton and yarn are Pakistan's primary textile exports. The textile industry accounts for over 60 percent of Pakistan's total exports. The All Pakistan Textile Mills Association is the organization that regulates the industry, which is currently facing a number of challenges, including the need to improve quality. Pakistan must compete with other producers similar in conditions and comparative advantage. The Pakistani Textile industry's biggest competitors are China, India, Indonesia and Turkey. The cost of power in Pakistan is comparatively high.

2.2.2 Raw Material:
Cotton:
Cotton is a fiber that grows from the surface of seeds in the Pods or Bolls, of a bushy mallow Plant. Each fiber is a single elongated cell that is flat and twisted with a wide inner hollow (Lumen). It is composed of about 90 percent Cellulose and about 6 percent Moisture; the remainder consists of Natural Impurities. The outer surface of the fiber is covered with a protective wax-like coating, which gives the fiber a somewhat adhesive quality. This characteristic combined with its natural twist contributes to making cotton an excellent fiber for spinning into yarn. Cotton yarn is used in making fabrics that are universally used for all types of apparel, home furnishings and industrial

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applications. It is one of the oldest fibers used in textile applications. Its versatility is almost unlimited and new uses are constantly discovered. 2.2.3 Type of Cotton: The particular type of cotton is often identified by the name of the country or geographical area where it is produced. The quality of cotton fiber is based on its color (degree of whiteness), length (or staple), fineness, and strength. Usually the longer fibers are finer and stronger. Variations among cotton fibers occur because of growth conditions including such factors as soil, climate, fertilizers, and pests. The more frequently used types are Upland Cotton, American Pima, Egyptian cotton, and Asiatic Cotton.

Upland Cotton: Upland cotton fibers are fairly white, strong, dull, and range in staple length from 22 to 32 mm. These are used in many fabrics, either wholly or as a component of blends with manmade fibers. Upland cottons are classified as short-staple (Less than 25 mm), medium- staple (26-28 mm) and long staple (29 mm and above). The quality and characteristics vary among the kinds. American Pima: The main varieties are Pima S-3 and Pima S-4. Staple length is from 35 to 38 mm and the fiber is fine, strong, lustrous, silky, and creamy-brown-white in color. The primary use is in sewing thread and a small amount is used in high quality broadcloth. Pima cotton provides silky smoothness, softness and luster to the fabrics. Egyptian cotton: Giza and Menoufi are the main varieties. Fibers are light brown, fine, strong and 32 to 38 mm in length. They are used in same applications as American Pima. Giza 45 fibers have staple length from 35 to 41 mm and are used in applications where fine and stronger yarns are required.

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Asiatic Cotton: Asiatic cotton is produced in India and China. These are coarse fibers, less than 25 mm in length. The major usage is in surgical supplies. Pakistani Cotton: In Pakistan, cotton is one of the major crops, cultivated on vast areas. Ten percent of the world’s cotton is produced in Pakistan. The cotton is of significant good quality with fiber length reaching 41 mm. Hand picking of cotton in Polypropylene bags results in Contamination in the fibers, deteriorating the quality. The cotton is graded based on the fiber of lower staple length. The whole lot receives a lower grade in Pakistan, as it is not segregated based on their staple length in the ginning stage.

2.2.4 Process of Textile Industry:
Spinning: Natural fibers are extracted from plants and animals in the form of Staple Fibers. These staple fibers should be converted into threads (yarn) for fabric manufacturing. Several techniques are available for yarn formation from fibers and their blends. Ring spinning and Open end spinning are the two most commonly used techniques. Some synthetic fibers are directly converted into yarns or filament fibers. Integration of staple and filament fibers is also possible.

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The formation of yarn from staple fibers by spinning is possible when they have surfaces capable of cohesiveness. Cotton fibers have natural twist which enables them to entwine around each other. The roughness of linen fibers causes them to cling together. The scales on the surface of wool fibers cause them to grasp each other. Synthetic fibers are given artificial crimps on their surface, resembling the crimps of cotton fibers, for combining them into yarn. Flexibility permits the fibers to be twisted around one another. Uniformity of staple gives yarns a required evenness and improves the quality. Weaving: Weaving is the oldest and most commonly used technique of fabric construction. It is said that the primitive people learned about this technique from nests of birds. The evolution of the process resulted in the development of Rude Looms which are very simple and hand operated. The modern power looms uses the same principle for fabric construction but the speed and quality has improved significantly.

The length wise threads in the fabric that run from the back to the front of the loom are called Warps. These threads are usually given more twist in the yarn to increase strength. Most of the stresses in weaving operation are tolerated by the warp yarns. The threads running widthwise are called Filling, Wefts or Woofs. These threads undergo fewer strains and therefore require less twist and fewer preparations for weaving.

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Pre-Treatment Fabrics constructed on looms are called Greige Fabrics which are in most cases not suitable for finished product application. Certain pretreatment is necessary to remove impurities and prepare fabric for dyeing and finishing processes. Finishing processes may change the appearance of the fabric, its hand feel, its serviceability and its durability. These processes include some chemical application on the fabric and are called Wet Processing. Wet processing can be carried out at any stage of fabric manufacturing (from fibers to fabric). This processing becomes economical and commercially viable if carried out on Greige fabrics. These processes are explained in detail below referring to the systems of Sarena Dyeing Mills. Dyeing: The dyeing and printing processes provide lasting beauty and delight to the textile by adding color to the fabric. Dyeing and printing differ in the method by which color is applied to fabric. In the Dyeing process, fiber, yarn or fabric is impregnated with a dyestuff.

In Printing, a pattern or a design is generally imprinted on the fabric in one or more colors by using dyes in paste form or some related means. To select a proper dye for a fiber, it is necessary to know which dyes have an Affinity for the fiber type. In general, the dyes used for cotton and linen may be used for rayon, but other fibers require different dyes. Stitching: Final stage is stitching where finished fabric is changed into garments, work wears or fashion wares. Mainly stitching houses are located in China, Bangladesh and Sri lanka. There are some in Pakistan as well but Pakistan is not famous for stitching.

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Finishing: Textile finishing covers an extremely wide range of activities which are performed on textiles before they reach the final customers. All finishing processes are designed to increase the attractiveness or serviceability of the textile product. This could involve such techniques as putting a glaze on an upholstery fabric, which gives it a more attractive appearance, to the production of easy-care finishes on dress fabrics, which improve the in-service performance of the dress wear. Thus the aim of textile finishing may be described as improving customer satisfaction. This improvement in the perceived value of a product to consumer forms the basis of modern ideas on product marketing. The finishing processes may be classified as Mechanical Finishes and Chemical Finishes.

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Chapter # 3 Methodology
For the compilation of any task you need to chose a method and by follow that method you achieved your objectives. Here our project is to do fundamental, technical and trend analysis of tobacco and textile industries. So for the compilation of our project we chose combination of different methods. For the collection of data we use the Secondary data collection technique in which we collect data from internet, annual reports and research papers. After the data collection we analysis the data by following two techniques: 1) Fundamental analysis 2) Technical analysis 3.1 Fundamental analysis: It is one of the main techniques used to find the financial health of the companies. In fundamental analysis different tools are used to evaluate the financial condition of companies. In our project we will use the following tools of fundamental analysis. 3.1.1 Ratios analysis To make a comparison of different companies, and the company with itself the calculation of ratio is important. In our project we use the following ratios.  Liquidity ratios: We use liquidity ratios to find that how much the company is liquid means the ability of the company to meet it maturing short term obligation. Working Capital Ratio: The working capital measures how much in liquid assets a company has available to build it business. The number can be positive or negative depending on how much did the company is carrying.

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This ratio is calculated as: Working Capital Ratio = Networking capital / Total Asset Quick Ratio: The quick ratio also known as the acid test ratio, it is the stringent test of the liquidity. This ratio is calculated as: Quick Ratio = (current assets –inventory) / Current liabilities  Activity ratios: We use these ratios to see how quickly the companies convert their various accounts into sales and cash. Inventory Turnover Ratio: This ratio shows the friction of year that an average items remains in inventory. Low turnover is a sign of in efficiency. This ratio is calculated as: Inventory turnover ratio = sales / inventory  Leverage ratios: These ratios are mostly helpful to the creditors to understand the company’s ability to meet the long term obligation as they become due. Debt to Equity Ratio: This ratio is a significant measure of solvency, the high degree of debt in capital structure may make it difficult for the company to meet interest charges and principal payment at maturity. This ratio is calculated as: Debt to Equity ratio = Total liabilities / Share holders equity

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Profitability ratios: We also calculate the profitability ratios because this ratio shows the financial health and

how effectively the firm or company is being managed to earn a satisfactory profit and return on investment. Gross Profit Margin Ratio: This ratio reveals the percentage of each dollar left over after the business has paid for it goods. The higher the Gross profit margin ratio the better it is for the company. This ratio is calculated as: Gross Profit margin Ratio = Gross Profit / Net Sales Return on Equity Ratio: This ratio measures the rate of return on in the common share holder investment. The higher the ratio it is good for the shareholders. This ratio is calculated as: Return on Equity Ratio = Net Income / Shareholders Equity Return on Asset Ratio: Return on asset ratio indicates the efficiency with which management has used its available resources to generate income. The higher the ratio the higher the performance of management and it is also good for the company. This ratio is calculated as: Return on Asset Ratio = Net Income / Total Asset Operating Profit to Sale Ratio: This ratio indicates how much profit a company makes after paying for variable cost of production such as wages, raw materials. The higher the ratio it is good.

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This ratio is calculated as: Operating Profit to Sale Ratio = EBIT / Sales 3.1.2 industry average The second tool we use in the fundamental analysis of companies in tobacco and textile sector. In industry average we compare ratio of all companies to the industry, which in result shows that which company is performed above or below the industry average and it is good technique to identify the healthy and weak companies. 3.2 Technical analysis: It is the study of stock or the market as a whole, strictly by using the price and volume history of a stock. In technical analysis we take a little or no information about the actual business behind the stock. Actually the technical analysis is the alternatives of fundamental analysis .the tool mainly used in technical analysis are Chart, Graph and Tables, which are used to interpret data. There is a phrase that picture speaks a thousand words. In technical analysis we calculate the Beta and Cost of equity of companies and their industries, which provide us the information of companies are perform in the market and how much the industry is risky.  Beta:

In finance, the Beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole. A company having beta of 1 indicates that the security's price will move with the market. The beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. Company that having a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk. The formula used for the calculation of Beta is:

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Cost of Equity:

In finance, the cost of equity is the minimum rate of return a firm must offer shareholders to compensate for waiting for their returns, and for bearing some risk. A higher cost of equity usually signifies a higher risk industry that commands a higher return for the increased risk. We determined the Cost of equity by the capital asset pricing model (CAPM). The formula used for Ke calculation is:

3.2.1 Trend analysis Here we see that how the company is performed in different years. This also provide information about the company’s position to the investor 3.3 Sampling criteria and industry selection: In this study we used convenient sampling technique in the industry selection, as in Pakistan there are two booming and investor focus industries i.e. tobacco and textile industries. Moreover we use random sampling technique in the selection of companies under tobacco and textile industry. There are three listed companies of tobacco sector in Karachi stock exchange so we have take up all the three companies for the fundamental and technical analysis. The names of these companies are: 1. Pakistan tobacco 2. Lakson tobacco 3. Khyber tobacco However under textile industry of Pakistan there above 160 listed companies in Karachi stock exchange from which we have selected 15 companies using random sampling technique. The companies selected in textile industries are: 1. Ahmad Hassan textile mills ltd 2. Blessed textile ltd

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3. D.M.Textile mills ltd 4. Din Textile Mills ltd 5. Fazal Textile Mills Ltd 6. Gul Ahmad Textile mills ltd 7. Gulistan textile mills 8. Hajira Textile mills ltd 9. Idrees textile mills Ltd 10. Ishtiaq Textile mills Ltd 11. Kohat Textile Mills Ltd 12. Kohinoor Textile Mills Ltd 13. Maqbool Textile Mills Ltd 14. Masood Textile Mills Ltd 15. Shams Textile Mills Ltd. 3.4 Merits and demerits of fundamental and technical analysis 3.4.1 Fundamental analysis: Merits: The following are the merits of fundamental analysis.       It identifies the intrinsic value of a security. It identifying long-term investment opportunities, since it involves real-time data If you get deep into stock fundamental analysis you are likely to end up with very good business insight. By understanding a specific market, it enables you to make more accurate long term predictions. You can develop strategies to find companies that are undervalued using stock ratios. From the fundamental analysis we came to known that how much the company earns, pay its debts and how much it improves than the previous years.

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Demerits: The following are the demerits of fundamental analysis.  Financial statements do not contain all of the information that investors need to make sound decisions, such as information on sales of specific products or on the firm's customers.    Financial statements do not include any psychological aspects, such as goodwill, that influence stock prices. In fundamental analysis the value we calculated on the basis of which the decision is taken could be wrong. Too many economic indicators and extensive macroeconomic data can confuse novice investors. 3.4.2 Technical Analysis: Merits: The following are the merits of technical analysis.     Technical analysis is less time consuming and less costly than fundamental analysis. We can evaluate the security by analyzing the statistics generated by market activity such as past prices and volume. Technical analysis used lots of Charts which provide a wealth of information. Using charts helps the trader to find patterns and predict price movements based on these patterns.

Demerits: The following are the demerits of technical analysis.   Technical analysis bases their investment decisions solely on the prices and volume movements of securities. In an efficient market, prices quickly and fully reflect all available information. Therefore, technical analysis can work only if security markets are in some way inefficient.  A final problem is that there is a great deal of subjective judgment involved in making predictions. Two analysts can look at the same pricing history and arrive at very different pricing projections.

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Chapter # 4 Data analysis and interpretation 4.1 Tobacco sector:
4.1.1 Industry average analysis of tobacco sector:
In this analysis we compare ratios of each company with its industry average to examine that how company is performed with respect to industry average.

Gross profit margin ratio:
Years 2005 2006 2007 2008 2009 Ratios Gross profit Margin Gross profit Margin Gross profit Margin Gross profit Margin Gross profit Margin Pakistan tobacoo 0.15 0.15 0.16 0.15 0.14 lakson tobacoo 0.20 0.20 0.20 0.17 0.16 khyber tobacoo 0.27 0.32 0.32 0.12 0.11 Industery average 0.07 0.06 0.07 0.05 0.05

Gross profit margin ratio
0.40 0.30 0.20 0.10 0.00 2009 2008 2007 lakson tobacoo 2006 khyber tobacoo 2005 Industery average Pakistan tobacoo

In this gross profit margin ratio chart we compare the companies with each other and with the industry average, first we start from year 2005. In 2005 the Khyber Tobacco has the highest ratio which is 0.267. But all companies perform above the industry average. In year 2006 & 2007 Khyber Tobacco has the highest ratio as compare to the other companies and industry average of tobacco sector. In year 2008 Lakson tobacco has the highest gross profit margin ratio which is 0.1730 and on the other side Khyber Tobacco’s ratio sharply decreased. The profitability of all companies in Tobacco sector decreases in 2007 & 2008 as compare to 2007. In 2007 all the companies perform above the industry average but in decreasing trend.

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Operating profit to sale ratio:

Years 2005 2006 2007 2008 2009

Ratios operating profit to sales operating profit to sales operating profit to sales operating profit to sales operating profit to sales

Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average 0.08 0.13 0.27 0.04 0.09 0.12 0.24 0.03 0.10 0.12 0.77 0.04 0.08 0.08 0.10 0.03 0.08 0.05 0.08 0.02

Operating profit to slaes ratio
0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 2009 2008 2007 lakson tobacoo 2006 khyber tobacoo 2005 Industery average Pakistan tobacoo

Interpretation: According to operating profit to sale ratio chart we can say that in year 2005 Khyber Tobacco has a ratio of 0.267 which is more than the other companies Pakistan and Lakson Tobacco which has ratio of 0.078 and 0.125 respectively. In year 2006 and 2007 Khyber Tobacco perform well as compare to industry average and other companies in tobacco sector. In year 2008 the operating profit to sale ratio of all companies decreases, as compare to year 2007. In year 2009 the ratio further decreased and the lowest ratio in 2009 has 0.0534 of Lakson Tobacco. But however the Pakistan Tobacco company ratios has not much more fluctuation from 2005 to 2009, and in all five years all companies perform above the industry average. Year 2009 has the lowest industry average value as compare to other years, which means that there is overall decrease in Tobacco sector.

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Working capital ratio:

Years 2005 2006 2007 2008 2009

Ratios working capital ratrio working capital ratrio working capital ratrio working capital ratrio working capital ratrio

Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average 0.07 0.38 -4.86 0.13 0.05 0.45 -8.90 0.08 -0.02 0.46 -3.70 0.08 -0.05 0.35 -0.84 0.04 -0.05 0.32 -0.45 0.03

Working capital ratio
2.00 0.00 2009 2008 2007 2006 2005 -2.00 -4.00 -6.00 -8.00 -10.00 Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average

Interpretation: According to the chart of working capital ratio Khyber Tobacco has the lowest ratio than the other companies in this sector from the year 2005 to 2009 and the lowest ratio was in 2006 which is -8.902 the Tobacco industry is in decreasing trend but only the Khyber tobacco is in increasing trend with a negative ratio, from 2007 to 2009. Khyber and Pakistan Tobacco perform below the industry average and only Lakson Tobacco performs above the industry average from 2005 to 2009.

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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Quick ratio:

Years 2005 2006 2007 2008 2009

Ratios Quick ratio Quick ratio Quick ratio Quick ratio Quick ratio

Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average 0.06 0.68 0.03 0.23 0.06 1.59 0.02 0.29 0.10 1.49 0.03 0.27 0.09 0.17 0.10 0.04 0.03 0.15 0.53 0.03

quick ratio
1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2009 2008 2007 lakson tobacoo 2006 khyber tobacoo 2005 Industery average Pakistan tobacoo

Interpretation: This chart of quick ratio shows that in the year 2005 the Lakson Tobacco has the high ratio that is 0.680 than the Pakistan and Khyber Tobacco and also from the industry average. In year 2006 and 2007 the quick ratio has the increasing trend and Lakson Tobacco has the highest ratio 1.589 and 1.494 respectively. But in year 2008 and 2009 the Quick Ratio has a decreasing trend in the whole Tobacco industry. Pakistan Tobacco has the lowest Quick Ratio in 2009 that is 0.0348. In year 2005, 2006 and 2007 only Lakson Tobacco performs above the industry average. But in the year 2008 and 2009all companies in Tobacco sector perform above the industry average.

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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Inventory turnover ratio:

Years 2005 2006 2007 2008 2009

Ratios inventory turnover inventory turnover inventory turnover inventory turnover inventory turnover

Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average 8.10 18.64 1.82 6.20 9.42 10.26 0.00 3.29 10.23 9.10 5.84 3.21 12.09 4.68 2.74 3.01 9.98 5.18 10.94 2.70

inventory turnover
20.00 15.00 10.00 5.00 0.00 2009 2008 2007 lakson tobacoo 2006 khyber tobacoo 2005 Industery average Pakistan tobacoo

Interpretation: According to the inventory turnover ratio graph Lakson Tobacco has the high ratio in 2005 which is 18.64 times and this is much more than Pakistan and Khyber Tobacco. In the year 2006 Khyber Tobacco has the 0.0 inventory turnover ratio but Pakistan and Lakson have 9.42 and 10.26 ratio respectively. In year 2007 and 2008 Pakistan Tobacco has the highest ratio which is 10.23 and 12.08 respectively. Khyber Tobacco has the highest ratio in 2009 that is 10.94. However all the companies have high ratio as compare to industry average only the Khyber Tobacco in 2008 which has 0.0 inventory turnover ratio. But the overall industry average shows a declining trend from 2005 to 2009.

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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Return on equity after tax ratio:

Years 2005 2006 2007 2008 2009

Ratios Return on equity after tax Return on equity after tax Return on equity after tax Return on equity after tax Return on equity after tax

Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average 0.36 0.41 -0.03 0.14 0.46 0.31 -0.04 0.13 0.60 0.31 -0.59 0.15 0.70 0.18 -0.22 0.16 0.71 0.14 -0.32 0.16

Return on equity ratio
0.80 0.60 0.40 0.20 0.00 2009 2008 2007 2006 2005 -0.20 -0.40 -0.60 -0.80 Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average

Interpretation: According to the graph of this ratio Pakistan Tobacco is performing above all other companies in tobacco sector from the year 2005 to 2009. In 2005 Khyber Tobacco has the lowest Return on equity after tax ratio -0.028 and Pakistan Tobacco has the highest ratio 0.363. On the other side Lakson Tobacco has a ratio in between Pakistan and Khyber Tobacco. Pakistan Tobacco shows the increasing trend and Lakson tobacco shows the decreasing trend from the year 2005 to 2009. But on the other side both Pakistan and Lakson Tobacco perform above industry average and only the Khyber Tobacco has the ratio below the industry average.

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Debt to equity ratio:
Years 2005 2006 2007 2008 2009 Ratios debt to equity debt to equity debt to equity debt to equity debt to equity Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average 0.99 0.37 -1.21 0.12 0.91 0.21 -1.12 0.18 1.20 0.18 -1.31 0.22 1.44 0.57 -2.37 0.36 1.61 0.55 -3.69 0.40

Debt to equity ratio
2.00 1.00 0.00 2009 2008 2007 2006 2005 -1.00 -2.00 -3.00 -4.00 Pakistan tobacoo lakson tobacoo khyber tobacoo Industery average

Interpretation: When we focus on this chart we see that in2005 Pakistan tobacco has the high (0.990) and Khyber tobacco has the low (-1.213) debt to equity ratio. In all the years from 2005 to 2009 Pakistan and Khyber tobacco has the high and low debt to equity ratio respectively and the Lakson tobacco has the positive debt to equity ratio and performs above the industry average. Khyber tobacco has the low ratio as compare to industry average. When we see the trend of these companies we see that debt to equity ratio of Pakistan tobacco first decrease in 2006 and then increase from 2007 to 2009. Lakson first show decreasing trend from 2005 to 2007 and then again show the increasing trend from 2008 to 2009. Debt to equity ratio of Khyber tobacco increases with a decreasing trend from 2005 to 2009. Industry average of tobacco sector has the increasing trend from 2005 to 2009.

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Return on assets ratio:
Years 2005 2006 2007 2008 2009 Ratios Return on Asset Return on Asset Return on Asset Return on Asset Return on Asset Pakistan tobacoo lakson tobacoo khyber tobacoo 0.17 0.30 0.13 0.22 0.26 0.35 0.25 0.26 1.94 0.24 0.12 0.16 0.25 0.09 0.12 Industery average 0.10 0.08 0.09 0.06 0.06

Return on asset ratio
2.50 2.00 1.50 1.00 0.50 0.00 2009 2008 2007 lakson tobacoo 2006 khyber tobacoo 2005 Industery average Pakistan tobacoo

Interpretation: This chart shows the comparison of return on assets ratio among the companies of tobacco sector and each individual company with its industry. In 2005 Lakson has the high 0.296 and Khyber tobacco has the low 0.103 return on assets ratio. In 2006 Khyber tobacco has the high and Pakistan tobacco has the low ratio. In 2007 Khyber and Lakson tobacco have the high ratio and Pakistan tobacco has the lowest ratio. When we look at the chart we see that in 2008 and 2009 Pakistan tobacco has the highest ratio and Lakson tobacco has the lowest ratio. When we compare the ratio of companies with the industry average we see that all the companies perform above the industry average. Pakistan tobacco first shows the decreasing trend from 2005 to 2006 and then increases from 2007 to 2009. Lakson shows the decreasing trend from 2005 to 2009 except 2007. Khyber tobacco first shows the increasing and then shows the decreasing trend. Industry average first decrease in 2006 and then increase in 2007 and then again shows the decreasing trend from 2008 to 2009.

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4.1.2 Cost of Equity (Ke) trend analysis of tobacco sector companies:
In this section we see the trend of cost of equity of tobacco sector companies.
year 2005 2006 2007 2008 2009 ke ke ke ke ke ke khyber tobacco 0.10 0.03 0.10 0.11 0.14 lakson toacco 0.08 0.07 0.05 0.10 0.13 pakistan tobacco 0.07 0.04 -0.02 0.03 0.10 industry average 0.03 0.02 0.01 0.02 0.04

Ke
0.15 0.10 0.05 0.00 2009 khyber tobacco 2008 2007 lakson toacco 2006 pakistan tobacco 2005 industry average -0.05

In this graph we make the comparison of cot of equity of tobacco sector companies. The trend of companies in cost of equity is shown with three different colors line. This chart shows the trend of the company individually and with other companies in the tobacco industry. According to graph the Ke of Khyber tobacco decreases form 2005which is 9.85% to 2006 which is 2.72% and then again rose to 13.8% in 2009. In comparison with Khyber tobacco the Lakson tobacco has the low cost of equity in 2005, 2007 and in 2010.but in 2006 Lakson has more Ke which is 6.8% and in 2008 cost of equity is equal to Khyber tobacco which is 10.5%. Pakistan tobacco in comparison with both Khyber and Lakson tobacco has the lowest cost of equity in years 2005 which is 6.8% to 2009 which is 9.92%. in 2006 Khyber has the lowest cost of equity comparison with other companies which is 2.7%. When we make a comparison of cost of equity of tobacco companies with its industry average we see that in 2005 all companies have the high cost of equity then the industry average. In all years from 2005 to 2009 cost of equity of companies is more than the industry average except in 2007 Pakistan tobacco has the lowest cost of equity -2.49% then the industry average. Pakistan Lakson and Khyber tobacco shows the high cost of equity in year 2008 and in the year 2009.

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4.1.3 Beta of companies in tobacco industry:
Years 2005 2006 2007 2008 2009 Pakistan Tobacco company 0.36 0.56 1.82 0.50 0.23 Lakson Tobacco company 0.22 0.26 0.60 0.06 -0.01 Khyber Tobacco company -0.20 0.76 -0.11 0.05 -0.12 idustry average
0.07 0.13 0.39 0.11 0.05

Beta
2.00 1.50 1.00 0.50 0.00 2009 2008 2007 2006 Lakson Tobacco company idustry average 2005 -0.50

Pakistan Tobacco company Khyber Tobacco company

From this graph we see the beta of individual company as well as the comparison with other companies in the tobacco sector. Over all beta of Pakistan tobacco is high as compare to Lakson and Khyber tobacco. But only in the year 2007 beta has the value greater than 1. In year 2006 Khyber tobacco has the highest beta that is 0.762. Khyber tobacco has the lowest beta in year 2009 and Pakistan tobacco has the highest beta in 2009 which is 0.227.lakson tobacco has the beat in between Khyber and Pakistan tobacco. From this chart we can conclude that the tobacco industry is not more risky because the value of beta is below 1 except in 2007 the beta of Pakistan tobacco is higher than one. When we make a comparison of companies Beta with its industry average beta, we can see that in year 2005 Pakistan and Lakson tobacco has the high value of beta then the industry average beta, Khyber tobacco ha the lowest beta -0.1995 in 2008. In 2006 all companies have high beta then the industry beta. In 2009 Pakistan tobacco shows the high beta then all the other companies and industry average beta. But the Lakson and Khyber tobacco has the lowest beta then industry beta in year 2008 and in 2009.

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4.2 Textile sector:
4.2.1 Industry average analysis of textile sector:
In this analysis we compare ratios of each company with its industry average to examine that how company is performed with respect to industry average.

Gross profit margin ratio:

years
2006 2007 2008 2009 2010

ratio
gross profit margin gross profit margin gross profit margin gross profit margin gross profit margin

Ahmed Hassan Textile
0.10 0.08 0.08 0.12 0.12

Blessed Textiles D.M. Textile Din Textile
0.14 0.15 0.12 0.14 0.20 0.12 0.09 0.08 -0.02 0.08 0.09 0.11 0.11 0.10 0.20

Fazal Textile
0.08 0.05 0.05 0.08 0.21

Gul Ahmaed textile
0.15 0.15 0.16 0.18 0.17

Gulistan Textile Hajra Textile Idrees Textile Ishtiaq Textile
0.16 0.13 0.14 0.20 0.18 0.00 -0.09 0.00 -0.01 0.01 0.18 0.16 0.18 0.15 0.18 0.06 0.05 0.02 -0.06 0.09

Kohat Textile Kohinoor Textile
0.11 0.08 0.05 0.00 0.10 0.15 0.15 0.15 0.15 0.19

Maqbool Textile
0.09 0.04 0.07 0.11 0.13

Masood Textile shams textile
0.18 0.17 0.18 0.19 0.18 0.10 0.05 0.06 0.05 0.12

industery average
0.01 0.01 0.01 0.01 0.01

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0.25 0.2 0.15

2006 gross profit margin 2007 gross profit margin 2008 gross profit margin 2009 gross profit margin Idrees Textile Gulistan Textile Kohat Textile shams textile Masood Textile Hajra Textile Gul Ahmaed textile Maqbool Textile D.M. Textile Din Textile industery average Kohinoor Textile Blessed Textiles Ishtiaq Textile Fazal Textile 2010 gross profit margin

0.1 0.05 0 -0.05 -0.1 -0.15

Interpretation:

This chart shows that in year 2006 Idrees and Masood Textiles have the highest Gross Profit margin ratio i.e. 0.179 and 0.177 respectively and Hajra Textile has the lowest ratio 0.0029 in the year 2006. In the year 2007 some companies improve their ratios and the ratios of some companies decrease as compare to 2006 the companies which gross profit margin ratio increase are Blessed Textile, Din Textile and Gul Ahmed Textile and rest of the companies ratio decrease as compare to 2006. Idrees, Masood and Gul Ahmed textile have the highest ratio in 2008 and Hajra has the lowest ratio (-0.0924). In the year 2009 some companies shows rapid growth and some companies’ shows rapid decrease in the gross profit margin ratio. In the year 2010 Blessed Textile and Din Textile shows the highest ratio but the overall companies have the high ratios as compare previous year. From this chart it is cleared that all companies shows the increasing and decreasing trends from 2006 to 2010, only Hajra Textile showed the negative ratios from 2006 to 2009 and in 2010 it shows positive ratio. When we compare these companies with industry average all companies shows the high ratio in all years from 2006 to 2010 except Hajra Textile which shows lowest ratios in all years and D.M and Ishtiaq Textile show low ratios in 2009 as compared to industry average.

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Operating profit to sale ratio:

years
2006 2007 2008 2009 2010

ratio
operating profit to sales operating profit to sales operating profit to sales operating profit to sales operating profit to sales

Ahmed Hassan Textile
0.07 0.06 0.03 0.09 0.13

Blessed Textiles
0.11 0.11 0.09 0.11 0.16

D.M. Textile
0.09 0.04 0.04 -0.04 0.06

Din Textile
0.07 0.08 0.08 0.06 0.13

Fazal Textile
0.06 0.03 0.04 0.06 0.17

Gul Ahmaed textile
0.07 0.08 0.08 0.09 0.08

Gulistan Textile
0.12 0.11 0.13 0.16 0.13

Hajra Textile
0.07 -0.12 -0.04 -0.06 0.00

Idrees Textile Ishtiaq Textile
0.14 0.13 0.14 0.17 0.13 0.05 0.03 0.01 -0.09 0.07

Kohat Textile
0.07 0.05 0.02 -0.03 0.07

Kohinoor Textile
0.12 0.08 0.13 0.09 0.14

Maqbool Textile
0.06 0.02 0.04 0.07 0.05

Masood Textile
0.10 0.10 0.12 0.12 0.10

shams textile
0.07 0.15 0.03 0.00 0.08

industery average
0.01 0.01 0.01 0.01 0.01

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0.2 0.15 0.1

2006 operating profit to sales 2007 operating profit to sales 2008 operating profit to sales 0.05 0

Idrees Textile

Kohat Textile

Gulistan Textile

2009 operating profit to sales Masood Textile shams textile Maqbool Textile industery average 2010 operating profit to sales Kohinoor Textile

Hajra Textile

Gul Ahmaed textile

D.M. Textile

Ahmed Hassan Textile

Din Textile

Blessed Textiles

Ishtiaq Textile

Fazal Textile

-0.05 -0.1 -0.15

Interpretation:

This graph shows that in the year 2006 Idrees, Gulistan and Kohinoor textiles shows the higher operating profit to sales ratio and that was 0.1386, 0.1225 and 0.1163 respectively. On the other Ishtiaq and Fazal textiles show the lowest ratio that is 0.0462 and 0.0589 in 2006. In the year 2007 shams, Idrees and Blessed textile have the high operating profit to sales ratio and other companies like Hajra, Maqbol and Fazal textiles show the lowest ratio. In 2008 Idrees textile has 0.1352 ratio, Kohinoor textile has 0.1340 and Gulistan textile has 0.1257 ratio which having the high ratio as compare to other companies ratios, and company like Hajra has (-0.0423), Ishtiaq has 0.0069 and shams has the 0.0274 ratio which are the lowest ratio in year 2008. In year 2009 Idrees, Gulistan and Masood textiles has the highest ratio as compared to other companies. But the companies D.M, Hajra, Ishtiaq and shams textiles have the lowest ratios in 2009. In 2010 all companies in textile sector have improved operating profit to sales ratio. When we compare the industry average with the ratios we can see that all companies perform above the industry average in year 2006 and 2010 but in the other years, Hajra textile in 2009 D.M and Ishtiaq textiles in 2008 perform below the industry average and the rest of the companies perform above the industry average.

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Working capital ratio:

years
2006 2007 2008 2009 2010

ratio
working capital ratio working capital ratio working capital ratio working capital ratio working capital ratio

Ahmed Hassan Textile
-0.12 -0.20 -0.18 -0.18 -0.12

Blessed Textiles
-0.07 -0.16 -0.07 -0.06 0.11

D.M. Textile
-0.15 -0.19 -0.15 -0.24 -0.27

Din Textile
-0.24 -0.19 -0.18 -0.04 0.01

Fazal Textile
0.05 -0.02 0.04 -0.09 -0.24

Gul Ahmaed textile
0.01 -0.02 -0.04 -0.02 0.00

Gulistan Textile Hajra Textile
0.23 0.19 0.13 0.09 0.02 -0.62 -0.72 -0.60 0.73 -0.15

Idrees Textile Ishtiaq Textile
-0.12 -0.11 -0.31 -0.14 0.04 -0.27 0.32 -0.15 -0.38 0.20

Kohat Textile
-0.07 -0.04 -0.10 -0.12 -0.08

Kohinoor Textile
0.01 0.02 0.02 -0.14 -0.13

Maqbool Textile
-0.05 -0.11 -0.14 -0.20 -0.41

Masood Textile
0.02 -0.04 0.15 0.12 0.12

shams textile
-0.03 0.02 -0.09 -0.17 -0.14

industery average
0.00 0.00 0.00 0.00 0.00

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0.8 0.6 0.4

2006 working capital ratrio 2007 working capital ratrio 2008 working capital ratrio Idrees Textile Kohat Textile Gulistan Textile shams textile Masood Textile Hajra Textile Gul Ahmaed textile D.M. Textile Din Textile Blessed Textiles Fazal Textile 2009 working capital ratrio 2010 working capital ratrio Ahmed Hassan Textile Maqbool Textile industery average Kohinoor Textile Ishtiaq Textile

0.2 0 -0.2 -0.4 -0.6 -0.8

Interpretation:

From this chart it is cleared that in year 2006 Gulistan textile has the highest working capital ratio that is 0.2293. Fazal, Gul Ahmad and Kohinoor textiles have the positive ratios and the rest of the companies show the negative ratio in 2006. In year 2007 Gulistan, Ishtiaq, Kohinoor and shams textiles shows the positive working capital ratio and the rest of the companies shows negative working capital ratio. In year 2008 most companies’ shows negative working capital ratio and four companies have the positive ratios. In 2009 only Gulistan and Hajra textile have the positive ratios and the rest of the companies have negative ratios. In 2010 working capital of most companies increase and after this some companies having negative ratio. In 2010 Ishtiaq has 0.199 and Blessed Textile has 0.1072 ratios, and these companies have the highest ratio in 2010. Overall industry average has negative values except in year 2008. Where we see that all companies perform below the industry average and only the Gulistan Textile perform above the industry average in all years from 2006 to 2008, Kohinoor perform above the industry average in 2006 and Masood also perform above the industry average in 2006 and from 2008 to 2010. However the overall industry shows the negative working capital ratio.

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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Quick ratio:

years
2006 2007 2008 2009 2010

ratio
Quick ratio Quick ratio Quick ratio Quick ratio Quick ratio

Ahmed Hassan Textile Blessed Textiles D.M. Textile
0.27 0.23 0.20 0.21 0.23 0.31 0.30 0.24 0.21 0.48 0.38 0.25 0.29 0.23 1.19

Din Textile Fazal Textile Gul Ahmaed textile
0.23 0.29 0.37 0.59 0.43 0.65 0.68 0.70 0.33 0.43 0.48 0.55 0.51 0.45 0.39

Gulistan Textile Hajra Textile
0.90 0.81 0.62 0.48 0.35 0.17 0.17 0.10 0.23 0.58

Idrees Textile Ishtiaq Textile Kohat Textile Kohinoor Textile Maqbool Textile
0.43 0.42 0.49 0.44 0.67 0.28 0.29 0.45 0.24 0.67 0.27 0.35 0.57 0.65 0.34 1.60 2.07 1.44 0.87 0.98 0.33 0.33 0.48 0.38 0.70

Masood Textile shams textile
0.58 0.56 0.85 0.90 0.81 0.69 0.78 0.45 0.44 0.43

industery average
0.05 0.07 0.05 0.03 0.04

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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2.5 2 1.5

2006 Quick ratio 2007 Quick ratio 2008 Quick ratio 2009 Quick ratio 2010 Quick ratio 1 0.5 0

Interpretation:

This chart shows the analysis of quick ratio among the companies and with the industry average. In 2006 Kohinoor Textile has the highest ratio which is 1.6005 and Hajra Textile the lowest ratio and that was 0.175. Kohinoor Textile has the highest quick ratio than all other companies in all years but its ratio first increased in 2007 and then shows decreasing trend from 2008 to 2010. On the other side Hajra Textile has the lowest quick ratio in all years except 2010 as compared to other companies. D.M Textile shows the highest ratio in 2010 which is 1.1867. When we see the industry average of quick ratio we see that industry average increased from 2006 to 2007 and then decreased to 2009 and then again increased in 2010 which is 0.0393. When we compare quick ratio of the companies with industry average all companies have high ratio then the industry average.

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Inventory turnover ratio:

years
2006 2007 2008 2009 2010

ratio
inventory turnover inventory turnover inventory turnover inventory turnover inventory turnover

Ahmed Hassan Textile Blessed Textiles D.M. Textile
4.75 5.09 4.39 3.97 5.52 6.02 5.08 3.54 4.80 7.72 4.36 5.16 9.01 6.04 28.12

Din Textile Fazal Textile Gul Ahmaed textile
4.66 4.30 5.54 7.20 5.43 4.40 7.22 4.29 5.63 9.99 3.15 4.25 4.08 3.61 3.98

Gulistan Textile Hajra Textile
2.32 2.29 1.83 1.28 0.55 11.96 8.35 7.67 24.88 45.52

Idrees Textile Ishtiaq Textile Kohat Textile Kohinoor Textile Maqbool Textile
2.33 2.30 1.77 1.53 4.12 6.82 7.02 8.37 2.15 12.12 3.85 3.89 7.63 14.29 4.01 1.79 4.07 4.52 4.75 4.47 6.78 7.23 8.03 6.31 10.14

Masood Textile shams textile
2.65 3.27 4.29 6.34 5.28 10.84 10.30 6.69 9.34 11.15

industery average
0.59 0.32 0.29 0.33 0.42

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2006 inventory turnover 2007 inventory turnover 2008 inventory turnover 2009 inventory turnover 2010 inventory turnover

50 45 40 35 30 25 20 15 10 5 0

Interpretation:

According to inventory turnover ratio graph in year 2006 shams textile has 10.84, Ishtiaq textile has 6.818 and Maqbol textile has 6.280 ratios which are higher than the other companies’ inventory turnover ratio. In 2007 Gulistan Textile and Idrees Textiles have the lowest inventory turnover ratio i.e. 2.287 and 2.98 respectively. In the year 2008 D.M and Ishtiaq Textile have the highest ratios i.e. 9.009 and 8.320 respectively and Idrees Textile has the lowest ratio in 2008 which is 1.269 as compared to other companies. Hajra and Kohat Textile show highest inventory turnover ratio and Gulistan and Idrees Textile have the lowest inventory turnover ratio in 2009. In 2010 Hajra, D.M and Ishtiaq Textile have the highest inventory turnover ratio and Gulistan and Gul Ahmed Textile has the lowest ratio. When we see industry average its show decreasing trend in 2007 and 2008 but it again shows increasing trend in 2009 and 2010. According to the chart all companies perform above the industry average the trend of inventory turnover ratio is variable, it means some time increase and some time decrease.

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Return on equity after tax ratio:

years
2006 2007 2008 2009 2010

ratio
Return on equity after tax Return on equity after tax Return on equity after tax Return on equity after tax Return on equity after tax

Ahmed Hassan Textile Blessed Textiles D.M. Textile
0.05 0.01 -0.14 -0.08 0.20 0.21 0.15 0.11 0.08 0.34 0.11 -0.05 -0.04 -0.15 0.03

Din Textile Fazal Textile Gul Ahmaed textile
0.05 0.08 0.07 0.07 0.25 0.04 -0.04 0.01 0.04 0.46 -0.01 0.06 0.05 0.04 0.13

Gulistan Textile Hajra Textile
0.03 0.01 0.04 0.00 0.03 0.54 3.13 0.62 0.53 0.10

Idrees Textile Ishtiaq Textile Kohat Textile Kohinoor Textile Maqbool Textile
0.04 0.04 0.04 -0.02 0.09 0.04 -0.02 -0.07 -0.42 -3.63 -0.01 -0.15 -0.54 7.38 1.29 0.06 -0.01 0.00 -0.15 0.08 0.09 -0.16 -0.02 0.00 0.36

Masood Textile shams textile
0.11 0.10 0.21 0.29 0.23 0.08 0.29 -0.08 -0.21 0.24

industery average
0.00 0.00 0.00 0.00 0.02

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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8 6 4

2006 Return on equity after tax 2007 Return on equity after tax 2008 Return on equity after tax Idrees Textile Kohat Textile Gulistan Textile 2009 Return on equity after tax shams textile Masood Textile Maqbool Textile Kohinoor Textile 2010 Return on equity after tax industery average 0 Hajra Textile Gul Ahmaed textile D.M. Textile Blessed Textiles Ahmed Hassan Textile Ishtiaq Textile Fazal Textile Din Textile -2 -4 -6 2

Interpretation: This graph provides us the information that in 2006 the following companies have the high return on equity after tax ratio, Hajra Textile has 0.536, Blessed Textile has 0.208, and Masood Textile has 0.114 ratios. Gul Ahmed and Kohat Textile have the lowest ratio i.e. (0.0106 and -0.0089) respectively. In 2007 the same companies Hajra, Blessed and Masood Textiles have the highest ratio but the companies having lowest ratio in 2007 are Maqbool, Kohat and D.M Textile. In 2008 Hajra Textile has the highest return on equity after tax ratio and that is 0.634. But in 2009 and 2010 kohat textile shows the highest return on equity after tax ratio and that was 7.37 and 1.29 respectively. In 2010 only the Ishtiaq textile has the (-3.630) return on equity after tax ratio. Ishtiaq textile has the negative ratio in all years except 2006. When we see the industry average it first show the negative trend from 2006 to 2008 and then increase in 2010. However Gul Ahmad and Kohat textile perform below the industry average in year 2006. D.M, Ishtiaq, Kohat, Kohinoor and Maqbol textiles perform below the industry average in year 2006 and 2008. In 2010 only the Ishtiaq textile performs below the industry average and all other companies perform above the industry average.

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Debt to equity ratio:

years
2006 2007 2008 2009 2010

ratio
debt to equity debt to equity debt to equity debt to equity debt to equity

Ahmed Hassan Textile Blessed Textiles D.M. Textile
3.49 4.02 2.43 2.84 6.73 2.92 2.65 2.32 1.68 0.86 2.45 1.18 1.10 1.31 1.12

Din Textile Fazal Textile Gul Ahmaed textile
3.20 2.55 1.21 1.87 1.36 1.64 1.63 3.96 3.19 1.72 4.34 3.78 4.40 4.26 3.99

Gulistan Textile Hajra Textile
1.55 1.68 2.09 2.69 4.25 10.80 -28.86 -11.64 -5.85 -3.37

Idrees Textile Ishtiaq Textile Kohat Textile Kohinoor Textile Maqbool Textile
0.03 1.89 2.33 2.03 3.19 2.43 2.48 2.54 3.81 -112.23 6.84 7.85 12.83 -68.85 120.46 2.41 1.99 2.71 4.12 5.07 2.63 3.95 5.57 3.00 2.45

Masood Textile shams textile
5.13 4.55 4.18 4.01 2.62 2.30 1.92 2.40 3.10 1.81

industery average
0.17 0.17 0.24 0.22 0.19

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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150

100

2006 debt to equity 2007 debt to equity 2008 debt to equity Idrees Textile Kohat Textile Gulistan Textile shams textile Hajra Textile Gul Ahmaed textile Masood Textile D.M. Textile Din Textile Blessed Textiles Fazal Textile 2009 debt to equity 2010 debt to equity Ahmed Hassan Textile Maqbool Textile industery average Kohinoor Textile Ishtiaq Textile

50

0

-50

-100

-150

Interpretation: This chart shows the graph of debt to equity ratio. In 2006 Hajra, Kohat and Masood textile has the highest debt to equity ratio, and Idrees and Gulistan textiles have the lowest debt to equity ratio. In 2007 kohat textile has 7.849, Masood textile has 4.554 and Ahmad Hassan textile has the 4.019 debt to equity ratio and these companies have the highest ratios in this year and the Hajra textile has the lowest debt to equity ratio in 2007 which is (-28.85). In 2008 kohat, Maqbol and Gul Ahmad textile has the highest ratios and Hajra has the lowest ratio which is (68.85) and (-5.0746) respectively. The companies which having the highest debts to equity ratio in 2010 are kohat, Ahmad Hassan and Kohinoor having 12.45, 6.731 and 5.0746 ratios respectively. The companies having the lowest debt to equity ratio are Ishtiaq and Hajra having ratios (-11.23) and (-3.366) respectively. The industry average first shows the increasing trend from 2006 to 2008 and then decrease from 2009 to 2010. In 2006 all the companies have the high ratios than the industry average except the Idrees textile. Hajra textile performs below the industry average from 2007 to 2010. In 2009 kohat textile and in 2010 Ishtiaq textile performs below the industry average and the rest of the companies perform above the industry average.

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Return on assets ratio:

years
2006 2007 2008 2009 2010

ratio
Return on Asset Return on Asset Return on Asset Return on Asset Return on Asset

Ahmed Hassan Textile Blessed Textiles D.M. Textile
0.01 0.00 -0.04 -0.02 0.02 0.05 0.04 0.03 0.03 0.18 0.03 -0.02 -0.02 -0.06 0.01

Din Textile Fazal Textile Gul Ahmaed textile
0.01 0.02 0.04 0.02 0.11 0.01 -0.02 0.00 0.01 0.17 0.00 0.02 0.01 0.01 0.03

Gulistan Textile Hajra Textile
0.01 0.01 0.01 0.00 0.01 0.05 -0.11 -0.06 -0.11 -0.04

Idrees Textile Ishtiaq Textile Kohat Textile Kohinoor Textile Maqbool Textile
0.02 0.01 0.01 -0.01 0.02 0.01 -0.01 -0.02 -0.09 0.02 0.00 -0.02 -0.04 -0.11 0.01 0.03 0.00 0.00 -0.04 0.02 0.02 -0.03 0.00 0.00 0.09

Masood Textile shams textile
0.02 0.02 0.04 0.06 0.06 0.02 0.10 -0.02 -0.05 0.09

industery average
0.00 0.00 0.00 0.00 0.01

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0.2 0.15 0.1 0.05

2006 Return on Asset Idrees Textile Gulistan Textile Kohat Textile

0

Masood Textile

shams textile

Hajra Textile

Gul Ahmaed textile

D.M. Textile

2007 Return on Asset 2008 Return on Asset 2009 Return on Asset 2010 Return on Asset

Ahmed Hassan Textile

Maqbool Textile

Kohinoor Textile

industery average

Blessed Textiles

Ishtiaq Textile

Fazal Textile

Din Textile

-0.05 -0.1 -0.15

Interpretation: With the help this chart we made the comparative analysis of return on asset ratio of different companies in the textile sector. First We start from 2006, in this year the Blessed textile has 0.0531, Hajra textile has 0.0454 and D.M textile has 0.0308 return on asset ratio and Gul Ahmad and Kohat textile have the lowest ratios which is (-0.0024) and (-0.0013) respectively. In 2007 Shams textile has 0.1006 and Blessed textile has 0.0419 ratio and both having the high ratio than other companies in 2007 and the lowest ratio in this year is (-.00274) of Kohinoor textile. In 2008 Masood, Din, and Blessed textiles have the highest ratios and Kohinoor and Maqbol textile have the lowest ratios in this year. Blessed and Masood textile have the highest ratio in 2009 which is 0.0294 and 0.0571 respectively. On the other side Idrees textile has (-0.00608) the lowest ratio in 2010, only the Hajra textile has the negative return on asset ratio and all other companies shows the positive ratios. However the industry average first decrease from the year 2006 to 2009 and then increase in 2010, especially Hajra, kohat and Kohinoor textile perform below the industry average but the rest of the companies perform above the industry average. In year 2008 and 2009 most companies shows the negative return on asset ratio.

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4.2.2 Cost of Equity (Ke) trend analysis of textile sector companies
In this section we see the trend of cost of equity of textile sector companies.

year 2006 2007 2008 2009 2010

Ke Ke Ke Ke Ke Ke

Ahmed Hassan Textile Mills 0.12 0.10 0.11 0.14 0.08

Blessed Textiles D.M. Textile Mills 0.09 0.02 0.09 0.03 0.11 0.10 0.16 0.13 0.17 0.05

Din Textile Mills Fazal Textile Mills 0.07 0.06 0.10 0.10 0.10 0.07 0.12 0.13 0.00 0.04

Gul Ahmaed textile mills Gulistan Textile Mills Hajra Textile Mills 0.07 0.05 -0.02 0.07 0.04 0.09 0.11 0.12 0.12 0.13 0.15 0.15 0.11 0.18 -0.01

Idrees Textile Mills Ishtiaq Textile Mills Kohat Textile Mills 0.04 0.09 0.03 0.14 0.07 0.02 0.21 0.06 0.12 0.13 0.12 0.14 0.19 0.13 -0.05

Kohinoor Textile Mills Maqbool Textile Mills 0.05 0.08 0.05 0.02 -0.03 0.13 0.06 0.14 0.09 0.05

Masood Textile Mills 0.09 0.08 0.27 0.14 0.18

shams textile mill 0.09 0.05 0.14 0.16 0.00

industry average 0.00 0.00 0.01 0.01 0.01

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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0.3 0.25 0.2

2006 Ke 2007 Ke 2008 Ke 2009 Ke 2010 Ke

0.15 0.1 0.05 0 -0.05 -0.1

Interpretation: This graph shows the trend analysis of cost of equity of textile industry. Here we can see both the trend of individual as well as the trend of companies with respect to each other. First we see the year 2006 in which there is difference between cost of equity of these companies here in 2006 the Hajra textile mill has the negative cost of equity(-3.0%) in contrast to this Ahmad Hassan textile has the highest cost of equity which is 17% if we compare 2007 with 2006we can see that there is low fluctuation in cost of equity of companies . year 2008 shows much fluctuation in Ke of companies and also as compare to other years Kohinoor textile has the lowest cost of equity which is -3%, and Masood textile mill has the highest Ke and that is 26.7%. In year 2009 companies have not much fluctuation in cost of equity of companies accept Kohinoor textile mills which has the lowest Ke in 2009 that is 6%. But when we compare 2009 with other years this shows less difference between cost of equity of companies but in other years there is enough difference between there Ke values. In 2010 graph shows up and down line which means there is much difference between cost of equity values of companies. Idrees textile has the highest cost of equity and kohat has the lowest Ke in 2010 and kohat also has the lowest cost of equity in all last consecutive five years. However the industry average of cost of equity shows the increasing trend from the year 2006 to 2009 and then decrease in 2010. All the companies having the cost of equity above the industry average from the year 2006 to 2009, except in the year 2006 Hajira textile and in the year 2008 Kohinoor textile has the negative or the lower cost of equity. In 2010 Din, Hajira, Kohat and Shams textile has the lower cost of equity then the industry average.

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4.2.3 Beta of textile sector companies:

years 2006 2007 2008 2009 2010

Beta Beta Beta Beta Beta Beta

Ahmed Hassan Textile Blessed Textiles Ltd. fazal textile mill ltd. -0.30 0.01 0.30 -0.17 0.00 -0.10 0.04 0.05 0.26 -0.15 -0.31 -0.08 0.40 -0.46 0.83

D.M textile mill ltd. Din textile mill ltd. shams textile mill ltd. kohinoor textile mill ltd. kohat textile mill ltd. 0.83 0.20 0.01 0.45 0.67 0.99 -0.08 0.62 0.69 1.10 0.10 0.11 -0.16 0.88 -0.02 -0.04 0.00 -0.28 0.52 -0.14 0.72 1.24 1.21 0.32 1.73

gul ahmad textile mills 0.21 0.35 0.05 -0.06 0.13
Idrees Textile 0.52 -0.77 -0.57 -0.06 -0.61

Masood Textile 0.04 0.23 -0.93 -0.14 -0.48

Hajra Textile 1.28 0.02 -0.04 -0.19 1.30

Ishtiaq Textile 0.01 0.34 0.36 0.04 0.00

Gulistan Textile 0.48 0.75 0.00 -0.20 -0.46

maqbool Textile 0.16 1.12 -0.10 -0.09 0.71

industry average 0.02 0.02 0.01 0.00 0.01

Fundamental and Technical Analysis of Tobacco and Textile sector in Pakistan

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2 1.5 1

2006 Beta 2007 Beta 2008 Beta 2009 Beta 2010 Beta -0.5 -1 -1.5 0 0.5

Interpretation: This graph shows the trend of beta of textile sector companies. In the year 2006 Hajira textile has 1.28 Beta which is the highest beta in 2006 as compare to other companies of textile sector. D.M and Kohat textile also has the high beta. Ahmad Hassan and Shams textile ha s the lowest beta in 2006. In 2007 Kohat, Gulistan and Kohinoor textile shows the higher beta, but on the other side Ahmad Hassan and Fazal textile has the low beta as compare to other companies in the year 2007. In 2008 and 2009 the overall beta of companies remain below 1, which means that the overall risk of the companies in 2008 and 2009 is low. The company that having the highest beta in the year 2008 and 2009 is Kohinoor textile. The overall risk of companies in 2010 is increases. The beta of Kohat textile is very high in 2010 as compare to other companies after this Hajira, Din and Shams textile has the high systematic risk in 2010 as compare to other companies of textile sector. However the trend of industry average of beta first increase from 2006 to 2007 and then decrease from 2008 to 2009 and in 2010 the industry risk again increases. When we compare the industry average with the companies beta then it is cleared that in 2006 and 2007 most companies having beta higher then industry beta , in 2008, 2009 and 2010 some companies having beta higher than the industry average and some companies showing the beta below the industry average.

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Chapter # 5 Conclusion and recommendation
5.1 Conclusion and Recommendation of tobacco and textile sector:
5.1.1 Tobacco sector: Over all tobacco industry contribute 4.4% or over Rs27.5 billion to the total GDP of Pakistan. It is the single biggest contributor of excise duty six time than that of cotton yarn. Over 6% to7% of all taxes collected in Pakistan comes from tobacco industry. In 2007 to 2008 the growth rate in tobacco sector was 2.22%, but in 2008 to 2009 it was 12.10% which is 6times that of 2007 to 2008 growth. The industry employees over one million people directly or indirectly. Pakistan tobacco has the highest market capitalization in year 2009 and that was Pakistani Rs which is 60% of total capitalization of tobacco sector. On the other side Lakson tobacco has the highest market price of share that is Rs 225.92 per share in 31 December 2009. According to analysis done by us the Khyber tobacco performs below the industry average and it also have the high cost of equity as compare to Pakistan and Lakson tobacco. Pakistan tobacco has the highest beta as compare to other two companies in the tobacco sector. According to Gross Profit margin ratio Khyber tobacco shows the high ratio but in 2008 and in 2009 it ratio decrease as compare to Pakistan and Lakson tobacco. But overall profitability of tobacco sector decrease in 2008 and in 2009. According to inventory turnover ratio Lakson tobacco has the high ratio then the other two companies in tobacco sector. From the overall analysis it is clear that the tobacco sector is satisfactory for the investment. 5.1.2 Textile sector: Textile is the world most diversified industry and its annual growth rate all over the world is 3%. Pakistan has the charming textile industry and 4th largest cotton producer in the world. Textile sector contribute 38% of total manufacturing and 8% of GDP. Textile sector is one of the biggest source of employment and employees almost 40% of industry work force.

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Textile industry accounts for 60% of Pakistan total export. China, India, Indonesia and turkey are the biggest competitors in textile sector. There are about 160 companies listed on the Karachi Stock Exchange. The market capitalization of textile sector in 2010 is Rs (9,433,689,099) which is 3.6% more than the market capitalization of 2009. The Fazal textile Mill ltd has the highest market price per share and that is RS 375 at 31june 2010. In the industry average analysis we compared the ratios of companies with the industry average, which shows the performance of companies with respect to industries. In gross profit margin ratio only Hajra, Ishtiaq and D.M textile Mills perform below the industry average. In comparison with quick ratio all companies perform above the industry average. According to profitability ratio the profit of most textile companies increases in 2009 and in 2010.inventory turnover ratio increases in 2010 which is a good sign that there is a demand for industry product. Cost of equity of most companies of textile sector decreases in 2010. From the beta analysis it is cleared that in 2010 the beta of most companies are above 1 which means the systemic risk is high but in other previous years the beta lies below the 1, so the overall industry is good for investment.

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References:
http://www.scribd.com/doc/22433618/Textile-Industry-in-Pakistan http://en.wikipedia.org/wiki/Textile_manufacturing http://www.aptma.org.pk/ http://www.aptma.org.pk/Energy.ASP http://www.pakistaneconomist.com/issue2000/issue31/i&e4.htm http://www.finance.gov.pk/survey/chapter_10/03_Manufacturing.pdf http://www.ptc.com.pk/group/sites/PAK_7SHBXN.nsf/vwPagesWebLive/DO7T9F7E?opendocument&SK N=1 http://www.philipmorrispakistan.com.pk/

http://www.sbp.org.pk/departments/stats/bsa.pdf http://www.madehow.com/Volume-2/Cigarette.html http://books.google.com.pk/books?id=_lnmxnhoAUEC&pg=PR3&dq=schaum's+outline+series+ theory+and+problems+of+managerial+finance&hl=en&ei=RHCCTaKrJ8jcsgafmNWdAw&sa= X&oi=book_result&ct=result&resnum=1&ved=0CCgQ6AEwAA#v=onepage&q=schaum's%20 outline%20series%20theory%20and%20problems%20of%20managerial%20finance&f=false

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