Page |1 Executive summary To assure development and sustainability, Pakistani fashion label Khaadi has employed a good financial approach throughout the years. The firm has concentrated on growing both its local and global retail reach as well as its product portfolio and level of quality (Tayyab, 2022). Khaadi has improved the management of its supply chains using technology and created strict auditing processes to provide efficient fiscal management measures. Khaadi intends to continue its rapid expansion with the latest investment from the International Finance Corporation (IFC) by extending the variety of its goods, investing in technology, and increasing its retail presence (Imran & Imran, 2022). Khaadi will be able to maintain its focus on ethical and sustainable business practices, which are becoming more and more significant to customers, thanks to the IFC financing. In summary, Khaadi has a sound financial plan in place and is well-positioned to maintain its development trajectory and broaden its influence in the fashion sector thanks to the backing of IFC. An increasing number of consumers are expected to value the company's dedication to sustainability and ethical business practices, making it an appealing investment prospect for IFC (Imran & Imran, 2022). Page |2 Table of Contents Executive summary ....................................................................................................................................... 1 Introduction .................................................................................................................................................. 3 Analysis ......................................................................................................................................................... 3 Financial Audit............................................................................................................................................... 3 Ratios of Profitability: ............................................................................................................................... 3 Ratios of Liquidity: .................................................................................................................................... 5 Solvency Ratios ......................................................................................................................................... 5 Efficiency Ratios ........................................................................................................................................ 6 Financial Strategy .......................................................................................................................................... 7 Implementation and Control Measures........................................................................................................ 8 Responsible and ethical considerations...................................................................................................... 10 Three-year profit and loss Forecast ............................................................................................................ 12 Conclusion ................................................................................................................................................... 13 Page |3 Introduction Khaadi is a popular fashion brand based in Pakistan that has successfully expanded its reach beyond the local market to establish a strong international presence. The company, which was founded in 1998, has become known for its vibrant and culturally rich designs, which reflect the country's rich cultural heritage. Over the years, Khaadi has grown into a leading fashion brand in Pakistan, with a significant presence in major cities across the country (Apollo, 2023). In recent years, Khaadi has embarked on an ambitious internationalization strategy, with a focus on expanding its reach to new markets around the world. The company has opened stores in key cities across the Middle East, South Asia, and Europe, and has established a strong online presence to cater to customers globally (Khaadi, 2023). Khaadi's success in international markets can be attributed to its unique and vibrant designs, as well as its commitment to ethical and sustainable business practices. Analysis Financial Audit Khaadi's strategic performance and health may be assessed using a number of financial ratios and indicators as part of the financial plan analysis. Ratios of Profitability: Gross Profit Margin A gross profit margin is a metric used to determine how much money an organization generates after subtracting the expenditures of products sold. For the fiscal year 2022, Khaadi's gross profit margin was 32.24%, which is less than the 38.65% 38,65 % 32,24 % average for the sector (PACRA, 2022). Khaadi Net Profit Margin: Net Profit Margin calculates the profit made Industry Net Profit Margin by an organization after all costs, such as taxes as well as interest, have been subtracted. For the last fiscal year of 2022, Khaadi's net profit ratio was 3.95%, which is less than the 9.69% average for the sector (PACRA, 2022). 3,95% 9,69% Khaadi Industry Page |4 Return on Assets (ROA): ROA gauges how well a business makes use of its resources to produce profit. Khaadi's ROA for the financial year 2022 was 5.79%, above the 4.32% standard for the sector. Return on Equity (ROE): This metric gauges how well a business turns equity into profits. In comparison to the industry average of 16.21%, Khaadi's ROE for the fiscal year 2022 was lower at 9.77% (PACRA, 2022). ROE 9,77% ROA 4,32% 5,79% 16,21 % Khaadi Industry Khaadi Industry Page |5 Profitability Ratios 45,00% 38,65% 40,00% 35,00% 32,34% 30,00% 25,00% 20,00% 16,21% 15,00% 9,77% 9,69% 10,00% 5,79% 3,95% 5,00% 4,32% 0,00% Gross Profit Margin Net Profit Margin Khaadi ROA ROE Industry Figure 1 : Profitability Ratios Ratios of Liquidity: The ability of an organization to cover its short-term obligations with its short-term assets is determined by its current ratio. For the fiscal year 2022, Khaadi's current ratio was 1.42, above the industry standard of 1.36 (DNB, 2023). The ability of an organization to meet its short-term obligations utilizing its assets with the greatest liquidity, which include cash and cash equivalents, is determined by its quick ratio. In comparison to the industry average of 0.58, Khaadi's quick ratio for the fiscal year 2022 was lower at 0.41 (DNB, 2023). Current Ratio Quick Ratio 0,41 1,36 1,42 Khaadi Industry 0,58 Khaadi Industry Page |6 Solvency Ratios Debt-to-Equity Ratio: This ratio calculates how much debt and equity were used to fund an organization’s assets. For the fiscal year 2022, Khaadi's debt-to-equity ratio was 0.23, which is less than the 0.28 industry average (PACRA, 2022). Interest Coverage Ratio: This ratio gauges the ability of an enterprise to use its income to pay the payments on its debt. For the fiscal year 2022, Khaadi's interest coverage ratio was 8.08, above the industry standard of 5.05 (DNB, 2023). Debt to Equity Ratio 0,23 Interest Coverage Ratio 5,05 0,28 Khaadi 8,08 Industry Khaadi Industry Efficiency Ratios Inventory turnover ratio: This metric gauges how frequently a business sells and replenishes its stock each year. For the last fiscal year of 2022, Khaadi's ratio of inventory turnover was 2.85, which is less than the sector median of 4.52 (PACRA, 2022). Receivables Turnover Ratio: This ratio gauges the effectiveness with which a business recovers its accounts receivables. For the fiscal year that ended in 2022, Khaadi's receivable ratio for turnover was 6.98, which is less than the sector average of 9.11 (PACRA, 2022). Inventory Turnover Ratio Recievables Turnover Ratio 2,85 0,28 4,52 Khaadi 0,23 Industry Khaadi Industry Page |7 Liquidity, Solvency & Efficiency Ratios 10,00 9,11 9,00 8,08 8,00 6,98 7,00 6,00 5,05 4,52 5,00 4,00 2,85 3,00 1,42 1,36 2,00 1,00 0,41 0,58 0,23 0,28 0,00 Debt to Equity Ratio Interest Coverage Ratio Inventory Turnover Ratio Khaadi Recievables Turnover Ratio Current Ratio Quick Ratio Industry Figure 2 : Liquidity, Solvency & Efficiency Ratios Khaadi's gross profit margin, net profit margin, inventory turnover ratio, and receivables turnover ratio are all below the industry medians, despite the company having a solid ROA and a low debt-to-equity ratio (PACRA, 2021). This suggests that Khaadi could be having trouble effectively managing its expenses, inventories, and receivables accounts, which could be influencing the company's financial performance. In terms of revenue growth, Khaadi's sales grew by 20.2% in the fiscal year 2022, above the 14.8% growth of the sector. But during the past few years, the business's rise in revenue has slowed down, which would mean Khaadi is having trouble gaining market share and keeping up its growth rate (PACRA, 2021). Financial Strategy Khaadi's financial strategy appears to be focused on achieving sustainable growth and profitability through strategic investments in its retail network, product diversification, and marketing initiatives (Apollo, 2023). The company has been expanding its retail network both domestically and internationally, with a focus on opening new stores in high-traffic locations. Khaadi has also been diversifying its product lines to cater to a wider range of customers, including men's and children's clothing (PBIT, 2018). Page |8 In terms of financial management, Khaadi appears to be focused on effective cost management, efficient use of working capital, and effective debt management. The company has a strong balance sheet, with healthy levels of liquidity and manageable levels of debt. Khaadi has also implemented effective inventory management practices to minimize the risk of excess inventory. Khaadi's financial strategy also appears to be focused on building its brand and increasing brand awareness through targeted marketing campaigns. The company has been investing in market research to better understand customer needs and preferences and has been using this information to develop targeted marketing campaigns to reach its target audience (Tayyab, 2022). One potential area where Khaadi could improve its financial strategy is in technology investment. The company could benefit from greater investment in digital platforms, automation, and data analytics to improve its operational efficiency and supply chain management. Overall, Khaadi's financial strategy appears to be focused on achieving sustainable growth and profitability through strategic investments in its retail network, product diversification, marketing initiatives, and effective financial management. The company's strong balance sheet and effective cost management practices provide a solid foundation for future growth (IFC, 2022). Implementation and Control Measures To ensure that the company continues to grow and prosper, Khaadi has implemented a number of implementation and control measures with regards to its financial strategy (PBIT, 2018). These measures are designed to ensure that the company's financial objectives are met, risks are managed effectively, and resources are allocated efficiently. Here are some examples of Khaadi's Page |9 existing implementation and control measures with regards to financial strategy: Risk Management Cost Control Implementation & Control Measures Financial Planning & Budgeting Financial Reporting & Analysis Figure 3 Financial Planning and Budgeting: Khaadi has a well-established financial planning and budgeting process that is aligned with the company's strategic objectives. The company develops an annual budget and financial plan that is reviewed and approved by the board of directors. The budgeting process ensures that financial resources are allocated effectively and efficiently to support the company's operations and growth (Tayyab, 2022). Financial Reporting and Analysis: Khaadi has established a strong financial reporting and analysis system to track the company's financial performance. The company produces regular financial statements that are reviewed by the board of directors and senior management. These statements provide a detailed view of the company's financial performance and help the management team to identify areas for improvement (Systems, 2022). P a g e | 10 Cost Control: Khaadi has implemented several cost control measures to ensure that expenses are managed effectively and efficiently. The company regularly reviews its expenses and identifies areas where costs can be reduced. For instance, the company has implemented costsaving measures in its supply chain operations, such as using more efficient transport and logistics systems (Systems, 2022). Risk Management: Khaadi has implemented several risk management strategies to mitigate financial risks and protect the company's financial assets. The company has established a risk management committee that is responsible for identifying potential risks and developing contingency plans to mitigate these risks (Tayyab, 2022). Responsible and ethical considerations Sustainability: Khaadi can focus on reducing its environmental impact by implementing sustainable practices such as reducing waste, conserving energy, and using eco-friendly materials in its products. The company can also promote sustainability among its employees, customers, and suppliers. Labor Practices: Khaadi should ensure that its labor practices are ethical and responsible. This can include providing fair wages and benefits, safe working conditions, and opportunities for professional growth and development (Ashraf, 2018). Supplier and Vendor Management: Khaadi should ensure that its suppliers and vendors adhere to ethical and responsible business practices. This can include ensuring that suppliers and vendors provide fair wages and safe working conditions for their employees, and that they adhere to environmental and social responsibility standards. Diversity and Inclusion: Khaadi should promote diversity and inclusion in its workforce, suppliers, and customers. This can include ensuring that employees of all backgrounds are given equal opportunities for employment and advancement, and that the company's products and marketing campaigns are inclusive of diverse groups. Data Privacy and Security: Khaadi should ensure that it adheres to data privacy and security standards to protect its customers' personal information. This can include implementing robust data security measures, transparent data privacy policies, and ensuring that customer data is not used for unauthorized purposes. P a g e | 11 Corporate Social Responsibility: Khaadi can promote corporate social responsibility by supporting social and environmental causes through philanthropic initiatives and partnerships with non-profit organizations (Ashraf, 2018). Overall, focusing on these responsible and ethical considerations can help Khaadi build a positive reputation, attract socially conscious customers, and achieve long-term sustainable growth (Ashraf, 2018). P a g e | 12 Three-year Profit and Loss Forecast Historical (Millions) Sales 2018 2019 2020 2021 2022 2023 2024 2025 2026 16824 19052 15678 15167 22037 24107 26139 30051 35917 13.24% -17.71% -3.26% 45.30% 9.39% 8.43% 14.96% 19.52% YoY Growth COGS Forecasted (Millions) -10195 -12674 6629 6378 4927 4803 6954 -5306 -5875 -5803 -5168 -5462 Operating Profit 1323 503 -876 -365 1492 2030 Non-operating income/expense -525 8 177 1369 -102 798 511 -699 1004 a) Total Finance Cost -150 -192 -1438 b) Tax -193 -205 455 114 Gross Profit Operating Expenses P/L before Interest & Tax Net Income -10751 -10364 -15083 -16500 -17891 -20568 -24583 8249 9483 11334 -5577 -5502.5 -5427 -5492 2746 4056 5842 185.4 185.4 185.4 185.4 1390 2216 2931 4241 6027 -1223 -423 -685 -792 -912 -807 595 88 -138 -25 -82 -53 -67 -1542 -131 829 1505 2058 3275 5153 7607 A major aspect of this increased profitability for Khaadi in the upcoming years is the investment made by IFC in the company (Imran & Imran, 2022). To expedite its development and expansion P a g e | 13 objectives, Khaadi should use the IFC investment in its financial strategy going forward. To draw in new clients and spur revenue development, the firm should concentrate on enhancing operational effectiveness, growing its market share, and extending its product ranges. Khaadi may think about making an investment in automation and technological advances to enhance its supply chain and inventory management procedures to meet these objectives (Imran & Imran, 2022). To increase its clientele and into new markets, it might also investigate joint ventures and new distribution methods. In order to appeal to customers that are socially concerned, the business should also concentrate on creating sustainable and ecologically friendly items. Khaadi should emphasize risk management and financial restraint in its overall strategy. Conclusion As the top fashion label in Pakistan, Khaadi has recently displayed tremendous growth and achievements. Due to its dedication to ethical and sustainable business practices, Khaadi has built a solid clientele both domestically and abroad. Khaadi is well-positioned to continue its growth and innovation in the fashion sector with the IFC's funding while simultaneously advancing its sustainable objectives (Imran & Imran, 2022). Overall, Khaadi has performed admirably, and with IFC's assistance, it is going to see much more success in the years to come (IFC, 2022). References Apollo (2023) Khaadi - overview, competitors, and employees, Apollo.io. Available at: https://www.apollo.io/companies/Khaadi/5fd1b66385252000014bb5c1 (Accessed: April 18, 2023). Ashraf (2018) CSR in Pakistan: The case of the Khaadi controversy, springerprofessional.de. Available at: https://www.springerprofessional.de/en/csr-in-pakistan-the-case-of-thekhaadi-controversy/15258306 (Accessed: April 18, 2023). DNB (2023) Khaadi Business Directory, DNB. Available at: https://www.dnb.com/businessdirectory/company-profiles.khaadi_pakistan_(smcprivate)_limited.6f26c6a667f9f2d86379162a875ea8b1.html (Accessed: April 18, 2023). P a g e | 14 IFC (2022) KHAADI, Projects. Available at: https://disclosures.ifc.org/projectdetail/ESRS/45445/khaadi-corporation-smc-pvt-ltd (Accessed: April 18, 2023). Imran, H. and Imran, H. (2022) IFC proposes to invest $25m in fashion giant khaadi, Fincro Insights | Empowerment through Financial Literacy. Available at: https://fincroinsights.com/ifc-proposes-to-invest-25m-in-fashion-giant-khaadi/ (Accessed: April 18, 2023). Khaadi (2023) Khaadi. Available at: https://corporate.khaadi.com/ (Accessed: April 18, 2023). PACRA (2021) 1. rating analysis Khaadi Pakistan (SMC-Pvt) limited 2 ... - PACRA, PACRA. Available at: https://www.pacra.com/summary_report/RR_2038_9580_14-Dec-21.pdf (Accessed: April 18, 2023). PACRA (2022) 1. rating analysis Khaadi Pakistan (SMC-Pvt) limited 2022 ... - PACRA, PACRA. Available at: https://www.pacra.com/summary_report/RR_2038_9580_14-Dec21.pdf (Accessed: April 18, 2023). PBIT (2018) Punjab Board of Investment and Trade, PBIT.com. Available at: http://www.pbit.gop.pk/system/files/Textile%20Industry.pdf (Accessed: April 18, 2023). Systems (2022) Khaadi fortifies supply chain and retail operations, Khaadi Unifies Retail, Supply Chain, and Operations Management. Available at: https://www.systemsltd.com/wp-content/uploads/2022/08/Khaadi-a-1.pdf (Accessed: April 18, 2023). Tayyab (2022) Khaadi Strategic Management Case Study - globalscientificjournal.com, GSJ. Available at: https://globalscientificjournal.com/researchpaper/Khaadi_Strategic_Management_Case.pdf (Accessed: April 18, 2023).
