Case

Sefam (Private) Limited: Asian Journal of Management Cases

1–21
A Credit Evaluation © 2020 Lahore University of
Management Sciences
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DOI: 10.1177/0972820120914515
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Atifa Arif Dar1 and Asad Alam1

All Sefam brands are built on two things; quality and innovation. Use of only the best materials and an unflinching resolve not to
compromise on quality, coupled with state-of-the-art technology enable us to produce products which are no less in quality and
design than the best in the world.
—Sefam Website

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

Company Background
Sefam was originally established in 1985 by Hamid Zaman and his sister with the aim of manufacturing
and retailing embroidered fabrics, equal in quality to the best in the world.1 Mr Zaman originally started
his career working in Ali Embroidery Mills (AEM), a company owned by his father which floundered
after regional unrest caused a drastic drop in demand for their product. Determined to re-establish the
family embroidered fabric business, but this time with a clear vision to focus on quality, the brother-and-
sister duo raised enough equity to restart operations at AEM using AEM’s discarded assets.
After some initial setbacks, production commenced, but unable to find buyers, they decided to set up
their own retail operations—Sefam. Sefam launched its first outlet under the name ‘Bareeze’, which was
an adaptation of the Persian word barsa meaning barkat (blessing or prosperity). The company’s first
store opened in 1985 at a location deliberately chosen to pitch their product against the abundantly avail-
able imported fabric.
For the first two years, Sefam operated with goods produced with a single overhauled machine.
They started with low-cost designs, but AEM eventually acquired sophisticated embroidery machines,

1
Suleman Dawood School of Business, Lahore University of Management Sciences, Lahore, Pakistan.

Corresponding author:
Atifa Dar, Suleman Dawood School of Business, Lahore University of Management Sciences, DHA, Lahore Cantt, Lahore 54792,
Pakistan.
E-mail: atifa.dar@lums.edu.pk
2 Asian Journal of Management Cases

thus increasing the variety of designs and their quality. Once the designs and quality were improved,
the product was selling at two to four times the price of other available options, but margins were not
very good as the cost of production was high and maintaining good quality meant limited production
by AEM.
Sefam’s second retail outlet opened in Karachi in 1986, and from that point, the company never
looked back. The company became a powerhouse in the fashion industry, and by 2015 enjoyed country-
wide recognition. Sefam became the largest textile retail chain in Pakistan. Apart from owning the largest
design house and company-owned outlets in the UK, India, the Middle East, Norway and Malaysia, it
was opening new outlets every year all over the world. While the company had started out with the
Bareeze brand of embroidered fabrics, over the years it had grown to encompass twelve different brands
(Exhibit 1) catering to different market segments. Sefam’s rapid growth could be measured on three
fronts: number of brands (product diversification), the number of stores and average store size. The
increase in stock-keeping units was complemented with an increase in the total number of stores and the
size of the stores in terms of the square footage of space utilized.
Embroidered fabric is a niche market, but by the early 1990s Bareeze faced some mild competition;
however, none of these competitors were able to establish themselves. Despite no significant advertis-
ing on its part in its earlier days, Bareeze was clearly a price setter with no serious competition due to
its distinctive quality. This was still true in 2015, especially as the flagship Bareeze brand had stayed
out of the cut-throat lawn sector.2 The company did, however, face competition with its other brands
(Exhibit 2).
The company had funded its growth primarily through retention of profits (retained earnings com-
prised 67 per cent of total equity on 30 June 2015) and a series of equity injections over the years with
the largest (PKR 243 million) and the most recent one in 2014. The last dividend distribution was in
2011. Despite restricting dividends, the company found itself having to resort to long-term borrowings,
albeit interest-free and from its own directors or their associates. There had also been a consistent rising
trend in short-term borrowings since 2012.
After the acquisition of land in 2014, which cost PKR 115 million, the company was planning a capi-
tal expansion project to enhance its offices to cater to the increased size of the business. Despite revenue
growth, the company faced diminishing profitability, and a detailed analysis was required to assess the
feasibility of extending long-term credit.

Business Strategy
Sefam’s strategy had always been based on three cornerstones. First, their outstanding ‘brand’ quality,
second, innovation and, last but not least, customer service.

Quality
The first batch of fabric produced by AEM in 1985 was completely damaged. After reworking, Sefam
was able to locate a buyer who was willing to sell the product under a different name which they refused
as the whole point was to create a quality ‘brand’ which was and would continue to be the underlying
philosophy of the company. The quality of the Bareeze fabric was such that the company never felt
the need for any formal advertising in its start-up years as word of mouth was more than adequate.
When the supply of quality fabric became a limiting factor in 1999, Sefam set up a fabric processing
Dar and Alam 3

plant as a separate company called Sarena Industries and Embroidery Mills in 2001. (Roughly 15% of
Sarena’s output was taken up by group companies while the remaining production was taken up by local
customers like Khaadi, Sapphire, etc., and the fabric was also exported to Europe, America and the Far
and Middle East.) The company’s commitment to quality continued to be reflected in the effort invested
in maintaining its image through the high-end retail stores it operated.

Innovation
Another cornerstone of the company’s ethos was innovation. In the initial years when Bareeze was the
only brand, innovation was reflected in their constant strive to introduce new fabric, stitches and designs.
This was carried further over time, by the addition of multiple product lines. The company had twelve
brands and was a franchisee for three internationally recognized brands (Exhibit 1). As the company grew,
younger members of the family joined the business to manage and modernize the expanding operations.

Customer Service
Based on the quality of its product, Sefam introduced the Western concept of a retail store to Pakistan
with a generous return policy, consistent countrywide practices and fixed prices. These concepts were
relatively new for the local market at that time. To date, the company continues to value the customers’
‘in-store’ experience by focusing on easy store layouts and friendly floor staff. Purchased products may be
returned at any outlet, and the introduction of the retail pro3 (acquired in 2013) software allowed real-time
tracking of inventory, allowing staff to guide customers concerning the availability of a particular product
at various outlets. While individual brand stores were also present, the company attempted to make the
shopping experience easier by providing access to multiple product lines within a single retail outlet.

The Decision
Akbar was not sure how to evaluate Mr Zaman’s comment that the credit facility was just a cost
management measure and that the company was growing every year and was in great shape. Sefam had
shown consistent growth in terms of year-on-year revenues, but the net income had fluctuated over the
past 5 years, falling by 33 per cent in 2014 and suffered the first-ever loss of over PKR 100 million in
2015. Akbar knew that the garment industry was highly competitive, with other bigger players operating
with similar business strategies based on quality, customer service and price. He had been provided with
audited financial statements from 2011 to 2015 (refer to Exhibits 3–7 for extracted financial data) all
of which had received a clean opinion from the auditors. However, he knew that the decision to extend
credit would need to take into consideration multiple financial and non-financial factors.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.
4 Asian Journal of Management Cases

Exhibit 1.  Sefam’s Brands4

Following are Sefam’s brands established over the years:

  1.  Bareeze: Embroidered fabric (1984)

  2.  Leisure Club: Ready-to-wear clothing for tweens and adults (1997)
  3.  Minnie Minors: Speciality children’s apparel and accessories (1998)
  4.  Bareeze Home Expressions: Home linen, rugs and accessories (1998)
  5.  Chinyere: Ready-to-wear clothing for men and women (1999)
  6.  Kayseria: Printed fabric (2006)
  7.  Bareeze Man: Classic Eastern wear for men (2010)
  8.  Urban Culture: Casual Western clothing (2011)
  9.  The Working Woman: Smart work and semi-formal apparel for women (2011)
10.  Rang Ja: Ethnic themed prêt for men and women (2012)
11.  Shahnameh: Premium Eastern clothing and accessories for men (2013)
12.  Super Squad: Prêt for youth and pre-teens (2013)

In addition to their own brands, by 2015, Sefam was operating as a franchisee for Ralph Lauren,
The Entertainer (Toys) and Giorgio Armani.
Source: Sefam’s website.

Exhibit 2. Sefam’s Competitors

ChenOne
ChenOne is a subsidiary of Chenab Limited, a member of the Faislabad-based Chenab Group. The group is one
of the largest exporters of home textile products from Pakistan. In 1997, ChenOne opened its first branch in
Islamabad, and like Sefam, it offers a complete range of products (fashion clothing and footwear, bed linen, kitchen
accessories and furniture) under one roof. The company has recently branched out into real estate development.5
The chain has thirty-plus stores located across Pakistan and the Middle East.
Source: ChenOne’s website.

Khaadi
Khaadi first opened its doors in 1998 in Karachi, offering its customers kurtas and loose fabric made from hand-
woven fabric. Khaadi, which means ‘hand-woven’, has stayed true to its name and continues to produce a fusion of
styles to complement both the East and the West, while still using hand-woven fabrics on select products.
Khaadi offers prêt, unstitched fabric, Eastern wear for men, women and children, Khaas (featuring exclusive and
limited-edition pieces), accessories and Home (featuring furniture, bedding and bath items). Khaadi has built more
than forty stores in Pakistan as well as stores in the United Arab Emirates, Saudi Arabia, Canada, Mexico, America,
Australia, Malaysia and the United Kingdom.6
Source: Khaadi’s website.
Dar and Alam 5

Gul Ahmed
At Ideas by Gul Ahmed, you will find a similar variety of products including prêt wear, unstitched fabric, accessories
and home items. The chain has expanded up to sixty stores across Pakistan since its inception in 2003. The group
began trading in textiles in the early 1900s and entered the field of manufacturing with the establishment of Gul
Ahmed Textile Mills Ltd (GTM). Gul Ahmed is a composite unit, making everything from cotton yarn to finished
products. It is a vertically integrated operation, with everything from manufacturing, across all stages, to retail under
one umbrella. The company was listed on the Karachi Stock Exchange in 1972.7
Soruce: Gul Ahmed’s website.

AlKaram Studio
The Alkaram group was founded in 1986 with a vision to be a provider of innovative textile solutions worldwide.
They are one of the few vertically integrated operations in Pakistan offering a diversified range of products. Building
on the strength of Alkaram Textiles, the retail arm Alkaram Studio was created for customers to experience the
depth, range and creativity of the Alkaram product portfolio—from fashion fabrics and apparel to kids’ clothing,
home textiles and homeware needs.8
Source: AlKaram’s website.
Exhibit 3.  Statement of Financial Position 2011 to 2015

As of June 30, Note 2015 2014 2013 2012 2011

Assets Rupees Rupees Rupees Rupees Rupees
Non Current Assets
Property, plant and equipment 4 1,445,092,333 1,061,122,531 804,362,373 677,824,849 521,286,079
Advances against capital expenditure – 8,186,383 – – –
Intangible Assets 5 70,912,490 80,460,197 81,792,827 196,568 187,000
Long term deposits 138,286,621 122,021,733 59,314,888 46,024,907 25,791,766
Due from associated undertaking 6 61,848,166 58,852,166 59,466,610 63,442,757 79,664,527
Current Assets
Stock in trade 7 2,181,058,756 1,711,121,566 1,422,453,811 1,255,671,951 970,170,380
Short term investments 60,000,000 27,548,833 – – –
Trade Debts 8 6,719,502 9,554,623 7,945,454 46,907,845 6,869,067
Advances-Considered good 9 720,111,345 648,820,968 268,706,085 210,496,079 153,367,822
Balances with statutory authorities 10 168,235,292 95,584,834 70,434,805 94,803,752 35,860,004
Mark up receivables 11 103,457 1,524,612 1,584,633 5,746,895 10,203,572
Prepayments and other receivables 12 277,587,265 235,340,678 146,481,957 95,514,481 37,740,403
Cash and bank balances 13 330,798,354 249,580,130 179,495,321 135,018,596 87,799,693
3,744,613,971 2,979,076,244 2,097,102,066 1,844,159,599 1,302,010,941
5,460,753,581 4,309,719,254 3,102,038,764 2,631,648,680 1,928,940,313
Share Capital and Reserves
Share Capital 14 685,500,000 685,500,000 442,500,000 442,500,000 315,490,000
Unappropriated Profit 1,436,009,912 1,539,972,085 1,355,288,104 1,079,338,843 860,167,522
Total Equity 2,121,509,912 2,225,472,085 1,797,788,104 1,521,838,843 1,175,657,522
Non Current Liabilities
Long term loan -unsecured 15 15,621,585 10,621,585 70,621,584 1,169,306 –
Deferred Taxation 16 117,918,401 92,088,059 – – –
Long term Deposits 106,566,256 105,440,041 81,251,484 66,312,484 58,480,484
Deferred gain 17 251,838 191,490 701,776 1,857,497 2,853,285
Liabilities against assets subject 18 68,268,247 45,751,047 29,349,337 33,909,272 13,453,195
to finance lease
(Exhibit 3 continued)
(Exhibit 3 continued)

As of June 30, Note 2015 2014 2013 2012 2011

Assets Rupees Rupees Rupees Rupees Rupees
Current Liabilities
Short term borrowings 19 1,990,424,532 906,304,720 457,166,619 315,865,772 248,312,526
Current portion of lease liabilities 18 57,959,995 45,222,320 31,868,750 25,692,901 8,864,368
Trade and other payables 20 948,418,187 862,989,325 623,677,806 660,969,125 418,751,396
Mark up Payable on short term bank 33,814,628 15,638,582 9,613,304 4,033,480 2,567,537
borrowings
3,030,617,342 1,830,154,947 1,122,326,479 1,006,561,278 678,495,827
Contingencies and Commitments 21 – – – – –
5,460,753,581 4,309,719,254 3,102,038,764 2,631,648,680 1,928,940,313
Source: Company’s financials.
Exhibit 4.  Income Statement Data 2011 to 2015

2015 2014 2013 2012 2011

For the Year Ended June 30 Note Rupees Rupees Rupees Rupees Rupees
Sales 22 9,072,607,917 8,279,805,417 6,924,176,005 5,656,151,022 4,412,147,134
Cost of sales 23 (5,877,235,408) (5,419,919,126) (4,561,994,853) (3,854,194,909) (3,046,748,118)
Gross profit 3,195,372,509 2,859,886,291 2,362,181,152 1,801,956,113 1,365,399,016
Operating Expenses
Distribution Cost 24 2,356,626,710 1,792,770,971 1,442,320,017 1,088,330,243 734,404,110
Administrative and General 25 709,658,151 617,115,861 523,269,597 404,099,891 276,933,966
3,066,284,861 2,409,886,832 1,965,589,614 1,492,430,134 1,011,338,076
Operating Profit 129,087,648 449,999,459 396,591,538 309,525,979 354,060,940
Other operating charges 26 643,076 29,846,220 27,476,527 21,772,347 24,729,463
Finance Cost 27 136,981,993 54,260,175 45,038,707 15,704,065 22,534,671
137,625,069 84,106,395 72,515,234 37,476,412 47,264,134
(8,537,421) 365,893,064 324,076,304 272,049,567 306,796,806
Other operating income 28 20,755,864 39,944,649 61,567,678 33,449,166 34,448,581
Profit before taxation 12,218,444 405,837,713 385,643,982 305,498,733 341,245,387
Taxation 29 116,180,617 221,153,732 109,694,721 86,327,412 111,572,481
Profit after taxation (103,962,173) 184,683,981 275,949,261 219,171,321 229,672,906

Earnings per share 30 (1.52) 2.69 6.53 6.72 8.82

Source: Company’s financials.
Dar and Alam 9

Exhibit 5.  Statement of Changes in Equity 2011 to 2015

Statement of Changes in Equity 2011 to 2015

For the Year Ended June 30
Share Unappropriated
Capital Profit Total
Balance as at July 01, 2010 255,400,000 645,818,616 901,218,616
Total comprehensive income for the year 229,672,906 229,672,906
Issue of share capital 60,090,000 60,090,000
Interim dividend @6% (15,324,000) (15,324,000)
Balance as at June 30, 2011 315,490,000 860,167,522 1,175,657,522
Total comprehensive income for the year 219,171,321 219,171,321
Issue of share capital 127,010,000 127,010,000
Balance as at June 30, 2012 442,500,000 1,079,338,843 1,521,838,843
Total comprehensive income for the year 275,949,261
Balance as at June 30, 2013 442,500,000 1,355,288,104 1,521,838,843
Total comprehensive income for the year 184,683,981 184,683,981
Issue of share capital 243,000,000 243,000,000
Balance as at June 30, 2014 685,500,000 1,539,972,085 2,225,472,085
Total comprehensive loss for the year (103,962,173) (103,962,173)
Balance as at June 30, 2015 685,500,000 1,436,009,912 2,121,509,912
Source: Company’s financials.
Exhibit 6.  Statement of Cash Flows from 2011 to 2015

2015 2014 2013 2012 2011

For the Year Ended June 30 Note Rupees Rupees Rupees Rupees Rupees
Cash Flows from Operating
Activities
Profit before taxation 12,218,444 405,837,713 385,643,982 305,498,733 341,245,387
Adjustment for non cash charges /
non operating items:
Depreciation on property, plant and 4.1.1 134,000,532 104,944,460 87,853,314 54,257,006 40,876,375
equipment
Amortization on intangible assets 17,078,723 20,021,141 13,729,350 26,702 26,400
Gain on sale of operating fixed assets (1,537,364) (10,920,198) (1,582,184) (1,042,742) (659,938)
Deferred gain (198,090) (510,286) (1,352,073) (1,254,538) (1,252,454)
Deferred loss – – 264,664 – –
Loss on sale and lease back of fixed 1,732,500 – – – –
assets
Other operating charges 643,076 29,846,220 27,476,527 21,772,347 24,729,463
Finance cost 136,981,993 54,260,175 45,038,707 15,704,065 22,534,671
288,701,370 197,641,512 171,428,305 89,462,840 86,254,517
Operating profit before working 300,919,814 603,479,225 557,072,287 394,961,573 427,499,904
capital changes
Cash flows from working capital
changes
Decrease/(Increase) in current assets
Stock in trade (469,937,190) (288,667,755) (166,781,860) (285,501,571) (300,812,102)
Trade debts 2,835,121 (1,609,169) 16,307,441 (40,038,778) (1,015,321)
Advances-Considered good (71,290,377) (380,114,883) (58,210,006) (57,128,257) (3,492,600)
Prepayments, mark up and other (40,825,432) (88,798,700) (24,150,264) (53,317,401) (13,176,924)
receivables
Balances with statutory authorities - (20,081,165) (21,945,017) (7,406,062) 3,724,729 –
sales tax
Increase/(Decrease) in current liabilities
Trade and other payables 114,506,546 236,941,827 (42,995,502) 245,174,846 178,536,965
Net cash used in working capital (484,792,497) (544,193,697) (283,236,253) (187,086,432) (139,959,982)
(Exhibit 6 continued)
(Exhibit 6 continued)

2015 2014 2013 2012 2011

For the Year Ended June 30 Note Rupees Rupees Rupees Rupees Rupees
Cash Flows from Operating
Activities
Cash generated from operations (183,872,683) 59,285,528 273,836,034 207,875,141 287,539,922
Less:
Taxes paid (142,919,568) (139,091,187) (83,328,505) (155,426,609) (147,202,002)
Dividends paid – – – – (15,324,000)
Other operating charges paid (29,720,759) (20,656,025) (16,363,554) (18,298,743) (19,663,417)
Finance cost paid (118,805,947) (48,234,897) (39,458,883) (14,238,122) (23,132,326)
(291,446,274) (207,982,109) (139,150,942) (187,963,474) (205,321,745)
Net cash generated from operating (475,318,957) (148,696,581) 134,685,092 19,911,667 82,218,177
activities

2015 2014 2013 2012 2011

For The Year Ended June 30 Rupees Rupees Rupees Rupees Rupees
Cash Flows from Investing Activities

Fixed capital expenditure (including capital (462,766,591) (305,751,817) (199,501,474) (171,840,082) (71,534,966)
work in progress)
Advance against capital expenditures 8,186,383 (8,186,383) – – –
Short term investments (32,451,167) (27,548,833) – – –
Increase in intangible assets (7,531,016) (18,688,511) (95,325,609) (36,270) –
Increase in long term deposits (16,264,888) (62,706,845) (13,289,981) (20,233,141) (5,472,110)
Receipt of loan due from associated (2,996,000) 614,444 3,976,147 16,221,770 43,162,433
undertaking
Proceeds from sale and lease back 12,363,500 – 17,856,500 17,000,000 29,259,000
Proceeds from sale of fixed assets 10,233,579 32,825,494 5,221,577 5,303,097 1,343,500
(Exhibit 6 continued)
(Exhibit 6 continued)

2015 2014 2013 2012 2011

For the Year Ended June 30 Note Rupees Rupees Rupees Rupees Rupees
Cash Flows from Operating
Activities
Net cash used in investing activities (491,226,200) (389,442,451) (281,062,840) (153,584,626) (3,242,143)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from long term loan 4,999,999 (60,000,000) 69,452,278 1,169,306 –
Issuance of share capital – 243,000,000 – 127,010,000 60,090,000
Proceeds from long term deposits 1,126,215 24,188,557 14,939,000 7,832,000 17,320,351
Repayment of lease liability (42,482,645) (48,102,817) (34,837,652) (22,672,690) (13,516,916)
Proceeds from short term borrowings 994,924,213 243,851,840 141,300,847 67,553,246 (117,931,872)
Net Cash generated from financing 958,567,782 402,937,580 190,854,473 180,891,862 (54,038,437)
activities
Net(decrease) /increase in cash and (7,977,375) (135,201,452) 44,476,725 47,218,903 24,937,597
cash equivalents
Cash and cash equivalents at (139,355,694) (4,154,242) 135,018,596 87,799,693 62,862,096
beginning of the year
Cash and cash equivalents at end of 34 (147,333,069) (139,355,694) 179,495,321 135,018,596 87,799,693
the year
Source: Company’s financials.
Dar and Alam 13

Following are excerpts9 from the company’s 2015 financial statements.

Exhibit 7. Notes to the Financial Statements

1. The company and its operations

Sefam (Private) Limited (the company) was incorporated in Pakistan in January 1989 as a private limited
company under the Companies Ordinance, 1984. by taking over the net assets of a registered firm. The
registered office of the Company is situated at 21-Waris road Lahore. The Company is principally engaged
in the manufacturing and retailing of embroidered cloth and plain cloth through its outlets.

2. Statement of compliance
These financial statements have been prepared in accordance with approved accounting standards as appli-
cable in Pakistan and the requirements of the Companies Ordinance, 1984. Approved accounting standards
comprise of such International Financial Reporting Standards (IFRS) issued by the International Accounting
Standards Board as are notified under the provisions of the Companies Ordinance 1984. Wherever the
requirements of the Companies Ordinance 1984 or directives Issued by the Securities and Exchange
Commission of Pakistan (SECP) differ with the requirements of these standards, the requirements of the
Companies Ordinance 1984 or the requirements of the said directives take precedence.
  As per SRO 929(1)/2015 issued by the (SECP), a non-listed company that has paid-up capital of `200
million or more or turnover of Rs.1 billion or more shall be categorized as a Large-Sized Company (LSC).
Every LSC is required to follow International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board as adopted by the Institute of Chartered Accountants of Pakistan for the
preparation of annual financial statements for the periods beginning on or after January 01, 2015.The com-
pany is already following International Financial Reporting Standards (IFRS) since previous years as an
Economically Significant Entity.

3. Significant Accounting Policies

3.1 Basis of preparation
These financial statements have been prepared under the historical cost convention modified by adjust-
ment of exchange difference
3.5 Stock in trade
These are valued at lower of cost and net realizable value. Cost determination basis is as under:

Raw material Moving average

Work-in process Average manufacturing cost (including an appropriate
portion of manufacturing overheads)
Finished Goods Average manufacturing cost

3.15 Taxation
Current
Provision for the current taxation is the higher of the amount computed on the taxable income at the cur-
rent tax rate after taking into account tax credits/rebates if any, and the minimum tax computed at the
prescribed rate on the turnover.
  Deferred tax is accounted for using the balance sheet liability method in respect of all temporary
differences arising from differences between the carrying amount of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of the taxable profit. Deferred tax
liabilities are generally recognized for all taxable temporary differences and deferred tax assets are
recognized to the extent that it is probable that taxable profits will be available against which the deductible
temporary differences, unused tax losses, and tax credits can.be utilized.
(Exhibit 7 continued)
14 Asian Journal of Management Cases

(Exhibit 7 continued)
  Deferred tax is accounted for using the balance sheet liability method in respect of all temporary differ-
ences arising from differences between the carrying amount of assets and liabilities in the financial state-
ments and the corresponding tax bases used in the computation of the taxable profit. Deferred tax liabilities
are generally recognized for all taxable differences and deferred tax assets are recognized to the extent that
it is probable that taxable profits will be available against which the deductible temporary differences, unused
tax losses, and tax credits can be utilized.

4. Property, plant and equipment

Note 2015 2014

Operating Fixed Assets 4.1 1,431,562,313 1,049,431,535
Capital Work In Progress 4.2 13,530,020 11,690,996
1,445,092,333 1,061,122,531

4.1 Operating fixed assets

Own 2015 2014
Land-Freehold 241,660,991 229,749,128
Building on Freehold Land 190,353,357 166,842,647
Plant & Machinery 42,016,466 34,918,828
Computers 90,393,413 83,172,070
Furniture & Fixtures 323,968,831 171,904,903
Office Equipment 175,781,616 121,260,485
Electric Equipment & Installations 146,300,863 82,545,553
Vehicles 60,666,579 32,878,637
Weapons & Fire Fighting Equipment 29,550 32,833
Library Books 47,812 53,125
Assets Subject to Finance Lease
Vehicles 106,265,247 110,138,393
Generator 54,077,588 15,934,933
1,431,562,313 1,049,431,535

4.2 Capital work in progress

2015 2014
Opening balance 11,690,996 4,088,176
Add: additions during the year
Civil Work-building 2,161,725 21,100,275
Plant & Machinery 840,000 2,096,240
Advance against intangible 6,942,205
3,001,725 30,138,720
14,692,721 34,226,896
Less: transferred during the year (1,162,701) (22,535,900)
13,530,020 11,690,996
(Exhibit 7 continued)
Dar and Alam 15

(Exhibit 7 continued)
7. Stock in trade

2015 2014
Raw material in hand 311,706,768 231,794,306
Work in process 114,588,629 121,715,566
Finished good 1,754,763,359 1,357,611,694

2,181,058,756 1,711,121,566

9.  Advances—Considered good

2015 2014
Advances to employees against salary 9.1 60,017,900 44,031,265
Due from associated undertaking - Current portion 9.2 27,500,000 27,500,000
Accrued income 138,767 150,000
Advances to Suppliers - Unsecured 569,535,383 535,030,094
Letter of credit 62,919,295 42,109,609
720,111,345 648,820,968

(9.1) These are unsecured but considered good by the management of the company
(9.2) DUE FROM ASSOCIATED UNDERTAKING
Due from associated undertaking 7.1 89,348,166 86,352,166
Less: Current portion 27,500,000 27,500,000
61,848,166 58,852,166

(6.1) This is unsecured but considered good by the management of the company

14.  Share capital

2015 2014
Authorized Rupees Rupees
200,000,000 (2014: 200,000,000) ordinary
shares of `10/- each 2,000,000,000 2,000,000,000
Issued, subscribed and paid-up
68,492,075 (2014: 68,492,075) ordinary
shares of `10/- each fully paid in cash 684,920,750 684,920,750
57,925 (2014: 57,925) ordinary shares of `10/-
each issued for consideration other than cash 579,250 579,250
685,500,000 685,500,000
(Exhibit 7 continued)
16 Asian Journal of Management Cases

(Exhibit 7 continued)
15. Long-term loan—Unsecured

2015 2014
Long term Loan - unsecured
- From directors 15,621,585 10,621,584
- From associate of the directors – –
15,621,585 10,621,584

This represents a loan from directors of the company. No portion of the loan is considered as a current liability as
management is of the view that no portion of the loan is payable in the next currency of the financial year.

16. Deferred taxation

2015 2014
Credit balances arising in respect of:
- Accelerated tax depreciation allowance 105,015,038 78,977,883
- Assets held under finance lease 52,230,556 42,286,254
Debit balances arising in respect of:
- Assets held under finance lease (41,117,966) (30,513,377)
- Intangible assets 1,790,773 1,337,299
117,918,401 92,088,059

18.  Liabilities against assets subject to finance lease

The rate of interest used as dicounting factor ranges from .57% to 1.29% (2014: 1.17% to 1.47%) per month.
The amount of future payments and period during which they fall due are:
2015 2014
Within one year 68,165,708 53,930,077
Within two to five years 74,645,689 50,782,789
142,811,397 104,712,866
Less: Future financial charges 16,583,155 13,739,499
Net lease obligation 18.1 126,228,242 90,973,367
Less: current portion taken as current liability 57,959,995 45,222,320
68,268,247 45,751,047

18.1 Break-up of net lease obligation

Within one year 57,959,995 45,222,320
Within two to five years 68,268,247 45,751,047
126,228,242 90,973,367
The rentals are payable in monthly and quarterly equal installments. In case of default of any payment an additional
charge at the rate ranging from 0.1% per day to 2% per month on overdue payments shall be paid. The Company
intends to exercise the option to purchase the assets at the expiry of lease term.
(Exhibit 7 continued)
Dar and Alam 17

(Exhibit 7 continued)
19.  Short term bank borrowings

2015 2014
Running finance 19.1 1,378,123,815 330,551,621
Morabaha finance 19.2 134,169,294 186,817,275
Bank over drawn 19.3 478,131,423 388,935,824
1,990,424,532 906,304,720
19. 1 This facility has been obtained from various banks against aggregate sanctioned limit of `1,982 million
(2014: `730 million). It carries mark up ranging from 1 months KIBOR plus 1.5% to 3 months KIBOR plus
1.75% and LIBOR plus 2%. (2014: 1 month KIBOR plus 1.5% to 3 months KIBOR plus 1.75% and LIBOR
plus 2%). The principal portion of these facilities is payable on demand and mark up on quarterly basis.
These running finance facilities are secured by first pari passu charged over the current assets of `1,433
million, equitable mortgage over the land and building and shops in the name of the company, charge on
the stocks, personal guarantees of the directors of the company and cross corporate guarantee of an
associated undertaking - Sarena Indusrtries and Embroidery Mills (Private) Limited.
19.2 This facility has been obtained from various banks against aggregate sanctioned limit of `450 million (2014:
`230 million). It carries mark up ranging from 3 months KIBOR plus 1.25% to 1.75% (2014: 3 months
KIBOR plus 1.5% to 1.75%) per annum. This facility is secured by first pari pasu charged over the current
assets of Rs.468 million with 25% margin, title of imported goods amounting to `30 million and personal
guarantees of the directors of the company
19.3 This overdrawn balance is due to issuance of cheques near the balance sheet date. However bank
statements show favourable balances of Rs. 8,125,040 (2014: 59,335,066).

20. Trade and other payables

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

21. Contingencies and commitments

Contingencies
A counter corporate guarantee given to the associated undertaking Sarena Industries and Embroidery Mills
(Private) Limited to different banks against the working capital finance limit.

Commitments
Commitments against irrevocable letter of credit amounting to `287.880 million (2014: `166.501 million)
(Exhibit 7 continued)
18 Asian Journal of Management Cases

(Exhibit 7 continued)
23.  Cost of sales

Cost of Sales 2015 2014

Raw and packing material consumed 3,692,833,717 3,587,536,304
Salaries, wages and benefits 1,081,374,415 854,834,214
Embroidery charges 700,497,982 638,361,948
Dyeing charges 261,503,346 207,628,601
Printing and sticker charges 203,819,398 126,895,307
Tailoring and stitching charges 86,397,101 17,910,708
Knitting and weaving charges – 456,892
Labour Commission 18,009,152 12,000,978
Electricity, gas and water 31,074,249 30,933,403
Vehicle running and maintenance 8,522,577 6,770,774
Repair and maintenance 37,233,638 34,878,869
Laundry and sample 3,988,921 4,526,897
Insurance 11,966,298 9,913,433
Carriage and freight 3,222,723 2,969,202
Rent, rates and taxes 70,288,516 37,379,780
Depreciation 53,600,213 41,977,784
Others 3,273,062 1,580,520
6,267,605,308 5,616,555,614
Less: Duty Draw back 345,172 587,395
6,267,260,136 5,615,968,219
Inventory effect of work in process
Opening stock 121,715,566 158,644,355
Closing stock (114,588,629) (121,715,566)
7,126,937 36,928,789
Inventory effect of finished goods
Opening stock 1,357,611,694 1,124,633,812
Closing stock (1,754,763,359) (1,357,611,694)
(397,151,665) (232,977,882)
5,877,235,408 5,419,919,126

24.  Distribution costs

Distribution Cost 2015 2014

Salaries and benefits 409,450,643 303,483,538
Rent, rates and taxes 629,864,430 333,117,658
Electricity, gas and water 81,640,081 61,298,174
Telephone, postage and courier 25,503,661 11,719,690
Printing and stationery 3,359,564 2,282,775
Traveling and conveyance 19,881,369 13,954,025
Entertainment 490,088 301,461
Repair and maintenance 99,106,164 103,585,311
(Exhibit 7 continued)
Dar and Alam 19

(Exhibit 7 continued)
Distribution Cost 2015 2014
Generator fuel and maintenance 39,998,206 30,439,968
Vehicle running and maintenance 1,926,330 1,055,147
Advertisement 456,022,184 324,914,644
Carriage outward 2,954,522 3,870,870
Clearing outward 3,677,733 2,980,961
Credit card charges 32,278,379 24,324,081
Packing material 32,726,252 38,599,337
Commission 420,358,777 452,351,814
Insurance 12,242,529 8,372,787
Fee and subscription 8,817,148 11,767,084
Security services 15,969,568 10,446,979
Amortization of intangible assets 16,508,819 19,692,014
Depreciation 40,200,160 31,483,338
Others 3,650,103 2,729,315
2,356,626,710 1,792,770,971

25. Administrative and general

Administrative and General 2015 2014

Directors’ remuneration 79,200,000 60,000,000
Salaries and benefits 368,154,451 298,111,439
Fuel and power 46,496,868 46,097,423
Telephone and postage 22,420,790 23,175,316
Traveling and conveyance 29,435,306 26,592,677
Printing and stationery 16,061,777 15,656,992
Fee and Subscription 5,875,666 12,451,331
Rent, rates and taxes 4,306,594 5,226,768
Insurance 8,715,240 5,762,764
Legal and professional 6,606,689 7,169,714
Auditors’ remueration 1,100,000 1,000,000
Newspapers and subscriptions 648,936 269,301
Entertainment 569,535 1,036,751
Repairs and maintenance 25,900,116 31,220,092
Vehicle running and maintenance 22,314,061 24,632,886
Donations 29,371,076 26,056,114
Amortization on intangible assets 569,904 329,127
Depreciation 40,200,160 31,483,338
Others 1,710,982 843,828
709,658,151 617,115,861
(Exhibit 7 continued)
20 Asian Journal of Management Cases

(Exhibit 7 continued)
26.  Other operating charges

Other operating charges 2015 2014

Workers’ profit participation fund 643,076 21,784,197
Workers’ welfare fund – 8,062,023
643,076 29,846,220

27. Finance cost

Finance Cost 2015 2014

Mark up on short term borrowings 119,055,940 41,643,502
Lease finance charges 11,506,658 8,929,189
Mark up on loan from directors 1,683,288 –
Bank charges 4,736,107 3,687,484
136,981,993 54,260,175

28. Other operating income

28 Other operating income 2015 2014

Gain on sale of fixed assets 1,537,364 10,920,198
Profit on PLS account 846,933 799,589
Interest on due from associated undertaking 1,650,114 5,947,420
Rental income 131,298 150,000
Exchange Gain/(loss) 2,207,874 (1,612,499)
Deferred gain 198,090 510,286
Loss on sale and lease back of fixed assets (1,732,500) –
Loss on insurance claim (374,186) (468,298)
Agency income 13,830,000 19,265,000
Capital gain 474,174 2,549,178
Others 1,986,703 1,883,775
20,755,864 39,944,649

29. Taxation (Exhibit 7 continued)

29 Taxation 2015 2014

For the year 89,435,275 125,473,713
Prior year 915,000 3,591,960
Deferred 25,830,342 92,088,059
116,180,617 221,153,732

29.1 Relationship between tax expense and accounting profit 2015 2014
Profit before taxation 12,218,444 405,837,713
Tax at the applicable rate of 33% (2014: 34%) 4,032,087 137,984,822
Net tax effect of items taxed at different rate (2,999,604) (2,999,604)
(Exhibit 7 continued)
Dar and Alam 21

(Exhibit 7 continued)
Impact of change in tax rate 90,451,360 4,058,377
Impact of tax credits (1,133,568) (9,977,922)
Others including deferred tax 25,830,342 92,088,059
116,180,617 221,153,732

30. Earnings per share

Earnings per share 2015 2014

Profit for the year (103,962,173) 184,683,981
Number of shares
Weighted average numbers of ordinary shares outstanding 68,550,000 68,550,000
during the year
Earning per share (in rupees) (1.52) 2.69

34.  Cash and cash equivalents

30 Cash and Cash Equivalents 2015 2014

Cash and bank balances 13 330,798,354 249,580,130
Overdrawn 19.3 (478,131,423) (388,935,824)
(147,333,069) (139,355,694)
Source: Company’s financials.

Notes
1. Sefam website: http://sefam.com/history.php, accessed May 2018.
2. A thin cotton fabric especially suited to the hot summer weather in Pakistan.
3. Retail Pro is a complete retail management solution providing not only point of sale but also store operations
management, customer management, back office, analytics, reporting and more.
4. Sefam website: http://sefam.com/aboutus.php#, accessed April 2016.
5. ChenOne website: http://www.chenone.com.pk/, accessed April 2016.
6. Khaadi Website: https://www.khaadi.com/pk/about-us, accessed April 2016.
7. Gul Ahmed Website: https://www.gulahmedshop.com/about-us, accessed April 2016.
8. AlKaram Website: http://www.alkaram.com/Corporate/index.html, accessed April 2016.
9. Note numbers indicate actual reference note in the financial statements not all of which are reproduced here.