Abstract
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 available 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, 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 countrywide 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 advertising on its part in its earlier days, Bareeze was clearly a price setter with no serious competition due to its distinctive quality. This was still true in 2015, especially as the flagship Bareeze brand had stayed out of the cut-throat lawn sector. 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 comprised 67 per cent of total equity on 30 June 2015) and a series of equity injections over the years with the largest (PKR 243 million) and the most recent one in 2014. The last dividend distribution was in 2011. Despite restricting dividends, the company found itself having to resort to long-term borrowings, albeit interest-free and from its own directors or their associates. There had also been a consistent rising trend in short-term borrowings since 2012.
After the acquisition of land in 2014, which cost PKR 115 million, the company was planning a capital expansion project to enhance its offices to cater to the increased size of the business. Despite revenue growth, the company faced diminishing profitability, and a detailed analysis was required to assess the feasibility of extending long-term credit.
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 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 pro 3 (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.
Footnotes
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.
Appendix
Following are excerpts 9 from the company’s 2015 financial statements.
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.
These financial statements have been prepared in accordance with approved accounting standards as applicable 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 company is already following International Financial Reporting Standards (IFRS) since previous years as an Economically Significant Entity.
3.1 Basis of preparation
These financial statements have been prepared under the historical cost convention modified by adjustment 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:
3.15 Taxation
Current
Provision for the current taxation is the higher of the amount computed on the taxable income at the current 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.
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 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.
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.
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)