The Comparative Study of Textile and Cement Sector of Pakistan

The purpose of this study is to find the internal and external determinants of profitability of textile and cement sector of Pakistan. Secondary data is collected from “Financial Statement Analysis of companies (non-financial) listed at Karachi Stock Exchange” for the period of 2005-2010 by using the random and convenient sampling technique. Dependent variables consist of ROA and ROE and independent variables are liquidity, leverage, growth, capital intensity, size and market share. Out of the six variables, first four represents the internal factors and remaining two are external factors. Panel data analysis is applied to find the relationship among dependent and independent variables. The results of this study indicate that the liquidity and leverage impact significantly in the textile sector but growth, capital intensity, size and market share have no relevance with the profitability of this sector. In case of cement sector, liquidity, leverage and growth shows considerable effect while other factors are insignificant. This study is useful for the management of these sectors while carrying out any decision regarding internal and external variables.


Introduction
Competence of the business enterprise to create earnings through all company actions is referred to as profitability. Making a profit is the sole purpose of any business. Most of the time, term profit is used in the same meaning of profitability. Though they are equally inter-reliant and strongly correlated but perform different functions in business. So, in reality these two terms are very much different. Profitability refers to the relative theory whereas profit is considered to be the absolute phrase. Pakistan's economic growth is widely impacted by the textile and cement sectors. These are the major contributors of economic development and many individuals from all over the Pakistan got employment from these industries. However, from some period, these areas of industry encounter some challenges that are hindrance for their effectiveness and therefore development of the country's financial system. Textile industry was leading export industry of Pakistan by way of readymade garments and hosiery funding 544 billion PKR to total trade conferring to the 2018-19 Pakistan Economic Survey studied by Gallup Pakistan. But when its total exports which is 2,263 billion is linked to the total imports that are 5,371 billion, we come to the conclusion that our trade sector requires serious measures for growth (Gallup & Gilani, 2019). Budgetary measures and improbability in exchange rate adversely impacted the exports said by the exporters, because there is hurried cost of raw material whereas liquidity crisis intensified because of non-issuance of stuck-up repayments (Rizvi, 2019). Production of cement in Pakistan is decreased in June (2910 Thousands of tonnes) as compared to May of 2019 (3537 Thousands of Tonnes) (Tradingeconomics, 2019).

Significance of Study:
The objective of this article is the relative investigation of Pakistan's textile and cement industries by checking the different variables impact on the firm's profitability. In the previous studies, much work is done on the determinants of profitability of different sectors worldwide especially banks. Reports are published in Pakistan about these sectors in which their overall factors for growth and decline according to government regulations are discussed which is only the one external factor of profitability but little work is done regarding the effects of internal and external determinants of profitability with descriptive statistics about textile sector and cement sector which are the backbone of our economy. The significant positive results pointed out by (Molyneux & Thornton, 1992;Bourke, 1989;Kwast & John, 1982;Short, 1979 andHeggested, 1977). Find support for the significant and negative effect of industry concentration on firm's productivity. He investigated external and internal factor's effect on the profitability of Class I railroads from 1996-2009 by constructing an econometric model. As the little work is done on the textile sector and cement sector in terms of profitability in Pakistan so, this paper will provide the foundation for this kind of study and helps these sectors to use the results of this research in formulating their plans. The growth charts of textile and cement sectors are as follows: The left behind portion of the research paper consisted of literature review under section 2, section 3 comprised of data and methodology, section 4 consisted of empirical findings and conclusion is explained in section 5.

Literature Review
Researchers in the previous studies divided determinants of profitability in two categories i.e. external determinants and internal determinants of profitability. The results indicate that the money supply and profits are positively and significantly related. He also recommended that growth in total market might produce possibility for banks to produce superior profits, if predominantly linked with entry obstacles. The factors which are believed to be away from the power of organization are external variables. The variables which are under the command of administration are internal determinants of profitability and these determinants are generally organized further in financial statement factors and non-financial statement factors.

External Factors of Profitability:
Relationship among profitability and growth in total market was investigated by Bourke (1989) and he used the growth in money supply as the proxy for market growth. The results indicate that the money supply and profits are positively and significantly related. He also recommended that growth in total market might produce possibility for banks to produce superior profits, if predominantly linked with entry obstacles. Molyneux & Thornton (1992) also found similar results i.e. significant positive relationship of growth in total market and profitability. Raza, Farooq, & Khan (2011) carried out a research in profitability and its relationship with various factors of the firm under the title of "Firm and Industry Effects on Firm Profitability: an empirical analysis of KSE". He used financial statements of the firms, published by state bank of Pakistan from 2004-2009. Allen, Shaik, Myles, & Yeboah (2011, Independent variables consist of market share, industry effect and firm effect whereas profitability measures are ROA and ROE. He used regression technique to find the results which indicate that the dependent and independent variables are significantly related. Kessides (1990) finds the considerable affiliation of profitability with the market share by estimating oligopoly as a precise model. Number and size of companies in the marketplace refers to concentration of industry. Various researchers inspected the influence of industry concentration on the organization's profitability. Mixed results are found by all of them i.e. positive, negative and insignificant. Internal Factors of Profitability: Ahmed & Khababa (1999) conducted a research on commercial banks in Saudi Arabia to assess their financial performance. For the analyses they incorporated both pooled time series data and time series data of 1987-1992. Major limitations of their research are the availability and short time series data. The profitability proxies are return on equity, earning per share and return on assets and checked its dependence on market size, concentration and business risk by employing the regression model. The results from all the three simulations indicate that company risk and bank size are major variables that explains financial performance. The study performed by Nagy, Newman, & Nelson (2009) carried out the research by taking the financial statement variables to assess the profitability of the firm. These variables include sales, 3-year return and prior year's net profit margin, firm's sector, reinvestment rate, dollar value of capital expenditures, debt-to-equity level and level of acquisition activity.
Profitability measure is ROA of the company. He concludes that these all factors are significant in shaping the ROA. Variables such as loan and deposit compositions and working costs believed to be a management controlled factors. Bank cost had the largest power to explain bank's profitability and then loan and bank's deposit composition (Fraser, Philips, & Rose, 1974). Influence of location on company's financial performance is determined by the (Vernon, 1971 andKwast &John, 1982). The outcome revealed that the location is significantly related with profitability. Many authors perform research on financial performance regarding natural environment and they all find positive results and give reasons for their conclusions. Such as Shrivastava (1995); Dechant, Altman, Downing, & Keeney (1994) and Hart (1995) suggest that hands-on to environmental issues increases the reliability of government, employees, customers and all other key stakeholders, develops the firm image and helps to keep away from harmful response of key stakeholders.

Methodology
This article tries to discover the internal and external determinants of profitability of textile and cement sector. For this purpose data of 157 companies of textile sector and 19 companies of cement sector are taken from "Financial Statement Analysis of companies (non-financial) listed at Karachi Stock Exchange" comprising the years 2005-2010. I take only non-financial sector because of the importance of textile and cement sectors for the economy of Pakistan. As textile and cement industries faced extreme recession in the period from 2006 to 2010 so the data examined in this study comprises the years 2005 to 2010 for better understanding and to see the impact of extreme recession in textile and cement sectors on these variables. Secondary facts are used through random sampling technique and convenient sampling technique. Moreover, panel data set is used and process which is used for decision-making for the panel data is that proposed by (Dougherty, 2016). (1) ROA it= β0+ β1(liqit) + β2(levit) + β3(git) + β4(cintit) + β5(szit) + β5(msit) + uit Random effect model: (2) ROA it= β0+ β1(liqit) + β2(levit) + β3(git) + β4(cintit) + β5(szit) + β5(msit) + uit+ ε it Model 2: Fixed effect model: (1) ROE it= β0+ β1(liqit) + β2(levit) + β3(git) + β4(cintit) + β5(szit) + β5(msit) + uit Random effect model: (2) ROE it= β0+ β1(liqit) + β2(levit) + β3(git) + β4(cintit) + β5(szit) + β5 ( Liquidity: The potential rationale for organizations to keep liquid assets is four according to the literature of finance and economics. It includes the agency reason (Jensen, 1986), the tax reason (Foley, C. Fritz;Hartzell, Jay C;Titman, Sheridan;Twite, Garry, 2007), the precautionary reason (Opler, Pinkowitz, Stulz, & Williamson, 1999) and the transaction reason (Miller & Orr, 1966). Significant effect of liquidity and profitability is inspected by (Singh & Pandey, 2008) during the study about Hindalco Industries Limited. Considerable relationship was found among working capital to total asset; receivable turnover ratio, current ratio and liquid ratio with the effectiveness of Hindalco Industries Limited. Saleem & Rehman (2011) also found the noteworthy impact of all the liquidity ratios (liquid ratio, current ratio and quick ratio) on the organization's financial positions. This study used the current ratio as a proxy for liquidity which is calculated as the ratio of current assets to current liabilities.
Leverage or Capital Structure: Organization's capital structure is defined as the arrangement of long-term debts, preference shares and equity shares. Negative relationship was found by Bagchi & Khamrui (2012) in his paper in which he investigated the linkage among working capital management and organization's profitability. His had taken 10 mostly used buyer goods in India from 2001-2010. Return on asset is used as a profitability measure and independent variables were debt-equity ratio, cash conversion cycle, interest coverage ratio, age of debtors, age of creditors and age of inventory. The results showed negative relationship between profitability and both the debt and working capital factors. This study uses the debt-equity ratio as a proxy for leverage.
Growth: Growth means enhancement in the value of the deal with the passage of time. It may be calculated as cash or non-cash such as intangible assets. Hayajneh & Yassine (2011) carried out a research to find the linkage among working capital efficiency and profitability. Research also includes the variables of size, growth and liquidity. He studied 53 Jordanian industrial organizations given in Amman Exchange Market during the duration of 2000 to 2006. Outcomes suggest an affirmative and significant association of sales growth, size and liquidity in relation to profitability of the firm while it shows negative relationship with working capital variables. This research paper uses the substitution for growth is ratio of intangible assets/tangible assets.
Capital Intensity: Capital intensity deals with the use and management of fixed assets and it is the amount of real or fixed assets given relative to other factors of production, particularly labor. Mean value of ROA means that the average company in textile sector receives 0.99085% of return as percentage of its assets. Lee (2010) examined the connection among profitability and capital intensity for the U.S. restaurant industry for the period of 2000-2008 and concluded the negative connection among them. In this study total asset over sales revenue is taken in the place of capital intensity.
Size: It is believed that the firm's profitability is significantly affected by the firm's size. Khan, Jawaid, Arif, & Khan (2012) tries to look for the relationship among working capital management and profitability of four Pakistani sectors i.e. sugar and allied, chemical, engineering and textile for the duration of 2004-2009 by taking the cross sectional data. Variables of this research include debt ratio, average collection period, firm size, current ratio, inventory turnover and average payment period. Author suggests that firm's financial performance is significantly affected by firm size, current ratio, and inventory turnover in all sectors. In this study, log of sales is taken to find the impact of size on profitability.
Market Share: It indicates the proportion of a dominence in the marketplace by a particular company or product. Genchev (2012) researched to find the Bulgarian banks' impacted factors. For this purpose 22 banks were taken for the duration of 2006-2010 and variables include market share and concentration ratio. Return on equity is considered as the profitability measurement. Empirical results specified the statistically considerable and positive interconnection among market share and profitability while concentration shows no relationship with profitability. In this study, the proxy used for market share is assets/total assets of industry.
Hypothesis: In order to find the impact of internal and external factors on the profitability of textile and cement sector of Pakistan, following hypothesis are developed. Liquidity H0 = liquidity has no positive impact on the profitability of textile and cement sectors H1 = liquidity has a positive impact on the profitability of textile and cement sectors Leverage H0 = leverage has no negative impact on the profitability of textile and cement sectors H1 = leverage has a negative impact on the profitability of textile and cement sectors Growth H0 = growth has no positive impact on the profitability of textile and cement sectors H1 = growth has a positive impact on the profitability of textile and cement sectors Capital Intensity H0 = capital intensity has no negative impact on the profitability of textile and cement sectors H1 = capital intensity has a negative impact on the profitability of textile and cement sectors Size H0 = size has no positive impact on the profitability of textile and cement sectors H1 = size has a positive impact on the profitability of textile and cement sectors Market Share H0 = market share has no positive impact on the profitability of textile and cement sectors H1 = market share has a positive impact on the profitability of textile and cement sectors

Empirical Results
The   Coefficients with significant at 1%= *, 5%= **, 10%= *** level of significance. Table 2 presents the correlation among the variables. Correlation matrix shows the relationship and detects the multicollinearity among the variables. This table shows that the liquidity, leverage, size and market share has a positive impact on ROA while these variables show negative relationship with ROE. Both the models indicate that the model is good fit as f-statistic is 1.88 with significance at 10% level in fixed effect model and Wald chi 2 is 81.17 with significant at 1% level. Within R-square is greater in fixed effect model while between and overall R-square is greater in random effect model. Growth and capital intensity has a negative relation with both ROA and ROE. Secondly, no multicollinearity exists among the independent variables as market share has the highest coefficient which is 0.5757 with significant that is less than 0.8 which is according to the rule of thumb is acceptable in case of significance among independent variables. Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed). (ISSN 2220-3796    R-square within = 0.0639, between = 0.1323, and overall = 0.0579, Wald chi 2 = 81.17, and Prob. > chi 2 = 0.0000. Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed). -.1179607 1.197832 -0.10 0.922 R-square within = 0.8111, between = 0.7474, and overall = 0.8012, Wald chi 2 = 1929.83, and Prob. > chi 2 = 0.0000. Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed).   This table shows that all the variables have 110 observations and the average age of ROA is 2.71246% with standard deviation of 12.83478%. It means that the panel is dispersed from -10.12232% to 15.54724% and average value signify that the average firm in cement sector gets 2.71246% return as percentage of its assets. Its minimum value indicate the existence of firm that earns loss of -24.7702% as percentage of its assets and it is the very weak firm in this sector and maximum value represents the extraordinary firm in the market that earns 43.82894% return as percentage of its assets. Similarly the mean, standard deviation, minimum and maximum values for other dependent and independent variables are shown in this table. Coefficients with significant at 1%= *, 5%= **, 10%= *** level of significance.

Information Management and Business Review
According to table 11 liquidity, size and market share are positively correlated with ROA and leverage, growth and capital intensity negatively linked with ROA and in case of ROE, only leverage has a negative relationship with profitability while all other variables shows positive behavior towards profitability. In case of multicollinearity the largest coefficient is of market share and size i.e. 0.6563 with significance which is less than 0.8 which shows no multicollinearity. So, regression can be run on these models. .3337747 0.78 0.447 R-square within = 0.2727, between = 0.0028, and overall = 0.0591, F statistics = 9.09, and Prob. > F = 0.0001. Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed). R-square within = 0.1757, between = 0.6775, and overall = 0.3952, Wald chi 2 = 172.18, and Prob. > chi 2 = 0.0000. Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed).  .9065111 0.84 0.411 R-square within = 0.9936, between = 0.9577, and overall = 0.9872, F statistics = 1.78e+06, and Prob. > F = 0.0000. Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed). R-square within = 0.9931, between = 0.9801, and overall = 0.9909, Wald chi 2 = 3.15e+06, and Prob. > chi 2 = 0.0000. Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed). Market share is negative in cement sector and in model 1 of textile sector but it is irrelevant in all the models. From the previous text, (Boulding & Staelin, 1990) found an insignificant results for market share and profitability. In random effect model liquidity and leverage are significant at 5% and 1% level of significance respectively and rests of the variables are insignificant. Model is god fit as f-statistic and Wald chi 2 is significant at 1% level of significance. Within R-square is greater in fixed effect model, whereas between and overall R-square is greater in random effect model. In order to check that results of which model is used, hausman test is applied and it shows the favorable behavior towards fixed effect model as chi 2 is 14.84 which is significant at 5% level of significance. .09* 1.78e+06* Variable is significant at * 1, ** 5, and ***10% level of significance (two-tailed).

Interpretation, Discussion and Conclusion
According to table 4.18, liquidity is positive in all cases and shows the significant behavior with profitability except in model 2 of textile sector the positive and significant behavior of liquidity is according to the hypothesis and consistent with the previous research such as the researches of (Saleem &Rehman, 2011 andNandi, 2012) as well as the positive and insignificant results of liquidity were also found by (Nandi, 2012) while conducting his research in Bharat Heavy Electrical Ltd for a period of 11 years. In case of leverage or capital structure, it is negative and significant in both the models of textile and cement sector. These results are also according to the hypothesis of this thesis and same as some of the previous authors found in their studies such as (Hayajneh & Yassine, 2011;Şamiloğlu & Demirgüneş, 2008;Bagchi &Khamrui, 2012 andObert &Olawale, 2010). Growth is positive and significant only in case of cement sector as per the hypothesis but in case of textile sector, in model 1 it is positive but insignificant and in model 2 it is negative and insignificant. Insignificant behavior of growth in textile sector shows that it has no relationship with profitability. Both types of results have some resemblance with the previous literature such as positive and significant results found by (Hayajneh & Yassine, 2011;Şamiloğlu & Demirgüneş, 2008& Coad, 2007. No relationship among growth and profitability was found by (Fitzsimmons, Jason R;Steffens, Paul;Douglas, Evan J, 2005). Capital intensity is negative in both of the models of cement sector and in model 2 of textile sector but it shows insignificant behavior with profitability in both the sectors. It is not according to the hypothesis and in the earlier studies (Lucius, Harold W;Habte-Giorgis, Berhe;Lee, Jooh, 2008) found no connection of capital intensity with return on asset. Size of the firm is positive in case of textile sector and negative in cement sector but have insignificant results. In the earlier studies Şamiloğlu & Demirgüneş (2008) and Molyneux, Philip, William, & John (1994) investigated no connection among size and profitability. In random effect model coefficients of liquidity from the above discussion, it is found that the liquidity and leverage considerably influences the textile sector but capital intensity, growth, size and market share shows no affiliation with profitability of this sector. In case of cement sector, liquidity, leverage and growth have a significant impact on profitability but capital intensity, size and market share not affects the profitability of this sector. So, we conclude that in general the internal factors affect the profitability of these sectors but external factors have no concern with these sectors.

Conclusion
The textile business is considered as the major and essential sector of Pakistan. It has the main role in contributing towards employment, exports and country's GDP. For the economy of Pakistan, it acts as the backbone. Out of total manufacturing of Pakistan, textile sector contains 38%. Cement industry is also the very important sector of Pakistan as it has the very critical and essential role in the socio-economic improvement. Growth in this sector is an indicator for monitory action. This study has been undertaken to scrutinize the internal and external determinants of profitability of textile and cement sector of Pakistan. Data is collected through secondary source which is "Financial Statement Analysis of companies (non-financial) listed at Karachi Stock Exchange" from 2005-2010 as this is the period of extreme recession for both the industries. The results of the study indicate the significant behavior of internal factors whereas outside factors are irrelevant from the profitability of textile and cement sectors as the liquidity and leverage shows much effect on profitability in case of textile sector and in cement sector, with the liquidity and leverage, growth as well affects significantly but capital intensity, size and market share shows insignificant behavior.
This study is useful for the management of textile and cement sectors as well as the investors that it provides information about the factors at which the management should emphasize such as the management should not need to worry about the size and market share of the industry as well as capital intensity is also not a problem for these sectors. It is recommended to the firm managers that they should concentrate on working capital management to ensure the sound liquidity position of the company. They should also focus on the leverage as it is negative in all cases which mean that industry's return on equity share is less than the cost of borrowing money. This study is also useful for the people who want to invest in these sectors. Moreover due to the comparative and empirical nature of this study, upcoming investigators will also find it useful. Further, they can reproduce the results of this study on other industries and also explanation for the irrelevant performance of external factors for these industries can also be the next topic for future researchers. Restrictions for this study are the use of limited variables and shorter time period as important external variables are overlooked like inflation, industry concentration and regulation etc.