Secondary Analysis of Pakistan’s Furniture Sector

Industry AnalysisFurniture Sector of Pakistan
Course: Analysis of Pakistani Industries
Assignment: Secondary Research



Furniture Sector Pakistan


  • History dates back to as long as 20th century, the furniture design is a combination of eastern and western style, due to the shared history with British.
  • There are ancient traditional values attached to the furniture in a house in our society. Items like, the old ‘charpais’ (string beds), inlaid ‘door jambs’, handcrafted ‘almaris’ (cupboards), ornate ‘jhulas’ (swings) and grandfather’s wooden ‘kursi’ (chair), wooden ‘takht’ (divans), and so on, have values attached. Moreover, due to the tradition of gifting furniture when marrying off daughters, the furniture craftsmen were always deemed as a significant part of the society.
  • Considered as a non-organized Small Scale Cottage industry.
  • The export of furniture which was worth US $3.46 million in 1995-96 decreased to US $3.33 million in 1997-98.
  • A growing trend towards contemporary furniture and posh furniture brands started in 1983 with the establishment of first brand ‘Vogue’ by Neelam Mawaz.
  • According to the PTDA, there are about 700 manufacturing units in the country.
  • These units are operating on the basis of single shift/300 days per annum.
  • 8,000 people (approx.) are directly and indirectly attached with this occupation
  • Strong historical background of craftsmen
  • The leading furniture making areas of Pakistan are Gujrat, Peshawar, Lahore and Karachi and Chiniot.
  • Wooden furniture forms 95% of the total furniture market in Pakistan.
  • The British retail chain Harrods sells some Pakistani furniture at its outlets.
  • Chiniot in Pakistan is well known throughout the word for its beautiful wood carvings and brass inlays. Its furniture is better in quality than that of other areas of the country.
  • This industry, combined with the handicraft industry, is employing about 50,000 people.
  • The demand for Pakistani furniture has been rising constantly. It has bright prospects to export more than $1 billion worth of furniture annually in the international furniture market.




  • The share of wooden furniture around the world is 77% followed by metal furniture 17% and plastic furniture at 6%.
  • Italy is the world’s biggest exporter of furniture followed by Germany and Canada. United States is the biggest importer of wooden furniture followed by Germany and France.
  • Pakistan’s world share is insignificant despite craftsmanship.




Raw materials:

  • Chipboard: imported chipboard is used in manufacturing bedroom sets, which sell the most.
  • Timber
  • Foam
  • Polish chemicals materials
  • Color paints
  • Hard ware
  • Nails
  • Screws
  • Glue/solution,
  • Spirit,
  • Thinner
  • Lacquer
  • Sealer
  • Hardener


  • Forests in Pakistan cover about 2% of the total area.
  • The best wood used in Sheesham/ Rosewood. 80 % of Pakistani furniture market is dependent on it.
  • Shisham (Dalbergia sissoo) is also commonly known as “Tali” in different areas of Pakistan and internationally it is known as “Indian rose wood” and Bombay black wood.
  • It grows almost everywhere in plains of Pakistan.
  • It varies considerably in size according to locality. Under good conditions it reaches a height of 25m with a bole early straight, clean, cylindrical having an average length of about 6m and diameter upto 1.5m.
  • The average time that Sheesham takes to grow is 50 years.
  • Reserves of Sheesham have decreased by 50 % in the last 5 years.
  • Alternative use of Sheesham; low value added or firewood by timber mafia.
  • Due to decreased supply, the prices have gone up.
  • Swati and Peshawari furniture is made from oak, deodar and partial wood, the wood-carvers of Azad Kashmir and some parts of the Frontier province use walnut wood.
  • Furniture markets are getting wood from timber markets, forest department and private farms.
  • Other types of wood used in manufacturing furniture are: . Teak wood . Walnut wood . Keekar wood.


  • Pakistan has been gifted with valuable craftsmanship e.g. Carved Sheesham tables are the specialty of the craftsman of Chiniot (Punjab)
  • The workers are usually unaware of the procedural standards and quality control requirements of the international market.
  • Wood seasoning facility center is available in Pakistan
  • The labor required for manufacturing process is easily available on daily wages, per unit basis and permanently employed.


  • The tools usually used are outdated and obsolete. They are locally made. Most of the work is performed through manual labor.


Advanced Factors

  • Training: Lack of educated, certified and professionally trained work force.
  • R&D: People do come up with innovative ideas and designs but no proper R&D facilities are available.
  • There is a constraint of technology i.e. improvised machinery in the region due to their high import price.
  • Few creative personnel are employed in the furniture industry due to lack of local demand and payoffs.



Wood is cut into different sizes of blocks and slabs. If the wood purchased is not seasoned then these blocks/slices are seasoned through different processes, namely:

  1. . Condensation
  2. . Boiler System
  • Vaccum system
  • Seasoning through putting the wood slices under normal environmental temperature for considerable duration.

Before start of manufacturing of any furniture product a desired design is selected. Selection of elegant design is important to ensure attractive finished product.

The seasoned wood blocks are cut into desired shape and slices according to the requirement of design. The slices of wood are molded into the desired shape according to the design. Once the different pieces are carved & molded than these parts/pieces are assembled or fixed together to give the shape to the final product.

Assembled product is grind to make the surface smooth. Once the surface is smooth, finishing material is applied to make the surface ready for paint or polish. After the base is prepared final finishing is applied depending on requirement in term of paint/polish. Upholstery of fabric is carried out according requirement of design.



Local Demand

  • Most of the local demand comes from hotels, restaurants, and public facilities.
  • Other demands include office furniture market which consists almost entirely of metal furniture,
  • Furniture items produced in Sindh comprise of ordinary chairs, tables, and other items like doors and windows and sold internally because of the simplicity of design and heavy weight.
  • The market is divided into home use and contract markets. The contract market constitutes those units that deal with supplies to hotels, restaurants, offices and public facilities.
  • More than 80 percent of the furniture demand in the country is met by the Chinioti furniture.
  • With the rapid increase in the development of new housing schemes, the increased demand of wooden furniture is anticipated
  • All Pakistan Furniture Exporters Association is established.
  • The major buyers of the Pakistani furniture are the UK, USA, Sri Lanka, the Gulf countries like Dubai, Saudi Arabia, Oman, Kuwait, etc.
  • The United States buys mostly bedroom furniture. UK and the Gulf countries import kitchen furniture and office furniture.
  • The demand of wooden furniture in the International market is increasing
  • Gradually at an annual average rate of 4 percent (Statistical Division of Pakistan).
  • Most players in the furniture market seem to be unaware of social compliance and environmental issues worldwide.
  • Karachi leads in terms of exports, followed closely by Lahore and Peshawar.
  • Pakistan’s exports kept increasing by 10 percent annually until 2007-08. However, the past decade can be considered as an opportunity lost for the nascent industry.
  • A few years back, an exhibition on furniture was conducted by then commerce minister Razzaq Dawood in Europe which attracted the attention of many Asian art craft lovers, and furniture manufacturers back home got hefty orders which could not be met owing to scale limitations.
  • Lack of these attributed to sudden decline in exports during testing times. In FY08, Pakistan exported furniture worth $12 million, while the amount fell to $9 million in 2009 and further declined to around $8 million in 2010. There are many other reasons for this decline too.
  • On a global level, the image of Pakistan in the furniture market is bad. Foreign firms do not trust Pakistani companies because the latter often fail to meet quality standards. Resultantly, these firms end up getting fewer orders. The government itself pays little attention to the problems faced by this industry. The fact of the matter is that there is a dire need to formulate a holistic plan of action to first make this industry sustainable, and later to help it foster and gain recognition on an international level. Otherwise, it’s curtains for this industry.



Supporting and related industries

  • Policy makers. Easy access of credit, tax holidays on expansion, frequent road shows and visits to international exhibitions, along with assistance from government officials for marketing furniture in Europe are some of the initiatives that can benefit the industry.
  • There are several other reasons for this industry’s current drawback. To start with, the cost of transport associated with the industry has increased manifold due to a significant rise in the fuel prices. The cost of labor too has increased without an increase in its quality. Even in this era of technological progress, at least 98 percent of manufacturers are using traditional methods in the furniture industry. The latest technology, hence, is not being used at all.
  • Pakistan’s wooden furniture industry has a great export potential, and in quality is inferior to none. The domestic market is very vast and varied. However, Japan’s import market has great potential, too. No tariffs are levied on the furniture or its components. The largest obstacle to imports of furniture into Japan is size. Western furniture is often rejected because it is too large for the Japanese consumers.
  • Traditionally, Japan’s furniture market has been heavily dependent on the so-called box furniture. This type of market, however, is gradually fading away. Instead, the focus of home-use furniture demand is shifting to furniture sets for reception rooms. The increasing adoption of western housing and interior designs will further accelerate this trend. Many single-family dwellings and condominiums come with built- in furniture – such as walk-in closets. The Japanese consumers have a traditional attachment to wood. They dislike the presence of knots in the furniture surface, and expect manufacturers to perform careful finishing to all parts. Hence, products that emphasize the beauty of the wood grain will be an important key to success.



  • The furniture industry has recently gone into aggressive marketing strategy in order to increase exports.
  • 95% of the furniture industry is dominated by wooden furniture manufacturing.
  • The two main types of wood furniture industry are cottage and small scale industry. They use obsolete machinery and emphasis on manual labor.
  • Wooden furniture is manufactured in Pakistan by a large number of cottage industries, spread over rural areas, small towns and cities.
  • Today, a large quantity of wooden furniture is manufactured in Pakistan at the cottage level. The environment and conditions being favorable, the wooden furniture industry holds out a bright scope for further expansion.
  • A number of families in Hala, Kashmore, Khanewal and Dera Ghazi Khan have stuck to the traditional workmanship, despite sharp, fluctuations in the taste of customers.
  • The wood carvers’ skills are predominantly visible in furniture making, apart from carving wooden ceilings, wooden panels, doors and windows.
  • The oldest single style evolved, has been evolved in the NWFP, where craftsmen design massive pieces, beds, desks, chairs, stands, lamps etc.
  • Swati furniture has basically broad sets, heavy legs (chairs) and geometric floral designs, carved in various styles of woodwork. It has been developed in the Peshawar valley.
  • Jacquard work is a popular traditional craft of Sindh. The articles, such as table lamps, chairs, and sofa sets, produced by the lacquer industries of Hala in Hyderabad district and Kashmore in the Jacobabad district, are very popular. There was a time, when villagers used lacquer work furniture only- bed legs, low chairs, in the modern homes of the rich in cities.
  • Furniture items produced in Sindh and parts of Punjab are more cottage industry based and for domestic use only.



  • Exporters are suffering manifold problems while local manufacturers are facing challenges due to heavy imports of furniture. Chinese furniture has also hit the local industry by 70 percent and the sales of locally manufactured household furniture have gone down by 30 percent.
  • Timber production on the other hand has gone down drastically because of unchecked deforestation.
  • About sixty percent raw material used in furniture making is imported from China. Imported item mostly used in furniture making are chipboard, hardware items and glass.
  • Exports of furniture have gone down since 2007 due to political and economic turmoil coupled with load shedding. It is observed that no importer has entered the Pakistani market and no one is ready to book orders by browsing through designs at company web-sites.



  • For a good start, the government should immediately introduce and implement a reforestation plan that is focused on replanting and sustenance of the ever depleting rosewood. A minimum of ten trees should be planted for every tree cut, and a heavy penalty should be placed on cutting these trees prior to their maturity period, which is approximately fifty to sixty years.
  • To cut down the local wastage of this precious wood, a ban on its use for minor, less profitable purposes is necessary. This may include banning the use of rosewood to make school furniture. To meet such type of demand, research should be carried out on finding alternatives for rosewood. Acacia, for instance, is one such alternative. It can be used as a perfect substitute if it is properly seasoned.
  • Also, to make furniture goods more competitive at the international level, the government should revise its taxes and duties on this industry. Allocating idle industrial zones and premises to the furniture industry will also help in boosting its exports. Furniture testing facilities should be set up to guarantee quality exports that would boost the confidence of international buyers. But most importantly, the government needs to give this sector a most favored industry status. Resultantly, the cost to consumers will fall, thereby stoking demand. This will lead to more demand which will enhance this industrial base, and potentially enhance furniture exports further. The potential for growth of the industry exists. With the right policies and will, this sector has every chance of excelling, despite the general economic conditions of the country.



Fatima Fertilizers Company Limited: Sensitivity Analysis in Stock Valuation


This was a spreadsheet assignment given to me for the course Financial Management, which I took with Ms. Sana Fatima in Spring 2014. You can refer to the case, its solution at the end and answers to some critical questions in this blog. If you can think of more reasons for the Critical thinking answers, please do share them in the comments.

Spreadsheet Assignment 1

Fatima Fertilizers Company Limited

Sensitivity Analysis in Stock Valuation


Fatima Fertilizer Company Limited, a fully integrated fertilizer complex, was incorporated on 24th December, 2003 as a joint venture between two major business groups of Pakistan: Fatima Group and Arif Habib Group. The Company is listed at all stock exchanges of Pakistan, through a successful initial public offering (IPO) in February 2010 to fund the requirement of the project at the time of the listing.


Fatima Fertilizer currently maintains highest profit margins among its peers due to its diversified product portfolio (urea, CAN and NP) and consistent gas from the dedicated Mari gas field. The companies on the Sui gas network face large unpredictable swings in gas supply leading to detrimental effects on their productivity. These advantages of Fatima will translate into a high sales growth for the next 2-3 years and high operating margins (Exhibit 2).

Arif Habib group has had a history of paying strong dividends in all of their subsidiaries. The management of Fatima will try to reach a payout ratio of 75% as soon as possible; however, it will be difficult to achieve that in near future due to the accelerated debt repayments which they have planning. Fatima plans to achieve a debt free status by 2017 and thus, most of the cash generated from operations will be used to pay off debts in the next five years; hampering their ability to pay high dividends. Once the debt-free status is achieved in CY17, Fatima fertilizer will shift to the desired payout ratio of 75%.


Based on the assumption that in the long run fertilizer demand in Pakistan will be limited by the availability of cultivable land, the terminal growth rate in FCFF is pegged to the GDP growth rate of 3%.


Given the unavailability of gas, Fatima is not expected to expand its production capacity; however, the company will incur maintenance capital expenditure of about PKR500 mn starting from CY14 onwards. The balance sheet and income statement for the year just ended are given in exhibit 1. Market value of company’s long-term debt is same as the book value. Projected financials for the company are given in exhibits 2. The market premium is estimated to be 8% and risk-free rate is 11.5%. Historical beta for Fatima’s stock is 1.15×.


  1. Using the given information, compute the fair price per share of Fatima stock on Dec 31, 2011. Use FCFF valuation Model.
  2. Show how the fair price will change if:

                     i.        The terminal growth rate changes (vary the TG rate from 0% to 10% with intervals of 1%).

                   ii.        The risk-free rate changes (vary the RF rate from 5% to 15% with intervals of 1%).

Exhibit 1: Balance Sheet and Income Statement


     (Millions PKR)

Year-ended December 2011
Net Sales 14,833.343
EBITDA    8,404.245
Depreciation and Amortization        746.378
EBIT    9,150.623
Financial charges    3,063.055
Pre-tax Profit    6,087.568
As of December 2011
Cash 3,839
Trade Debt 196
Inventory 1,215
Other current assets 2,876
Total Current Assets 8,126
Net Fixed Assets 68,221
Total Assets 76,347
Creditors & accruals 7,725
ST Borrowings 0
Current Portion: LT Debt 3,033
Total Current Liabilities 10,758
LT Debt 34,457
Deferred Liabilities 3,077
Total Liabilities 48,292
Paid-up 24,000
Share premium 790
Un-appropriated Profit 3,265
Total Equity 28,055
Additional Data:
Tax rate (%) 35
Interest rate on LT Debt (%) 12
Market Price per share (PKR) 22.92
Number of common shares (million) 2,100


Exhibit 2: Forecasted Financials

2012 2013 2014 2015 2016
Sales Growth 102.22% 19.50% 6.50% 5.00% 5.00%
Operating Margin (EBIT/Sales) 49.39% 50.93% 50.91% 49.92% 48.97%
Depreciation    3,424 3,508 3,533 3,558 3,583
Capital Expenditure 1675 500 500 500 500
Investment in NWC (% of additional sales amount) 20% 10% 10% 10% 10%



2017 2018 2019 2020
Sales Growth 5.00% 5.00% 5.00% 5.00%
Operating Margin (EBIT/Sales) 47.93% 46.81% 37.95% 35.5%
Depreciation 3,608    3,633    3,658 3,683
Capital Expenditure 500 500 500 500
Investment in NWC (% of additional sales amount) 10% 5% 5% 5%


Answers to Critical Thinking Questions:

  1. Why is the DDM model not appropriate for valuing the stock of Fatima?


The following reasons serve why DDM is inappropriate for Fatima:

  1. Because company is not a dividend paying firm, hence DDM model is not applicable here.
  2. The payout ratio is constant at 75%, hence there is no link between the profitability of the company and the dividend payout ratio, hence DDM is inappropriate to apply here.
  3. Also, since the company is observing a group holding structure which gives it a control perspective hence it serves as another reason why DDM is inappropriate here.


  1. Why is the FCFE model not appropriate for valuing the stock of Fatima?


  • Since Fatima plans to achieve a debt-free status by 2017, thus changing its capital structure hence the FCFE is not appropriate.
  • The future cash-flows tend to be negative due to the future high repayments, thus making FCFE negative, not reflecting the company’s actual state.


  1. What will happen to the beta value of Fatima stock once it achieves the debt-free status in CY17 as planned?


  • Since the debt to equity ratio will fall, hence beta will also fall.


  1. Is using the single WACC figure appropriate for discounting the FCFFs for all years?


  • Yes, because initially when the company is deciding on the capital structure it is assumed that this is the optimal capital structure for the company, and hence discounting it for long term is appropriate.
  • WACC reflects the cost of the whole company and FCFF reflects the cash to all the capital holders hence it is the appropriate discount rate.


  1. Is an all-equity financing option good for companies? If not, why is Fatima planning to have a no-debt status?


  • Where an all-equity financing option may be less riskier than a loan, may add more credibility to your business, while giving you cash on hand for the expansion of the firm, it also gives you the advantage of not being bound to repay.
  • However, at the same time, it poses the threat of a lifelong obligation to the investors as compared to the debt financing when obligations end as soon as the loan is repaid. It also creates the disadvantage of a loss of control and higher regulations.
  • Hence, a blend of the both the financing options, is optimal.

Fatima is going for a no-debt status because it plans to channel its profits towards capital expenditure.