Nishat Mills Limited

Nishat Mills Limited (PSX: NML) is the flagship company of the business giant Nishat Group. Nishat group of companies is one of the largest business houses of Pakistan having presence in all major sectors including textiles, cement, banking, insurance, power generation, hotel business, agriculture, dairy and paper products.

NML came into existence in 1951 with ambitions to serve the textile industry. The company is engaged in the manufacturing and sale of a wide variety of yarn, home textiles and garments. As of june-19, the company had 247,968 spindles, 790 looms and 4149 machines installed. Manufacturing units spread out across Faisalabad, Sheikhupura and Lahore. As a composite, production facilities include spinning, weaving, printing, dyeing, home textile, garment stitching, and power generation- capacity to produce 788 MWH as of June-19.

The average turnovers for the past five years remained above the Rs50 billion mark, one of the highest in the industry. Bulk of the revenue is generated through exports, constituting over 80 percent of the revenues. Client portfolio comprises of brands like Levis, Next, Gap, Tommy Hilfiger, and Hugo Boss, to name a few.

Pattern of shareholding

As of year ended June-19, half the company ownership is split between the general public and directors and their spouses. Both entities having a 25 percent share in the company. Associated companies have an 8 percent stake in the company while modarbas and mutual funds account for about 12 percent of the ownership stake- insurance companies amounted to 6 percent shares of the company during the year.

Industry overview

The giant textile industry is known for its massive employment footprint and a significant contribution to the exchequer. In isolation, the industry accounts for more than 50 percent of the exports annually while providing employment to more than 40 percent of the industrial labor force. There is no doubt about the massive scale of the industry but right now it is facing headwinds from both domestic and foreign sources.

Economic uncertainties during FY19 dominated the textile landscape. The emergence of a global slowdown, tentative Brexit situation, trade dispute between the economic giants USA and China over tariff rationalization are some of the factors that created impediments in the smooth functioning of the industry during the year. On the domestic front, a massive devaluation of more than 20 percent during the year and an interest rate hike of more than 5 percent weighed heavily on the industry.

As of now, the industry is facing challenges emanating from the imposition of the 17 per cent sales tax, the CNIC condition for transactions, which has effectively blocked the flow of money, and a four percent withholding tax on every transaction within the sector.

Financial performance

The top-line during FY19 grew by 18 percent, crossing the Rs60 billion mark-highest recorded in the past five years. The achievement comes on the back of a growth witnessed in both domestic and export sales-specifically export sales from weaving, dyeing and home textile segments. Despite the declining unit prices on export globally, the company managed to increase exports by about 20 percent as a result of volumetric growth and rupee devaluation during FY19. Adding to the total turnover, domestic sales grew by more than 10 percent as well during the same period.

A less than proportionate increase in cost of goods sold lifted the gross profit margin to 12 percent in FY19 from 10 percent in the preceding year. Gross profit during the year increased by 38 percent while cost of sales increased by 16 percent. The company attributes the rise in margin to efficiency achieved in operations.

Net profit margin during the year increased to 9.2 percent from 7.6 percent recorded in the preceding year. The upside for net profitability stood compressed as finance costs increased by 68 percent as a result of a steep rise in interest rates of 5 percent during FY19.

The company in its financial accounts exhibit signs of a liquidity crunch. The alarm for a crunch stems from a low ratio of cash flow from operation when compared to operating profit. It implies that the company is building up receivables, as the percentage of cash retained from operations to operating profit deteriorated from 36 percent in the preceding year to 11 percent in FY19. Days receivables increased year-on-year by 18 percent - indicating a delay in receiving payment while inventory turnover remained largely flat.

In the past, the company has witnessed sticky margins. For the period FY15-19 gross margins averaged at 12 percent and remained within a tight proximity. While Net profit margins for the same period averaged at 9 percent- largely stable. The sales mix of domestic and foreign markets hasn't changed much either.

Future outlook

Financial year 2019-20 will be quite tough for the textile industry and the challenges will trickle down to the company level. However, NML is equipped with the ability to mitigate the impact. NML being one of the larger players has its perks- especially with acquiring financing. Moreover, having subsidiaries internationally gives an edge to the company to stay up to date with international practices and standards.

It can resist the storm with its diversified customer base and product range as it can retune the mix to meet industry demands. In fact, the company diversified its spinning business by commissioning an open-end yarn unit in February-19. A plan is also in the pipeline to double the production capacity by adding another 1,200 Rotors-as per company accounts. Also, a plan to establish a towel manufacturing is in the books.