The flagship company of the Nishat Group, Nishat Mills Limited is one of the largest vertically integrated textile companies in Pakistan. In 2011, the firm completed 50 years of being listed on the Karachi Stock Exchange, and has been a force to be reckoned with in the textile industry. The company owns 198,120 spindles along with 655 Air-jet looms, two stitching units for home textile as well as one for garments, making it one of the most modern textile manufacturers in the country.
Financial Highlights:
Overall Nishat Mills experienced declining profitability during the third quarter of FY12, with heavy fuel costs offsetting any respite that lower cotton prices could have provided.
The earnings after taxes declined a substantial 27 percent year-on-year after shrinking to Rs 2.5 billion as compared to Rs 3.5 billion during the same period last year. The primary reason for this fall in profitability stems from the energy crisis that has led to a steep hike in fuel expenditures.
The profitability ratios for this period show a 2.2 percent decrease over the corresponding period due to the surge in cost of sales. Despite the gains experienced from the garment and processing sectors, the depressed yarn prices and decrease in volumetric sales, did not let the company enjoy an increase in net revenues.
With Furnace oil and diesel consumption costs going up Rs 432 million since March 2011, the firm has been mostly unable to fully realise the potential gains expected from their processing and garment divisions.
There has also been an increase in finance costs for the company owing to an increase of Rs 1.4 billion in borrowing costs. Long-term loans amounting to Rs 678 million have been obtained during this year to finance a number of projects mainly related to establishment of power generation facilities using alternative and cost-efficient fuel sources.
Operational Highlights:
During 9MFY12 net revenues for the spinning division of the company declined in comparison to the corresponding period owing to a reduction in gross margins on yarn sales.
Note that yarn prices rocketed during the third quarter of the corresponding period due to rising cotton prices, and Nishat's spinning division reaped the benefit of their timely purchase of cotton at cheaper prices, allowing them to enjoy exceptionally high gross margins. However in the current period, key variables have changed and there have been profit reductions due to increased costs incurred in lieu of power generation.
The weaving division performed better in comparison to the spinning division, despite the rising costs of production of greige fabric in Pakistan. Coupled with the non-implementation of WTO's law abolishing import duties, business from the European sector has been slow in coming .This, however has been offset by increased interest from Far Eastern clients.
On the other hand, the textile division showed a negative trend with sales volume decreasing 5.5 percent over the corresponding period. This can be contributed to the decrease in demand from the deteriorating American economy and the fluctuating cotton prices during the period.
Value Addition: The way to go:
The figures reported in the firm's interim report speak volumes about the prospective profitability of the value addition aspect of the textile industry. Despite the increasing concerns about the economic situation in the country, gas curtailments and overall challenging circumstances being faced by businesses during this period, Nishat's apparel division has gained strength through a remarkable manifestation of research, development and technological innovation.
The company is continuously engaged in capacity building in this division, and there have been two more additions to the already available 20 production lines. The company is also planning to continue their investments in process automation, which will not only ensure enhanced quality but also will allow them to meet ever-increasing consumer demand.
With the remarkable success of 'Nisha' by Nishat Linen, the company has been able to generate sales upwards of Rs 700 million during the current period, allowing them to come close to being the biggest player in the textile and home fashion market. Continued aggression through extensive marketing campaigns is likely to continue into the coming months, allowing the brand to increase their customer base.
Alternate Fuels and the Textile Sector: Since the gas supply and demand gap is widening consistently, there is a great need for exploration into relatively efficient means of generating steam for the textile industry. Facing shortages of up to five million cubic feet per day, the growth statistics for the textile sector have been consistently going down-stream. In this regard Nishat has investing heavily into fixed assets related to energy generation using alternative fuel sources.
There have been two high performances, low pressure steam generating boilers using rice husk and wood chips as fuels already in operation at two of the firm's production facilities. The company has also invested in a new CHP installation in Lahore which will produce 6MW of electricity and 65 tons/hour of steam, allowing them to effectively lower their costs for the upcoming periods and increase their yield margins.
Future Outlook: Despite lower cotton prices, the major Pakistani textile players remained largely un-competitive in the international market during the last period, owing primarily to insurmountable cost hikes. Having said that repeatedly, the fact remains that there is a dire need for a timely intervention by the government so that a concrete solution to this problem could be chalked out.
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Nishat Mills Pakistan
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(Rs mn) 9M 2008 9M 2009 9M 2010 9M 2011 9M 2012
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Sales 13,826 17,267 22,329 34,864 32,514
Cost of Sales 11,836 13,751 18,253 29,125 27,693
Gross profit 1,990 3,516 4,076 5,739 4,820
Distribution costs 669 959 1,171 1,483 1,670
Administrative expenses 281 297 404 480 540
Other operating expenses 71 191 199 308 222
Other operating Income 594 445 558 1,685 1,897
Profit from operations 1,562 2,514 2,859 5,153 4,284
Finance cost 615 1,086 809 1,209 1,357
Profit before taxation 947 1,428 2,051 3,943 2,926
Provision for taxation 193 211 240 462 400
Profit after taxation 754 1,217 1,811 3,482 2,526
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Source: Company accounts
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