ABOUT THE COMPANY: The flagship company of Pakistan's largest business house Nishat Group, Nishat Mills Limited (PSX: NML) has been around since 1951. With 32 manufacturing units that specialise in specific product ranges in Faisalabad, Sheikhupura and Lahore, Nishat Mills stands as Pakistan's largest vertically integrated textile company. Its market capitalization is over Rs 59.3 billion.
Nishat Mills is undoubtedly one of the largest names in Pakistani textile. Its production facilities comprise of spinning, weaving, printing, dyeing, home textile, garment stitching, and power generation. The company also has a broad base of multinational customers, including top brands like Levis, Next, Gap, Tommy Hilfiger, and Hugo Boss, to name a few. In addition, it has made its own waves in the Pakistani fashion industry with its retail venture Nishat Linen, commanding a strong presence in apparel, upholstery, and bed linen.
Stock performance & pattern of shareholding For the most part, NML stock has been above the KSE100, peaking around February. However, this performance feels a little underwhelming considering the company's expansion plans moving forward.
Over 27 percent of NML stock is in the hands of the public, which seems to be mostly local. The company's main associated company is DG Khan Cement, with Adamjee Insurance holding less than one percent of the total stock and MCB holding nearly nothing. Around a fourth of the total stock is in the hands of the family.
Prior performance Nishat Mills may easily have the highest sales by any Pakistani textile company, with annual revenues of Rs 48 billion as of FY16. The company crossed the Rs 50 billion mark in FY13 and reached its zenith of almost Rs 55 billion in FY14, but the top line has been retarding since then; the company's sales CAGR for the past five years is just 1.33 percent. Meanwhile, margins have been fluctuating over the years.
Nishat's falling sales can be attributed to its falling exports. Being an export-oriented company, around three-fourths of its revenues come from exports. No surprise, then, that the top line has been falling, given the plethora of issues that textile exporters have been dealing with in Pakistan.
A look at the company's segments reveals that home textile is the chief revenue earner (35%), followed by weaving (29%), and then spinning (22%); the remaining 14 percent comes almost evenly from power generation and garments. Garments used to be Nishat Mills' most profitable segment, but the strengthening of the rupee and rise in wages hurt the margins. Margins from spinning have also collapsed largely due to the lower cotton prices and weak international demand. Only the home textile segment has emerged as a prominent profit earner with increasing margins thanks to its diverse product range - including top-tier designer and boutique-range products - and addition of new customer portfolios in Europe, US, and Australia.
Finally, it is pertinent to mention that since Nishat Mills has ten subsidiaries, it obtains a significant portion of its net profits from other income. This is in the form of dividend income, interest income from loans to subsidiaries, and rental income from investment properties.
Recent performance For the nine months ended FY17, Nishat Mills' performance was somewhat disappointing; despite managing a three percent growth in its top line year-on-year, the company's gross profit was lower by 15 percent, while the bottom line declined by 13 percent. The main reasons for this decrease were increase in gas prices, increase in minimum wages, and decline in profit margins due to cut-throat competition in textile sector, reads the 9M Director's Report.
Nishat Mills' 3Q was wrought with a significantly higher distribution cost (+24% YoY) and lower other income (-32% YoY); the net profit for the quarter was almost half of what it was a year ago.
On the plus side, there has been significant growth in Nishat's home textile (+21% YoY) and garment (+34% YoY) segments for the nine months ended. The company had been undertaking huge investments in capacity expansion and technological up-gradation in these segments that seem to be paying off. However, the higher costs and decline in other segments - particularly yarn - kept a lid on the growth.
Outlook There is just too much to say about Nishat Mills going forward; the company has acquired land in a Special Economic Zone (SEZ) in Faisalabad Industrial Estate for its spinning segment - with more than twice the initial capacity - expected to begin production in August 2017. It will receive tax and duty exemptions at this location.
In the weaving segment, Nishat is focusing more and more on technical and industrial fabrics using various fibers such as polyester, tencil, and viscose. The company is in the process of acquiring new looms which are expected to be commissioned in June 2017.
The home textile segment has been in an expansionary phase for most of FY17 - new machines were commissioned during the year, which enhanced the production capacity by 20 percent. Amazingly, the segment saw full capacity utilisation throughout 3Q. Recently, the company has announced that it will expand its supplies to China to tap the demand for high-value home textile products there. The potential rewards from this move could be enormous.
In garments, Nishat launched a new Denim Garments Plant in 4QFY16. An increase in production orders from large European brands is anticipated during 1HFY18. The company's investment into making the plant green has also been particularly useful as it fulfills the environmental requirements of foreign buyers.
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NISHAT MILLS LIMITED
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Rs (Million) 9MFY17 9MFY16 YoY 3QFY17 3QFY16 YoY
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Net Sales 37,287 36,196 3% 13,283 12,698 5%
Cost of Sales 33,089 31,269 6% 11,720 10,868 8%
Gross Profit 4,198 4,927 -15% 1,563 1,830 -15%
GP Margin 11% 14% down 12% 14% down
240 bps 260 bps
Distribution Cost 1,806 1,616 12% 673 543 24%
Administrative Expenses 860 849 1% 272 275 -1%
Other Expenses 173 223 -22% 19 62 -69%
Other Income 2,907 2,713 7% 312 460 -32%
Profit From Operations 4,226 4,952 -15% 910 1,410 -35%
Finance Cost 670 812 -17% 249 260 -4%
Taxation 507 572 - 123 142 -
Profit After Tax 3,089 3,567 -13% 538 1,007 -47%
NP Margin 8% 10% down 4% 8% down
160 bps 390 bps
EPS 8.78 10.15 -13% 1.53 2.86 -47%
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Source: company notice to PSX
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PATTERN OF SHAREHOLDING
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Shareholders Category Percentage of holding
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Directors, CEO, their spouses and minor children 25.22%
Associated Companies, Undertakings & Related Parties 9.41%
D.G. Khan Cement Company Limited 8.61%
Adamjee Insurance Company Limited 0.79%
MCB Bank Limited 0.00%
Banks, DFIs, Non-Banking Financial Institutions 2.60%
Insurance Companies 3.49%
Modarabas and Mutual Funds 9.14%
Shareholders holding 5% or above 50.33%
General Public 27.32%
Local 26.95%
Foreign 0.37%
Others 21.20%
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Source: Company accounts
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