Nishat Mills Limited

Shareholders in Nishat Mills must have breathed a sigh of relief yesterday. The company, whose stock was being bashed around since the start of calendar year 2011, said it posted a phenomenal jump in net earnings, while treating investors with a cash dividend of Rs3.3 - yielding nearly 7.7 percent for those who purchased the stock at the start of fiscal year 2011. The firms ROE and ROA for FY11 also rose to 13.8 percent and 9 percent respectively - their highest since FY08. Though NMLs profits declined by 4.4 percent on a quarter-on-quarter basis, its earnings surged by a whopping 66 percent year-on-year - an increase that, in part, came on the back of a jump of 54 percent in the firms top line. But all was not hunky dory for the countrys biggest listed composite textile player. Gross margins remained under pressure for most part of the year - falling 280 basis points year-on-year - as gas load-shedding led to higher furnace oil consumption, resulting in higher cost of production. The real driver was in fact NMLs other operating income that ballooned by 149 percent, as a result of which the other operating income margins rose to 50 percent in the year ending June - its highest since at the least FY05. According to company sources, the firm made some smart gains to the tune of Rs871 million on forward dollar bookings, Rs204 million on account of sale of investments and Rs998 million worth of dividend income. Given the companys increasing exposure to foreign markets, via its wholly-owned subsidy in the UAE that has already opened three retail outlets in Dubai, dividend income might contribute further to NMLs bottomline in the years to come. But that of course depends on the companys brand acceptability. Going by the companys Nishat Linen experience that saw sales jump 8-10 times in a matter of two years, the future in the UAE market appears promising. Then again, there is a huge difference between local and global markets. The real test for the company, however, is to maintain the growth trajectory of its margins in the face of volatile cotton prices. NMLs gross margins, as well as its stock prices, move somewhat in tandem with cotton prices, which means cotton will continue dictating its core operations.

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NISHAT MILLS LIMITED
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Rs (mn)                       FY11      YoY   4QFY11      QoQ
                                     change            change
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Sales                       48,565      54%   13,702     1.4%
Cost of sales               40,718      59%   11,594     4.8%
Gross profit                 7,846      31%    2,107     -14%
Gross margin                  16.2%    down     15.4%    down
                                    280 bps           280 bps
Total operating expenses     3,277      29%    1,008      20%
Other operating income       2,444     149%      760      59%
Profit from operations       7,012      59%    1,860     -11%
Finance cost                 1,601      42%      393     -22%
Profit after tax             4,843      66%    1,361      -4%
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Source: Company notice