Textile: NISHAT MILLS LIMITED - Analysis of Financial Statements Financial Year 2001 - Financial Year 2008
NML is the market leader in the textile composite sector. It has a huge asset base unmatched by other companies in the sector. The company has enjoyed 57 years of existence in the market. The bulk of its earnings are export-based.
Different operations of textile industry like spinning, weaving, processing, dyeing, bleaching, printing, finishing and even export of home textiles in foreign markets are carried out by the company.
The facilities are located in Faisalabad, Sheikhupura, Ferozwatan and Lahore. This vertical integration has benefited NML in terms of economies of scale, ease of marketing and bargaining power as a supplier.
NML is also a trendsetter in the industry. It introduced the sophisticated state-of-the-art equipment before other companies. Moreover, the company benefits from four power projects dedicated to the mills for its electricity requirement, which provides 80 MW of power. The strong backing of Nishat group, having access in the cement and financial sector, is also a major strength of the company's success. Family members of Nishat group and other concerns have 47% equity in NML.
INDUSTRY SCENARIO The global textile industry has entered into a freer trade regime after dissolution of MFA (Multi- Fibre Agreement) on 31st December 2004. The quota restrictions have been finished but tough competition has developed in regional markets from India, China and Bangladesh. The post MFA phase has made survival for textile industries more challenging then before. Now firms have to be more competitive. Industry faces high costs of production due to increased prices of oil, which is an input of polyester, chemicals, labour, cotton and electricity compared to other countries in the region.
Cotton production in the country declined by 30-35%. Our focus is still on export of low value added commodities like cotton and yarn while, Bangladesh has expanded its ready-made garment industry. Textile sector needs to plan according to the changing needs of the global market. On the demand side, the credit crunch in US has implications on the export of textiles. The sub-prime mortgage crisis that started in US has led to a global recession. This will affect existing trade and make new prospects difficult to find.
PROFITABILITY
In FY08, NML's net sales, gross profit and profit after tax have increased by 12.15% and 4.35% compared to the last period of FY07. This is due to increase in prices of cotton from Rs 2,485/maund in 2007 to Rs 3,047/maund in 2008 - a net increase of 22.62%. The increase in profit is mainly due to capital gain resulting from mark to market transaction of investment in MCB Bank shares, and increase in dividend income. Spinning: NML has a one-time cotton buying policy that has enabled it to bypass shocks in cotton prices. Demand of 100% grey cotton yarn remained steady. Far East remained main selling market of cotton yarn. USA had some steady demand during this year, whereas in Europe, demand of cotton yarn was reduced more.
Weaving: Yarn prices did not increase in proportion to fabric prices. Business in South America reduced by 80% in comparison with previous period because of the bullish yarn market and cheaper prices from competitors. NML's strategy is to diversify its consumers, markets and products. Technological innovation is done by bringing in new looms so that the company can make cloth of various widths so that it can better meet customer's demands. Dyeing and finishing: Sales volumes have increased with a better product mix: Viscose Lycra, Cotton/Kapok/Lycra, Bamboo Lycra and Linen based items.
Processing and stitching: This year, the sales declined to the domestic challenging scenario and recession of American market further. Retailers were stuck-up with high inventory levels, which hindered new ventures. Unanticipated bankruptcy of some major textile businesses including, Dan River, Linen & Things, Goody's Family Inc also gave unprecedented setback to an already fading market. This situation did not allow suppliers to increase prices to overcome excessive overhead costs and ease out the worsening condition. Profits were maintained by increasing efficiency. The stitching plant at Faisalabad was moved to Lahore, adjacent to the processing unit.
Nishat dyeing and finishing: This section performed well. This was achieved by an increase in customer base in the US and Europe due to verticality of operations and marketing efforts. The price per metre of cloth has also steadily increased over the years, which contributed to more profits. However, nothing can be said about future performance as tough competition persists.
LIQUIDITY
The liquidity of the company has declined significantly after following an increasing trend for seven years. Current liabilities have increased at a greater rate than current assets. Short-term borrowings have increased by 80%. Trade and other payables have shown an increase. This is primarily due to increase in input prices and to meet short-term funding requirements.
The asset management ratios have shown a good trend in recent years. NML is maintaining a reasonable working capital cycle. The number of days to sell inventory on credit and to convert trade debt into cash makes up the total operating or working capital cycle. Small operating cycles improve liquidity. In the current period, the DSO and ITO have shown an upward trend, as there was low demand of textile products in international market due to recession. Total asset turnover has declined over the past few years due to capital expenditure on BMR (Balancing, Modernization and Replacement) as well as expansion.
The D/E ratios have declined over the years. The company was raising funds through increase in equity. As a result, there was a decline in debt. However in FY08 the debt increased by 35.51% whereas equity declined by 16.06%. The TIE ratio has shown a substantial increase as the company reported a huge increase in net income. EBIT was consequently higher and financial charges were similar as in the last period. Hence earnings can easily cover cost of borrowing for the current period. This ratio depicts good standing of the firm to fulfil its short-term debt obligations.
INVESTOR EXPECTATIONS
The free float of the company comprises 48.09% of the total float. The rest has been contributed by institutional investors in which joint stock companies lead with 17.29% shareholdings. The EPS surged due to substantial increase in net income of the company. The market prices of NML stocks have seen a downward trend due to lacklustre performance of stock market in general and textile industry in particular. The low share price and high EPS have together given a declining trend for P/E ratio especially for FY08.
This P/E ratio shows that the company is under-valued. The increased earnings show good performance and show the potential for increase in stock prices in future. Hence, investment in NML looks feasible. However the returns from textile industry are still unpredictable. The increase in profits has resulted mainly due to increase in prices of textile products and gain on sale of MCB investments and not as a result of major increase in volumes of sales.
This graph shows adverse stock price movements for the first 9 months of CY08. This shows the price has fallen from a high of over Rs 120 to Rs 45 due to crisis in the stock markets. The dividend per share has declined from Rs 3.50 to Rs 2.50 despite increase in profits. This could be due to an increase in the number of outstanding shares or the firm has retained the profits to meet the fixed capital expenditures requirements or meet its financial obligations. The book value per share has also declined. This is due to an increase in the number of outstanding shares.
BUDGET FY09
Although last year, the textile industry was given many incentives yet textile exports declined by 3.1% on year-on-year basis. The current budget has neither provided new benefits nor reduced the existing ones as textiles still contributes 65% of total exports of the country. The government has reduced import duty on PSF from 6.5%to 4.5% and declared molasses, input of textiles, zero-rated. This should reduce manufacturing costs making our products more competitive in the regional market. The 6% R&D subsidy introduced for the textile industry last year remains unchanged. However, the minimum wage rate has increased from PKR 4,600 to PKR 6,000. Textile sector is labor incentive and this increase will inflate their cost of production. OGRA has decided to increase gas tariffs by 30% applicable from July 1, 2008. The expected subsidy on gas, as given to fertilizer sector, was not provided to the textile industry. However, with a depreciating PKR, the textile manufacturers should be able to price their products competitively in the regional market and the increase in input cost should not impact profitability. Uninterrupted power supply has also been promised to textile units against an average of 5 hours/day load shedding during peak hours. NML possesses the capability to outperform the textile industry and take maximum advantages of the given incentives.
FUTURE OUTLOOK
After 31st December 2008, Pakistan will face even tougher competition from China. WTO imposed conditions on China in 2001 upon its accession to WTO that countries can impose quota on textile imports from China for that year if these exceed by (6-7.5%) the amount imported in the previous year. This measure will expire on 31st December 2008. For NML specifically machinery is being developed to produce better quality of yarn. State-of-the-art ring frames are under installation at one of the spinning units. Company is also planning for PFD (polyester based) plant in weaving section.
There is increased demand for PFD fabrics in Europe. It would increase customer profile in Europe. To improve production lead times, the company will bring state-of-the-art looms. NML is installing caustic soda recovery plant to have further value addition and diversification in production resources. NML should concentrate on increasing its high value-added exports (apparel) to boost profits and widen its product base eg denim.
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NISHAT MILLS LIMITED (NML) - FINANCIALS
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Balance sheet 2004 2005 2006 2007 2008
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NON CURRENT ASSETS
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Property, plant and equipment 8,132,083 9,151,096 10,611,353 10,586,159 13,929,518
Long Term Investments 3,198,405 5,003,177 10,793,026 15,466,506 13,321,088
Long term loans, deposits,
prepayments and deferred costs 17,243 16,912 16,507 18,865 10,541
Total non-current assets 11,347,731 14,171,185 21,420,886 26,071,530 23,987,061
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CURRENT ASSETS
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Stores,spares and loose tools 434,934 424,827 471,520 422,428 490,229
Stock-in-trade 2,797,208 2,897,392 3,003,174 3,106,436 4,103,648
Short Term Investments 718,530 2,173,530 4,350,146 8,118,459 7,129,154
Trade debts 1,517,143 877,358 1,026,884 831,653 1,329,027
Advances, Deposits and prepayments 374,023 463,713 449,319 437,665 30,400
Other receivables 370,830 388,598 407,147 322,839 370,013
Cash and bank balances 615,382 520,999 50,250 69,607 73,752
Total current assets 6,828,050 7,746,417 9,758,440 13,309,087 13,929,518
TOTAL ASSETS 18,175,781 21,917,602 31,179,326 39,380,617 37,916,579
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EQUITY AND LIABILITIES
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SHARE CAPITAL AND RESERVES
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Authorised capital 1,500,000 1,784,700 1,784,700 1,784,700 1,784,700
150,000,000 ordinary
shares of Rs 10 each
Issued, subscribed
and paid-up capital 1,224,788 1,452,597 1,452,597 1,597,857 1,597,857
Reserves 6,626,552 10,468,761 17,120,114 28,359,567 23,549,323
Surplus on Revaluation
of operating fixed assets
Total Equity 7,851,340 11,921,358 18,572,711 29,957,424 25,147,180
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NON CURRENT LIABILITIES
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Long term loans 2,617,117 2,796,512 2,982,353 1,773,820 1,047,794
Deferred liabilities -
Redeemable Capital
Liablilities against assets
subjected to financial lease 5,756 61,643 33,031 -
Total non-current liabilities 2,622,873 2,858,155 3,015,384 1,773,820 1,047,794
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CURRENT LIABLITIES
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Short term finances 5,608,985 4,284,815 4,315,708 5,018,664 9,175,518
Current portion of long
term liabilities 816,545 711,164 1,342,771 1,341,565 926,025
Accrued markup 88,449 151,236 131,744 201,847
Trade and other payables 1,085,349 812,216 960,436 926,593 1,141,227
Provision for taxes 190,689 356,689 281,382 230,807 276,988
Total current liabilities 7,701,568 6,253,333 7,051,533 7,649,373 11,721,605
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Total liabilities 10,324,441 9,111,488 10,066,917 9,423,193 12,769,399
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Profit and loss 2004 2005 2006 2007 2008
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NetSales 14,875,877 11,374,630 16,417,358 17,180,192 19,267,633
Cost of goods sold 12,941,953 9,239,731 13,701,626 14,335,254 16,298,857
Gross profit 1,933,924 2,134,899 2,715,732 2,844,938 2,968,776
Administrative, general,
distribution and selling expenses 924,850 756,264 1,007,167 1,340,738 1,471,249
Operating profit 1,009,074 1,378,635 1,708,565 1,504,200 1,497,527
Other income 371,283 621,569 277,961 562,710 746,460
EBIT 1,380,357 2,000,204 1,986,526 2,066,910 7,304,400
Financial and other charges 427,144 407,696 755,054 819,267 907,432
Workers' participation fund 47,711
474,855 407,696 755,054 - -
Share of profit in
associated companies 440,846 527,394 571,527
Profit for the period/year
before taxation 905,502 2,033,354 1,758,866 1,819,170 6,396,968
Provision for taxation 154,442 166,000 126,000 145,000 258,000
Profit after taxation 751,060 1,867,354 1,632,866 1,674,170 6,138,968
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FINANCIAL RATIOS 2004 2005 2006 2007 2008
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PROFITABILITY RATIOS
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Profit Margin 5.05% 16.42% 9.95% 9.74% 31.86%
Gross profit margin 13.00% 18.77% 16.54% 16.56% 15.41%
Return on Assets 4.13% 8.52% 5.24% 4.25% 16.19%
Return on Equity 9.57% 15.66% 8.79% 5.59% 24.41%
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LIQUIDITY RATIOS
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Quick Ratio 0.47 0.71 0.89 1.28 0.80
Current Ratio 0.89 1.24 1.38 1.74 1.19
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ASSET MANAGEMENT RATIOS
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Inventory Turnover(Days) 78.22 105.15 76.19 73.95 85.83
Day Sales Outstanding (Days) 36.72 27.77 22.52 17.43 24.83
Operating cycle (Days) 114.93 132.91 98.71 91.37 110.66
Total Asset Turnover 0.82 0.52 0.53 0.44 0.51
Sales/Equity 1.89 0.95 0.88 0.57 0.77
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.57 0.43 0.35 0.24 0.34
Debt to Equity Ratio 1.31 0.76 0.54 0.31 0.51
Long Term Debt to Equity 0.33 0.24 0.16 0.06 0.04
Times Interest Earned 3.23 4.91 2.63 2.52 8.05
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MARKET RATIOS
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Earning per share 6.13 12.86 11.24 10.48 38.42
Price/Earnings Ratio 9.16 7.37 9.96 9.05 2.44
Dividend per share 2.00 2.50 2.50 3.50 2.50
Book value per share 64.10 82.07 127.86 206.23 157.38
No of Shares issued (in thousands) 122,479 145259.7 145259.7 145259.7 159785.717
Market prices(Average) 56.13 94.8 111.93 94.8 93.68
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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