Nagina Cotton Mills Limited

Nagina Cotton Mills Limited (PSX: NAGC) is part of the Nagina Group of Companies. The former was set up as a public limited company in 1967, under the Companies Act, 1913. It manufactures and sells yarn.

Shareholding pattern

As at June 30, 2020, a major chunk of shares, that is about 71 percent shares are held by the directors, CEO, their spouses and minor children, collectively. Of this, roughly 17 percent shares are held by each of the following: Mr. Shahzada Ellahi Shaikh, the chairman, Mr. Shafqat Ellahi Shaikh, a non-executive director, and Mr. Shaukat Ellahi Shaikh, an executive director of the company. About 16 percent shares are with the associated companies, undertakings and related parties; close to 11 percent held by the local general public. The remaining 2 percent shares are with the rest of the shareholder categories.

Historical operational performance

Topline for Nagina Cotton Mills has only contracted once in FY15 between FY12 to FY20. Profit margins gradually declined until FY16, when they were recorded at the lowest, before increasing again; however, they fell again more recently, in FY20.

During FY17, the company experienced its highest growth rates in revenue, at nearly 23 percent. This was attributed to better selling prices as well as volumes. While revenue from exports also increased and is also the largest contributor to the total revenue pie, it was local sales of yarn that saw the highest growth, at almost 47 percent. Cost of production, on the other hand, lowered to 93 percent, from over 96 percent in FY16. This helped improve gross margin close to 7 percent. The effect of this also transferred to the net margin as it was recorded at a positive 1.5 percent, compared to a negative 2 percent in FY16.

Revenue growth continued during FY18, albeit at a lower rate of 12 percent. Apart from better selling prices, as seen last year, changes in the exchange rate and “benefits of export drawback scheme” also played a role in growing revenue, although a lot of the increase in revenue was seen in local sales- around 45 percent. Moreover, cost of production went further down to 91 percent of revenue. This raised gross margin to nearly 9 percent. With an overall decrease in expenses, coupled with a rise in other income coming from dividend earnings, bottomline and net margin, both doubled year on year, with the latter reaching nearly 3 percent for the year.

In FY19 the company saw yet another double-digit growth in its revenue at nearly 18 percent. In addition to better prices and higher volumes, the currency devaluation also helped in raising revenue. Both local sales and export sales witnessed double digit growths. Cost of production fell below 90 percent of revenue; most of this decline was attributed to fuel expense making a lower relatively lower share in revenue. While there were marginal changes in total operating costs, finance cost increased notably to consume 3 percent of revenue- the highest seen thus far. This was due to an increase in interest rates that rose the cost of short-term borrowings. However, given the improvement in revenue, it did not affect profitability drastically, as the company managed to increase net margin to 4.5 percent for the year.

In FY20 the company saw one of its lowest growth rates at almost 2 percent. The event of Covid-19 that brought the world to a halt significantly impacted several industries, owing to the resultant lock down. With delay and cancellation of orders, global trade was also deeply impacted; this led to serious supply chair disruptions. Nagina Cotton Mills was also shut down during lock down that led to lower profitability eventually. Cost of production again crossed the 90 percent of revenue mark, at nearly 92 percent. This was largely attributed to rising cost of raw materials. Some support was brought in by other income, however it was not sufficient to maintain profitability. Although the company did not incur a loss, it bottomline shrunk significantly, to Rs 8 million, compared to previous year’s Rs 309 million.

Quarterly results and future outlook

During 1QFY21, revenue was lower by 27 percent year on year. This was attributed to a reduction in installed capacity since as part of its BMR activities, the company scrapped obsolete spindles. This led to sales falling both in terms of value and volumes. With little changes in other elements, and some support coming in from other income, the company was able to post a gross margin of 10 percent.

In the second quarter, revenue improved by 7 percent quarter on quarter but was lower by 24 percent year on year. This was again attributed to a decline in capacity and “finer spun count”. Despite this, the company was able to improve its profitability from the previous quarter as well as collectively, when compared to 1HFY20. This was largely due to a notable reduction in cost of production during 2QFY21, which in turn was a result of timely procurement of raw materials as well as new machinery that helped reduce costs. Thus, the company was able to more than double its bottomline from the first quarter of FY21; profitability was also higher in 1HFY21 at nearly 7 percent net margin, compared to near 2 percent in 1HFY20, despite the latter earning more in other income.

As global trade has gradually resumed with several countries having begun Covid-19 vaccination drives, demand for home textiles, towels and denim have increased. This has generated significant demand for yarn in the local market. Fetching better prices locally, the company has shifted its product more in the local market. Despite this, the risk remains of raw cotton shortage locally, that can prove to be detrimental to one of the largest sectors of the economy.