Nishat Chunian Limited

Nishat Chunian Limited (PSX: NCL) is part of the Nishat Chunian group that includes Nishat Chunian Power Limited and Nishat Chunian USA Inc. in addition to Nishat Chunian Limited. The latter operates in the textile sector. In addition to spinning, weaving, dyeing, stitching, processing, it also deals with yarn, fabric, and synthetics.

Shareholding pattern

As at June 30, 2020, nearly 26 percent of the shares are with the directors, CEO, their spouses and minor children. Of this, nearly 23 percent are with Shahzad Saleem, the CEO of the company. Close to 33 percent shares are held by the general public, followed by 16.6 percent shares held by associated companies; banks, DFIs and NBFIs hold nearly 11 percent. The remaining 14 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has seen a rising topline for a large part of the decade, except for FY12 and more recently in FY20. Profitability, on the other hand, had been fluctuating in the first half of the decade; it rose gradually after FY14, until FY19, and dropped in FY20.

Revenue growth during FY17 stood at over 15 percent, nearing Rs 30 billion in value terms. Since better margins were seen in the local market for the spinning division, the company that primarily earned its revenue from export sales, shifted its focus to capture the local market. This is reflected by an almost 50 percent rise in local sales whereas export sales reduced very marginally year on year. Although cotton prices increased during the year, indicating a rise in cost of production; however, the company was able to pass on the cost to the customer. With most other elements seeing little changes, Nishat Chunian raised its net margin slightly, from 5 percent in FY16 to 5.4 percent in FY17.

Topline continued to grow in FY18 at over 19 percent, with both, local and export sales witnessing growth. Local sales grew by 24 percent, while export sales posted over 14 percent rise. Collectively, net sales crossed Rs 30 billion. Most of this increase in topline was contributed by the spinning division, while the weaving and home textile business saw low demand and margins due to competition. Spinning division was also the largest contributor to total revenue- over 50 percent. Production cost for the spinning division increased due to raw material prices but was offset by increase in yarn prices. Thus, with currency devaluation, duty drawback incentive, and better margins in spinning division, the company posted a higher net margin of 6.65 percent.

Nearly Rs 40 billion in value terms, net revenue grew by over 10 percent in FY19. Majority of this was attributed to the increase in local sales, that increased by nearly 34 percent, while export sales decreased by almost 3 percent. Category-wise, spinning and home textile division that grew by 12.5 percent and 25.5 percent, respectively, were the major contributors to the total revenue. While marginal increase in cost of production as a share in revenue kept gross margins relatively stable at 12 percent, the rise in other income coming from a net exchange gain and dividend income raised operating margin to nearly 15 percent. However, this was diluted by finance expense that inclined due to short-term running finances, short term finances and export finances. Thus, net margin could only increase to 8 percent for the year.

After rising consecutively for seven years, topline contracted in FY20 by over 9 percent. Both, export sales and local sales witnessed a contraction, by 3.3 percent and 16 percent, respectively. Although the company remained operational during Covid-19, the pandemic did have its adverse impacts on the business. The lock downs in global markets, and the US-China trade war created a negative impact for the spinning division in particular. Apart from the decline in sales, profitability was also affected due to other income falling to Rs 454 million, compared to over Rs 1 billion seen in the previous years. This was due to the absence of net exchange gain and dividend income. Finance expense also reduced profitability due to higher short-term running finances. Thus, net margin dropped to less than 1 percent.

Quarterly results and future outlook

During 1QFY21, revenue increased by 25 percent year on year as business activities resumed after the strict lock down placed. Moreover, the Chinese export destinations are looking towards other opportunities, thus creating new avenues for local players. Moreover, the company has added new machinery to its value-added divisions, the effect of which is reflected in the improved topline. Although the higher costs due to cotton shortage and compromised quality reduced profitability year on year.

In 2QFY21, revenue was higher by nearly 14 percent, while 1HFY21 saw 19 percent higher revenue than 1HFY20 as demand picked up. With higher contribution by other income, profit margin for the period improved year on year, along with a reduction in finance expense due to lowering of KIBOR by the State Bank of Pakistan.

Opening up new outlets for its home textile brand, grabbing opportunities by filling the void left by other players, and improving and adding machinery, the company has seen a higher capacity utilization, for the spinning, weaving and dyeing divisions. Some of the risks that continue to exist are cotton availability, uncertainty in prices, rise in power tariffs and the third wave of the Covid-19 pandemic.