Nishat Chunian Limited

Nishat Chunian Limited (PSX: NCL), a public limited company was set up under the repealed Companies Ordinance, 1984. The company is in the business of spinning, weaving, dyeing, printing, stitching, processing, doubling, sizing, trading and dealing in yarn, fabric and made-ups from raw cotton, synthetic fiber and cloth. It also generates, distributes and thus, supplies and sells electricity.

Shareholding pattern

As at June 30, 2021, close to 26 percent shares are with the directors, CEO, their spouses and minor children. Within this category, Mr. Shahzad Saleem, the CEO of the company, is a major shareholder. Close to 17 percent shares are held in associated companies, undertakings and related parties, followed by almost 33 percent held by the general public. About 11 percent shares are held by banks, DFIs, and NBFIs, while the remaining roughly 14 percent shares are with the rest of the shareholder categories.

Historical operational performance

Nishat Chunian has largely seen a growing topline since FY09, with the exception of FY12 and FY20 when it contracted by 8.4 percent and 9.3 percent, respectively. Profit margins increased gradually between FY16 and FY19, before falling in FY20, only to rise again in FY21.

In FY18, topline grew by over 19 percent to reach Rs 35.5 billion, with both, export sales and local sales registering an increase. Export sales grew by over 14 percent while local sales recorded a growth of 24 percent. Between the various segments of the company, the spinning division was largely responsible for the increase in revenue whereas the weaving and home textile business was impacted by low demand and margins as a result of competition. Although the increase in prices for raw material raised the cost of production, the rise in yarn prices made up for it. Coupled with this was the currency devaluation and duty drawback incentives that allowed the company to post a relatively higher net margin of 6.65 percent, whereas the net profit at Rs 2.4 billion was the highest till that time.

Topline continued to grow in FY19 by nearly 11 percent to reach over Rs 39 billion. While export sales registered an almost 3 percent decrease, local sales grew by 34 percent. Regarding the segments, spinning and home textile division grew by 12.5 percent and 25.5 percent, respectively. They were also the major contributors to the total revenue. Note that the home textile division has seen low margins in the previous year. Despite the double-digit growth, gross margin remained more or less flat at 12 percent, however, operating margin neared 15 percent on the back of other income doubling year on year in value terms. The rise in other income was attributed to a dividend income and a net exchange gain. Although net margin also increased, to 8 percent, the effect of a higher operating margin was not fully transferred due to an escalation in finance expense to consume 5.5 percent of revenue. The rise in finance expense was due to short-term running finances, short term finances and export finances.

Revenue contracted for a second time in the decade in FY20 by over 9 percent, to fall to Rs 35.7 billion. Both export sales and local sales fell, by 3 percent and 16 percent, respectively. During the year, Covid-19 pandemic struck the world that led to global lockdowns, border closures and halt in trade activities that had its impact on the company’s spinning segment in particular, despite the company remaining operational. The fall in gross margin was not drastic, at 11.8 percent, however, operating and net margin fell to an all-time low of 9.45 percent and 0.7 percent, respectively due to the decrease in other income that had remained near or above Rs 1 billion since FY12. The decrease in other income came from the absence of a net exchange gain and dividend income.

Topline bounced back in FY21 as it posted a growth of 38 percent- the highest seen since FY12, to reach an all-time high of Rs 49.3 billion. The spinning segment continued to be a major contributor to revenue as it witnessed a sales growth of more than 32 percent. This was attributed to business activities normalizing somewhat as well as export orders shifting from China to Pakistan due to the US-China trade war, and again from India to Pakistan due to the grave Covid-19 situation seen in India. The weaving segment found majority of its sales in the domestic market while the home textiles also saw growth in exports. Thus, gross margin grew to 18.2 percent that also reflected in the net margin which reached an all-time high of 11.36 percent. Net profit was also at its peak of Rs 5.6 billion.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 24 percent year on year as business activities continued to expand. Additionally, the same period last year had seen economic activities only beginning to resume therefore demand had not picked up full-scale. With better revenue the company also posted a significantly better net margin of almost 15 versus 4 percent in 1QFY21. The second quarter too saw revenue higher year on year, by 36 percent. The spinning business saw notably higher cotton prices and margins. Additionally, the transfer of orders to Pakistan from other countries also boosted sales. Thus, the company saw a net margin of 15 percent for 1HFY22 versus 5.7 percent in 1HFY21. Two years into the pandemic, business activities have returned more or less to normal, however this has also led to inflation as demand has picked up.

For the company, the phenomenon of transfer of orders to Pakistan is yet to be seen if it is long-term, however, presently, it has boded well for Nishat Chunian Limited.