Nishat Mills Limited

Nishat Mills Limited (PSX: NML) was established in 1951 under the Companies Act, 1913 (now Companies Act, 2017). It is part of the Nishat Group of Companies. The company’s functions range from textile manufacturing, spinning, weaving, bleaching, dyeing, printing, stitching, apparel, and trading in yarn, linen, cloth, and fabrics made from raw cotton and synthetic fibre. The company also generates and sells electricity.

Shareholding pattern

As of June 30, 2021, over 25 percent shares are held by the directors, CEO, their spouses, and minor children within which 12.6 percent shares are held by each of the following: the CEO, Mian Umer Mansha and Chairman, Mian Hassan Mansha. The local general public owns over 29 percent shares followed by nearly 10 percent in modarabas and mutual funds and another almost 9 percent in associated companies, undertakings, and related parties. In the latter category, majority of the shares are owned by D.G. Khan Cement Company Limited. The remaining close to 27 percent shares are withthe rest of the shareholder categories.

Historical operational performance

The company has often seen a growing topline, while profit margins in the last six years have been fluctuating.

At 18 percent, revenue growth in FY19 was the highest seen since FY12. Topline crossed Rs 63 billion in value terms with export sales rising by 23 percent. All the segments of the company, that is, weaving, dyeing and home textiles performed well. Moreover, currency devaluation made exports favorable that benefitted companies focused on export sales. This is also reflected in Nishat Mills’ higher gross margin at 12 percent. With operating expenses declining as a sharein revenue and other income bringing in additional Rs 5 billion due to dividend income and a net exchange gain, net margin improved to over 9 percent with net profit at an all-time high of Rs 5.9 billion.

In FY20, revenue contracted by 4 percent largely attributed to the outbreak of the Covid-19 pandemic that resulted in strict nation-wide lockdowns. Export sales were also impacted as the fell by 6 percent since borders were closed therefore trade was also reduced.Primary export markets of Europe, China and USA were also under strict lockdowns that affected export sales. While gross margin was flat at nearly 12 percent, operating and net margin reduced due to a substantial reduction in other income to Rs 3 billion. Net margin as thus recorded at 5.8 percent for the year.

Revenue in FY21 grew by over 17 percent to reach an all-time high of Rs 71.4 billion. Although export sales continued to be the major contributor to the total revenue, it was the growth in local sales that nearly doubled year on year. This was due to an improvement in sales volumes. Therefore, gross margin increased to 13 percent. Net margin also followed as it was recorded at a higher 8.3 percent. The increase in net margin is more pronounced due to a reduction in finance expense that was a result of a lower borrowing cost and increased cash inflows.

Quarterly results and outlook

Revenue in the first quarter of FY22 was higher by almost 53 percent year on year. This was largely due to the growth seen in the dyeing division coming from an increase in demand as the segment was experiencing its peak business cycle. Other divisions also saw some growth that cumulatively allowed net margin to be significantly higher year on year at 13.5 percent compared to 5.9 percent in the same period last year. Cost of production was also significantly lower in 1QFY22 consuming 80.5 percent of revenue, versus over 88 percent in 1QFY21.

Growth continued in the second quarter of FY22 as topline posted an increase of 66 percent year on year. Overall, the textile exports of the country grew as primary export destinations such as US and Europe opened as mass vaccinations rolled out and business activities and trade returned to some normalcy after the outbreak of the Covid-19 pandemic. In the spinning divisions, majority of the increase in revenue was seen in local sales as volumes and prices grew while prices in the export market remained under pressure. The weaving division also saw an improvement in demand as markets opened gradually. The increase in prices was resisted in the export market, yet demand continued to exist. The dyeing division also saw notable increases in revenue as well as sales volumes. While cost of production was marginally better in 2QFY22, other income brought in substantial support of Rs 1.5 billion that increased net margin to 8 percent versus 4.8 percent in 2QFY21.

While revenue is increasing on the back of a surge in demand, a major challenge for the company as well as the industry is the rising cost of inputs that can make profitability uncertain. On the other hand, currency devaluation is benefitting export-oriented companies such as Nishat Mills as it makes exports favorable in the global market. The company is also upgrading its machinery that will enhance production in the future to meet the rising demand for textile products.