Nagina Cotton Mills Limited

Nagina Cotton Mills Limited (PSX: NAGC) is part of the Nagina Group of Companies, and 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, 2022, close to 71 percent shares are held by the directors, CEO, their spouses and minor children. Within this category, Mr. Shahzada Ellahi Shaikh, Mr. Shaukat Ellahi Shaikh and Mr. Shafqat Ellahi Shaikh are the major shareholders, holding 17 percent shares, each. Over 16 percent shares are held under the associated companies, undertakings and related parties, followed by over 10 percent held by the local general public. The remaining roughly 2 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline since FY12, with the exception of FY15. Profit margins, in the last six years, increased between FY17 and FY19, before declining in FY20. After that, they showed significant recovery in FY21 and FY22.

In FY18, topline registered a growth of over 12 percent to reach close to Rs 6 billion in value terms. This was a result of a combination of factors such as higher selling prices, changes in the exchange rate and “benefits of export drawback scheme”. While majority of the growth was seen in local sales, that witnessed an increase of 45 percent, export sales was the major contributor to total revenue pie. Thus, gross margin improved to 8.7 percent for the year. Coupled with some support from other income, net margin also increased, to 2.7 percent, while bottomline doubled year on year from Rs 79 million in the previous year to Rs 158 million in FY18.

The company neared Rs 7 billion in FY19 as topline grew by nearly 18 percent. This was again a result of several factors such as better prices, better volumes and currency devaluation that boosted both, local sales and export sales. Local sales grew by 26 percent while export sales registered an increase of over 16 percent. Cost of production fell to 88 percent of revenue that raised gross margin to a four-year high of 12 percent. Despite the increase in interest rates that drove finance expense up, net margin grew to 4.4 percent, while the bottomline at Rs 309 million was the highest seen since FY14.

Topline growth in FY20 was marginal at 2 percent that allowed revenue to cross Rs 7 billion in value terms. This was hampered by the outbreak of the Covid-19 pandemic that led to strict lockdowns. This resulted in a halt in production and trade. The company’s manufacturing facility was also shut down that adversely impacted profit margins as is evident from gross margin falling to 8.4 percent. This also trickled to the net margin that was recorded at less than 1 percent as interest rates continued to escalate the finance expense that consumed nearly 4 percent of revenue for the year.

Topline growth remained subdued for another year recorded at 1.6 percent in FY21. Despite the marginal increase in revenue, gross margin more than doubled to reach 19.75 percent as cost of production fell to 80 percent. The latter was attributed to timely procurement of raw material that is evident from the fact that majority of the reduction in production cost was associated with raw material expenses. This also reflected in the net margin that was recorded at a significantly higher 10.36 percent, while bottomline reached the highest thus far at Rs 744 million.

Recent results and future outlook

Topline growth stood at an all-time high of 56.4 percent to reach Rs 11.2 billion in value terms. While local sales fell drastically from Rs 6.4 billion in the previous year to almost Rs 2 billion in FY22, export sales accelerated to nearly Rs 10 billion, from last year’s Rs 1.2 billion. Barring FY21, export sales have historically been the major contributor to topline. On the other hand, the rise revenue is attributed partly to a rise in demand and partly to an increase in selling prices of yarn. The latter was also driven by better quality of yarn that was due to installation of modern spinning machinery. Additionally, the timely procurement of raw materials helped in driving profitability that is evident from an all-time high gross margin of over 22 percent. With considerably lower taxation, net margin also peaked at over 16 percent, while bottomline reached a high of Rs 1.8 billion.

While improved selling prices have driven profitability for the year, the devastating floods that have damaged cotton crop, combined with a 14 percent decline in seed cotton arrivals at the ginneries, the future demand and profitability is at a risk. With crop shortage and currency devaluation, the imported raw material will escalate production costs. Moreover, the possible recession in major world economies will adversely impact demand of textile products. For the company, due to advance selling of yarn and raw material procurement, the first quarter of FY23 holds a positive outlook.