Nishat Mills Limited

Nishat Mills Limited (PSX: NML), the flagship company of Nishat Group was established in 1951. Being one of the largest vertically integrated companies in Pakistan, the company is engaged in spinning, weaving, printing, dyeing, bleaching, and stitching and apparel business. NML deals in yarn, linen, and other products made from raw cotton and synthetic fiber. The company is also in the business of generating and supplying electricity.

Pattern of Shareholding

As of June 30, 2022, Nishat Mills Limited has an outstanding share capital of 351.6 million shares which are held by 13,861 shareholders. The local general public holds the majority stake of 32.62 percent in the company followed by directors, the CEO, their spouse, and minor children representing 25.22 percent of the company’s ownership. Around 10.35 percent of the company’s shares are owned by the government of Pakistan while associated companies, undertakings, and related parties grab the next spot with a stake of 8.76 percent in NML. Joint stock companies account for 7.96 percent of NML’s shares. Modarabas & Mutual funds hold 4.25 percent shares whereas Banks, DFIs, and NBFIs have 3.84 percent shares. Foreign companies and the foreign general public have 3.03 percent and 1.54 percent of NML’s shares respectively. The remaining ownership is held by other categories of shareholders.

Historical Performance (2019-23)

Except for a dip in 2020, NML’s topline and bottom line have been riding an upward trajectory in all the years under consideration. Among all the years under consideration, 2022 steals the show when it comes to topline and bottom-line growth. NML’s margins which grew reasonably in 2019 bounced back in 2020. The subsequent two years marked a period of recovery for NML’s margins. However, in 2023, gross and net margins slightly faded while operating margins continued to heighten. The detailed performance review of the period under consideration is given below.

In 2019, NML’s net sales flourished by 18.18 percent year-on-year. Export sales, which constituted over 83 percent of the company’s total sales mix in 2019, rebounded by 23 percent year-on-year in line with the company’s marketing strategy of expanding its footprint in diverse geographies. Gross profit rose by 37.95 percent in 2019 with GP margin climbing up from 10.33 percent in 2018 to 12.06 percent in 2019. This was on account of Pak Rupee depreciation which considerably drove up the margins of export sales. Moreover, cost rationalization, scalability of production, and availability of gas and electricity at subsidized rates of USD 6.5 per MMBTU 7.5 cents per KWH during the year also greatly contributed to achieving a robust GP margin. Distribution expense multiplied by 13.6 percent in 2019 mainly on account of outward freight & handling and commission to selling agents on account of increased export sales. Administrative expenses spiraled by 4.15 percent in 2019 due to higher payroll expenses incurred during the year. Elevated profit-related provisioning resulted in a 90.34 percent spike in other expenses incurred during the year. However, it was washed away by superior other income on account of net exchange gain and dividend income earned by NML in 2019. Operating profit mounted by 43.93 percent in 2019 with OP margin clocking in at 13.49 percent up from 11.08 percent in 2018. A 67.85 percent hike in finance cost in 2019 was the consequence of a higher discount rate and increased borrowings due to greater working capital requirements. NML’s gearing ratio picked up from 20.77 percent in 2018 to 27.31 percent in 2020. Nevertheless, NML was able to register 43 percent year-on-year growth in its net profit which clocked in at Rs.5859.048 million in 2019 with EPS of Rs.16.66 versus EPS of Rs.11.65 in 2018. NP margin also enlarged from 7.63 percent in 2018 to 9.23 percent in 2019.

After a year full of achievement and recovery in terms of margins and profitability, came 2020, when NML’s topline posted a year-on-year downtick of 4.09 percent. These were the times when the local as well as global economies were crippled due to the global pandemic. NML’s top line took a hit as export sales to its main markets – China, the US, and Europe – dropped considerably during the year owing to lockdowns imposed in the last quarter. Gross profit plummeted by 4.97 percent in 2020, however, GP margin marginally ticked down to clock in at 11.95 percent. Distribution expense posted a marginal growth of 3.81 percent in 2020 due to higher outward freight & handling charges. Administrative expenses hiked by 10.67 percent in 2020 on account of higher payroll expenses as the company added 567 new employees to its workforce to take it up to 18,278. This was because the company expanded its yarn production facility besides establishing a new towel manufacturing unit and 3.075 MW solar power plant during 2020. All these expansions required additional employees. Other expenses slid by 40.97 percent in 2020 on account of lesser provisioning for WPPF. Other income also eroded by 41.21 percent in 2020 due to thin dividend income and net foreign exchange gain recorded by NML in 2020. As a consequence, operating profit declined by 30.16 percent in 2020 with OP margin slipping to 9.82 percent. Finance costs also shrank by 9.94 percent during the year due to monetary easing towards the end of the year. Net profit slumped by 40.16 percent in 2020 to clock in at Rs.3506.284 million with EPS of Rs.9.97 and NP margin of 5.76 percent.

In 2021, NML’s topline registered a 17.28 percent year-on-year rise which was the result of a remarkable 84 percent rise in local sales. Export sales also inched up by 2.2 percent as COVID-related restrictions began to ease off. Duty drawback incentives on export sales also positively contributed to topline growth in 2021. While prices of raw materials significantly hiked during the year, however, the strategic pricing and cost control strategies adopted by the company enabled it to attain 28.06 percent year-on-year growth in gross profit with GP margin rising up to 13.04 percent in 2021. Distribution expense escalated by 7.69 percent in 2021 on account of higher outward freight and handling charges. Administrative expenses surged by 8.22 percent in 2021 as NML’s workforce expanded to incorporate 20,599 employees which drove up the payroll expense. 55.64 percent hike in other expenses was the consequence of increased profit-related provisioning done in 2021. However, it was wiped off by 23.67 percent bigger other income earned during the year on the back of superior dividend income, particularly from MCB Bank Limited, an associated company of NML. Scrap sales and rental income also strengthened other income in 2021. This translated into a 38.75 percent rise in operating profit in 2021 with OP margin picking up to 11.62 percent. Finance costs declined for the second consecutive year due to monetary easing and better cash flow to meet the working capital requirements for the year. Net profit posted a staggering 68.91 percent year-on-year growth in 2021 to clock in at Rs.5922.470 million with EPS of Rs.16.84 and NP margin of 8.29 percent.

Among all the years under consideration, 2022 stands out when it comes to topline and bottom-line growth. NML’s topline magnified by 62.07 percent in 2022. The growth was the result of favorable pricing and bigger volumes sold during the year. Local and export sales mounted by 84 percent and 62 percent respectively during the year. Pak Rupee depreciation, supply chain disruptions, huge increase in raw cotton prices due to damage of cotton crop on account of catastrophic floods, energy crisis as well as upward revisions in energy prices increased the cost of sales in 2022, however, with better volume and prices, the company was able to attain 86.05 percent rise in its gross profit with GP margin reaching its optimum level of 14.97 percent in 2022. The massive 82.98 percent year-on-year hike in distribution expense during the year was the effect of higher outward freight and handling charges as well as commission to selling agents. Expansion of the workforce to include 24,086 employees resulted in a 24.72 percent spike in administrative expenses in 2022. Improved profitability allowed the company to book higher provisions for WPPF which resulted in 51.30 percent bigger other expenses incurred in 2022. Superior dividend income, net exchange gain, rental income, and scrap sales drove other income up by 48.56 percent in 2022. All these factors led to 81.54 percent stronger operating profit recorded by NML in 2022 with an OP margin of 13.02 percent. Finance cost soared by 75.76 percent in 2022 on account of increased discount rates and increased working capital-related borrowings. NML’s gearing ratio reached 34.68 percent in 2022 from 27.97 percent in 2021. The imposition of super tax also diluted the bottom line which nevertheless registered year-on-year growth of 74.11 percent in 2022 to clock in at Rs.10,311.674 million with EPS of Rs.29.33 and NP margin of 8.91 percent.

In 2023, NML’s topline mustered 22.45 percent year-on-year growth on the back of better local and export sales made during the year. Despite elevated raw material costs, energy price hikes, Pak Rupee depreciation, and high indigenous inflation, NML was able to keep a check on its cost of sales by implementing rigorous cost control measures. This coupled with upward revision in prices and Pak Rupee depreciation allowed NML to record a 21.6 percent year-on-year rise in gross profit with GP margin slightly ticking down to 14.87 percent. Distribution expenses hiked by 10.10 percent due to higher payroll expenses, commission to selling agents, fuel, and travel costs incurred during the year. During the year, NML streamlined its workforce from 24,086 employees to 21,975 employees; however, adjustment in the minimum wage rate resulted in higher payroll expenses and drove up administrative expenses by 28.67 percent. Higher provisioning for WPPF resulted in 11.12 percent higher other expenses incurred by NML in 2023. Superior dividend income from its associated companies particularly MCB, higher net exchange gain and interest income earned on loans granted to Nishat Linen (Private) Limited, a wholly owned subsidiary of NML resulted in record high other income of Rs.10,201.578 million in 2023, up 83.11 percent year-on-year. Operating profit multiplied by 48.23 percent in 2023 with OP margin reaching its highest level of 15.76 percent. 220.67 percent surge in finance cost in 2023 was the consequence of an unprecedented level of discount rate and additional short-term loans obtained during the year due to working capital requirements. NML registered the highest gearing ratio of 40.77 percent in 2023 versus 34.68 percent in 2022. Net profit grew by 17.97 percent in 2023 to clock in at Rs.12,166.022 million with EPS of Rs.34.60 and NP margin of 8.58 percent.

Recent Performance (1QFY24)

While NML’s topline and bottom line registered reasonable growth of 17 percent and 10 percent respectively in 1QFY24, the deterioration of its gross and net margins during the period tell the underlying grim facts. 27 percent higher cost of sales incurred by NML in 1QFY24 versus the same period last year was the effect of high raw material prices, hike in energy tariff as well as soaring inflation. Lackluster demand for textiles in the international market particularly in the US and Europe didn’t allow the company to pass on the impact of cost hike to its consumers, resulting in a 25 percent smaller gross profit recorded by the company during the quarter with GP margin clocking in at 12.39 percent in 1QFY24 versus 19.37 percent in 1QFY23. Lower sales volume culminated in an 18 percent thinner distribution expense recorded by NML in 1QFY24. Administrative expenses inched up by 5 percent during 1QFY24 on account of high inflation. Lesser profitability didn’t allow the company to book higher provisions for WPPF, resulting in a 50 percent decline in other expenses. Other income was magnified by a massive 270 percent in 1QFY24. Over the years, the main components of other income are dividend income, interest income from loans to subsidiary companies, and net exchange gain. Other income gave considerable support to NML’s operating profit which spiraled by 50 percent in 1QFY24 with an OP margin of 20.98 percent versus 16.34 percent during the same period last year The strength provided to NML’s financial performance by other income was faded by finance cost which escalated by 186 percent in 1QFY24 on the back of higher discount rate. Net profit rose by 10 percent year-on-year in 1QFY24 to clock in at Rs.4548.72 million with EPS of Rs.12.94 versus EPS of Rs.11.81 in 1QFY23. NP margin marched down from 12.09 percent in 1QFY23 to 11.36 percent in 1QFY24.

Future Outlook

With strong recessionary waves hitting the economies worldwide, cotton consumption is dropping and prices are expected to bottom out. However, the sharply depreciating Pak Rupee wouldn’t allow the local textile manufacturers to enjoy the low international cotton prices. This coupled with a hike in energy tariffs, shortage of capital, and high discount rate; all point towards the bottom-line slide and margin contraction in the absence of a vigorous other income.