Starting out as a single spinning unit in 1990, Nishat Chunian Ltd (PSX: NCL) has expanded and diversified into a fully vertically integrated textile conglomerate. With a market capitalisation of over Rs 9.4 billion, the company is one of the largest textile units on the Pakistan Stock Exchange. Nishat Chunian Limited operates in four segments - spinning, weaving, processing and home textile, and power generation (which do not have any external sales). The company's yarn market spans a range of loyal customers all over the world; major markets include Hong Kong, Mainland China, and Europe. Apparel fabric is exported to the Far East, Europe and North America, whereas the sheeting fabric is mainly exported to high-end US and European buyers. In terms of sales, the company is one of the largest Pakistani exporters of sheeting products to the US.
Nishat Chunian has a number of subsidiaries to its name as well - Nishat Chunian (Power) Limited; NC Electric Company Limited (established in June 2014); and most recently, NC Entertainment (Private) Limited (to set up multiplex cinemas all over Pakistan - a project currently in the works).
Pattern of Shareholding and Stock Price
NCL is a frequently traded stock, with a daily average of over 760,000 being traded on the exchange. This makes it one of the hottest stocks in the textile composite category. Gul Ahmed Textile Mills, a peer with a comparable stock price and scale, had a daily traded average of just over 300,000 over the same period.
As of FY15, the general public has access to around 32 percent of NCL's total outstanding shares issued - a decent amount for a float. The Director, CEO, and family collectively held over 25 percent, while associated companies had around 17 percent. Of the associated companies, Nishat Mills has around 14 percent stake.
For the most part of FY16, NCL stock has traded above the KSE100. However, for the latter part of the fiscal year - ie March to July - the stock remained below the index. This has less to do with the company and its fundamentals, and more to do with the KSE100's upward march; the rise in KSE100 was due to the euphoria of re-inclusion in MSCI index and due to formation of PSX and potential strategic sale of it.
Prior Performance
Circa 2012, Nishat Chunian Limited's top line has seen steady growth each year. However, where the firm's profitability is concerned, each year has been different; profitability has taken on a mixed trend over the years, and a largely negative one.
Gross and net margins skyrocketed in FY13 due to a dollar appreciation and increased sales, not to mention cost-cutting measures, as per the Director's Report. However, in the subsequent year, the margins suffered not only due to increased global competitiveness and exchange rate fluctuations, but due to high-scale expansion of spinning capacity, which wasn't able to operate to its maximum capacity. In FY15, the demand for textile products in general and cotton yarn in particular declined during the year, while the Rupee appreciation hurt the bottom line.
A segment-wise analysis shows that the spinning segment accounts for 60 percent of total revenues (as of FY15), while home textile makes up 27 percent and weaving forms 13 percent. In terms of profitability, the trend has been largely mixed, albeit negative.
The spinning segment's gross margins plummeted in FY14 and it has been struggling to recover since; where once spinning gave margins in 19-21 percent range, it is now at the 5 percent mark. Similarly, the profitability of the company's weaving business has also fallen over time. Only the processing and home textile segment has managed to maintain some form of stability, though even this business took a huge hit in FY14.
The main reason cited for the fall in profitability of these segments in FY14 has been sudden foreign exchange rate fluctuations. Historically, exports have accounted for close to 70 percent of the company's total sales. So, any distortions in the exchange rates or international markets would have an adverse impact on the company's sales. Moreover, the spinning segment has remained largely vulnerable due to the fact that a large majority of sales go to China and demand has been lower there, not to mention the increased competition from India.
Recent Performance
For the nine months ended FY16, Nishat Chunian has shown a comeback, with a top line growth of nine percent year-on-year and a bottom line increase of 44 percent, compared to one percent growth and 60 percent loss a year ago, respectively. Net margins inched up 100 bps as administrative expenses, other operating expenses, and finance cost were all contained. However, this was offset by a decline in other income.
The increased sales have been due to an increase in global demand of made-ups. The spinning sector didn't witness any revival, as the slump in Chinese business persisted. However, it is expected that the imposition of 10 percent RD on yarn imports helped with the domestic situation.
Cost efficiencies from investments made in the previous year on various projects - machines improvement, boilers improvement, grid station up-gradation, and advanced lab equipment might also have played a role in bettering the margins.
Outlook
With zero-rating on exports announced for FY17, the textile industry looks well-poised to stage a comeback. For Nishat Chunian, the company's prospects appear bright; the firm recently invested into a 46MW power plant, and this should reap some fruit in the years to come. Moreover, the company has begun launching retail outlets for its home-textile products. It also continues to invest on advancement of plant and machinery and introducing latest state-of-the-art technologies.
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