Nishat Mills Limited

The flagship company of the illustrious Nishat Group, Nishat Mills Limited (PSX: NML) began its humble journey in 1951 and listed itself on the KSE a decade later. Today, it stands as one of the largest vertically integrated textile companies in Pakistan, with a market capitalisation north of Rs48.5 billion.
A household name in the textile industry, Nishat Mills operates in the business segments of textile spinning, weaving, processing, home textile, garments, and power generation. It has 32 manufacturing units, each specialising in a specific product range, in Faisalabad, Sheikhupura, Ferozewatwan, and Lahore.
The company has a working relationship with some of the world's top brands such as Levi's, Next, Tommy Hilfiger, and Hugo Boss, to name a few. In addition, it has made its own strides in the Pakistani fashion industry with Nishat Linen, commanding a felt presence in apparel, upholstery, and bed linen.
Stock performance & Pattern of shareholding
While largely muted for the most part of the year (September '15 to May '16), NML stock has seen an enormous turnaround with the coming of the new fiscal year.
Over 27 percent of NML stock is in the hands of the public, which seems to be mostly local. The company's main associated companies are DG Khan Cement, with Adamjee Insurance holding less than one percent of the total stock and MCB holding nearly nothing. Around a fourth of the total stock is in the hands of the family.
Prior Performance
A falling topline has plagued the textile mammoth for the past couple of fiscal years, and profits only showed some signs of growth in FY16. The main reasons for the recent increase in profitability were an improvement in the performance of the firm's value-added business, an optimal fuel mix, and cost efficiencies due to better cost controls, as per the FY16 Director's Report.
It's no secret that Pakistan's textile industry continues to suffer from a high cost of doing business. The past couple of years have seen the country's textile exports decline due to cut-throat competition from regional players, an overvalued Rupee, energy shortage, various taxes and surcharges, and the slowdown in China and other markets. Nishat Mills would know this; it earns more than half of its revenues from exports. In fact, the company single-handedly contributes around three percent to the textile exports of Pakistan.
A segment analysis reveals that the lion's share of the firm's revenues - around 35 percent - comes from the Processing and home textile segment. In terms of gross profit, however, it accounts for 56 percent (Starting FY16, the 'Processing and home textile' segment is reported as two separate segments - 'Dyeing' and 'Home textile.' For the purpose of our analysis, the two segments have been combined).
As the graph illustrates, all of Nishat's segments have seen a decline in their sales over the past couple of years, while profitability has taken on a mixed trend. The Processing and home textile segment's gross margins have steadily improved and reached a new high in FY16, in spite of sluggish retail demand in the US and Europe. This was due to a diverse product mix, proactive marketing strategy, addition of new markets, and investment in new technologies, as per the FY16 Director's Report.
The Garments division has seen a plummet in its gross margins, reaching a new low in FY15. This was attributed to weak demand from Europe and an increase in wages. However, the segment's profitability showed some improvement in FY16, credited largely to high production efficiencies. Similarly, the spinning division has been on a nosedive since FY13, with FY16 seeing new lows in light of the cotton crop shortage sending up cotton prices but demand for yarn remaining low.
Recent Performance
For the first quarter ended FY17, Nishat Mills has shown some improvement. The company's sales declined by three percent year-on-year, but the bottomline exactly doubled over last year. Gross and net margins have expanded nicely, as the company has improved its profitability.
As per the Director's Report, the main reason behind the enhanced profitability was the achievement of production efficiencies and better inventory management. Moreover, a higher other income and lower finance cost further improved the bottomline.
During the period, Nishat Mills' spinning segment took a huge hit, with volumes falling by around 33 percent over 1QFY16. This was due to subdued demand in core markets. In the weaving segment, exports decreased due to economic slowdown in Europe, especially in the UK following Brexit. Nevertheless, volume sales were up by around seven percent year-on-year. The company has started exporting polyester open-end fabric (used for sun protection) and is also expecting growth in the abrasive fabric market going forward.
The real performance, however, came from the value-added end. Home textile reported a 20 percent growth in volume sales, but margins were suppressed. This was due to the sharp decline in the pound sterling and Euro after Brexit. Garments also reported a healthy growth in volume of 27 percent year-on-year, with much higher margins than before.
The company is enhancing the segment's production capacity and will be commissioning a new denim jeans facility soon.
Outlook
Nishat Mills has started the new fiscal year on a high note. Although the company is still looking at a lower topline, recent investments in capacity enhancement and production efficiencies have begun paying off. Moreover, the restoration of zero-rating on textile exports might also help the situation.

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Pattern of Shareholding                                     Percentage

Shareholders Category                                       of holding

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Directors, CEO, their spouses and minor children                25.22%

Associated Companies, Undertakings & Related Parties             9.41%

D.G. Khan Cement Company Limited                                 8.61%

Adamjee Insurance Company Limited                                0.79%

MCB Bank Limited                                                 0.00%

Banks, DFIs, Non-Banking Financial Institutions                  2.60%

Insurance Companies                                              3.49%

Modarabas and Mutual Funds                                       9.14%

Shareholders holding 5% or above                                50.33%

General Public                                                  27.32%

Local                                                           26.95%

Foreign                                                          0.37%

Others                                                          21.20%

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Source: Company accounts

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Nishat Mills Limited

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Rs(mn)                       FY16      FY15          YoY

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Net Sales                  47,999    51,200          -6%

Cost of Sales              41,735    45,153          -8%

Gross Profit                6,264     6,047           4%

GP Margin                     13%       12%   up 120 bps

Distribution Cost           2,138     2,426         -12%

Administrative Expenses     1,117     1,102           1%

Other Expenses                317       366         -13%

Other Income                4,079     3,982           2%

Profit From Operations      6,771     6,135          10%

Finance Cost                1,046     1,745         -40%

Taxation                      802       478          68%

Profit After Tax            4,923     3,912          26%

NP Margin                     10%        8%   up 260 bps

EPS                         14.00     11.13          26%

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