Nishat Chunian Limited

Nishat Chunian Limited (PSX: NCL) has come a long way from its humble origins. What started off as a spinning mill comprising of 14,400 spindles has now become the fourth-largest textile company by sales in the country. NCL is a vertically integrated unit with annual spinning production of 75,000 tons of yarn, 3 million metres of greige fabric in weaving and 4 million meters of finished fabric.
Apart from textiles, the group also entered the power sector in 2007 by setting up a 200 MW power plant to cater to the rising energy demand. Venturing into entertainment sector, NC Entertainment was founded in 2015 to further diversify business interests. However, the company has recently divested its entire stake in NCEL.
Other companies in Nishat Chunian Group's portfolio include Nishat Chunian Power Limited (a power generation company), Nishat Chunian USA Inc. (Incorporated in USA), Nishat Chunian Electric Corporation Ltd.(a captive power generation company).
Stock & pattern of shareholding
NCL's trailed the benchmark KSE-100 index since Nov-17 while briefly outperforming it for two month period before that. The stock paid a dividend of Rs2.75 in FY17 which translated into a dividend yield of 5.8 percent. The pattern of shareholding shows that NCL's majority shareholding lies with the general public. The second-largest is with associated companies. Shahzad Saleem, CEO of the company owns 11.62 percent of the company while Nishat Mills Limited (NML) owns 13.61 percent.
Prior performance
NCL has managed to maintain its top line growth trajectory over the past several years while margins have tended to fluctuate in comparison. FY13 was a good year for the company in light of the dollar appreciation, good contribution from the yarn segment while also implementing cost-minimization.
But FY14 was an entirely different story where NCL saw margins drop on account of several factors which included rising expenditures and intense competition in the global markets which led to unutilized capacity in the spinning segment. Exchange rate fluctuations were also unfavorable taking a toll on margins.
In FY15, the demand for textile products in general and cotton yarn in particular declined, with a Rupee appreciation further hurting the company's margins. However, the subsequent year was definitely stolen by strong performance from the home textile division while the company was also able to undertake further cost rationalization.
When talking about Nishat Chunian's bottom line, however, it becomes pertinent to mention the huge role played by 'other income,' which has often times been higher than the bottom line itself! This is mostly in the form of dividend income from one of its subsidiary companies, Nishat Chunian (Power) Limited.
FY17 saw profitability grow in light of the investment on BMR activities and the shining performance of the Home Textiles Division which managed to augment its exports. According to the Director's report NCL invested almost Rs2.754 billion in capacity addition and modernization. The bulk of this went to the spinning division with an investment of Rs1914 million resulting in an addition of 53,664 spindles out of which 40,608 were replacements.
Segment-wise, constitutes the largest chunk of NCL' revenue, followed by processing & home textile, and then weaving. Seemingly, the sales mix has not changed much over the years, as spinning has accounted for 54-60 percent of sales over the past five years, while processing has remained around 29-31 percent. However, for FY17, the home textile's division contributed 29 percent to the top line which might be indicative of a gradual shift in the sales mix.
Being primarily an export-oriented company NCL earns roughly 69 percent of its revenues from exports. In terms of segments, the home textile segment earns the highest foreign exchange (93% of its sales are exports), while both spinning (57%) and weaving (37%) have a relatively stronger domestic presence. However, the company has taken steps to increase the home textile segment's domestic market share by launching "The Linen Company" to enter the retail space in Pakistan which has been doing well.
Recent performance
NCL posted impressive growth of almost 55 percent in its full year earnings for FY18 on a consolidated basis. The company managed to increase its top line by 14 percent helped by the rupee depreciation and an increase in cotton yarn prices which helped its spinning division deliver strong sales. NCL's gross profits picked up by 20 percent while its gross margins also increased due to inventory gains on cheaper cotton procurement. On the other hand, export rebates on value added segments also helped the firm amp up its bottom line.
NCL also kept its expenses in check which saw limited growth. On the other hand, NCL's other income managed to increase by more than three-fold. The company's finance costs also picked up by 21 percent on the back of aggressive raw material purchases as well as capex requirements.
On a consolidated basis, NCL saw its bottom line go up by 40 percent while its EPS increased from Rs10.2 to Rs15.8 in FY18. This enabled the company to give a positive surprise in its final cash dividend of Rs4 as compared to Rs2.75 last year.
Future outlook
The government has decided to exempt zero-rated sectors including textile, leather, sports and surgical goods from the increase in gas prices to lower their cost of production by giving a subsidy to the tune of Rs44 billion which will benefit the textile sector. In addition, the recently amended finance bill has also provided slashing of duties on more than 80 items which would provide relief to the local industry worth almost R5 billion. NCL's gross margins might pick up in the coming year owing to rebates coupled with a decrease in cost of production.
NCL has also started operations of the 99 looms that it acquired last year to revive one of its defunct spinning units while it has also invested Rs340 in its dyeing and printing unit. The company's investment in BMR will result in enhanced productivity going forward. The company is also expanding its retail footprint by opening outlets of its flagship store "The Linen Company" in Rawalpindi and other cities as well. Further depreciation in the rupee will be an added boon for the company.

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Nishat Chunian Limited (Consolidated)

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Rs (Mn)                  FY18    FY17     YoY Chge

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Revenue                 53033   46491          14%

Cost of sales           43745   38766          13%

Gross profit             9287    7725          20%

Distribution cost         968     895           8%

Admin expenses            483     448           8%

Other expenses            171     285         -40%

Other income              888     255         248%

Profit from operations   8553    6353          35%

Finance cost             2712    2246          21%

PAT                      5471    3919          40%

EPS                     15.84   10.21          55%

Gross margin            17.5%   16.6%    up 90 bps

Net margin              10.3%    8.4%   up 189 bps

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Source: PSX Notice

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Pattern of Shareholding

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Shareholders Category                               Percentage

                                                    of holding

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Directors, CEO, their spouses and minor children        14.18%

Executives                                               0.00%

Associated Companies, Undertakings & Related Parties    16.64%

Public Sector Companies & Corporations                   0.00%

NIT and IDBP (ICP UNIT)                                  0.00%

Banks, DFIs, Non-Banking Financial Institutions         10.29%

Insurance Companies                                      2.72%

Modarabas and Mutual Funds                               4.52%

Joint Stock Companies                                   13.15%

Others                                                   0.89%

General Public                                          37.61%

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