Nishat Chunian Limited was incorporated in 1990 as a public limited company with an equity investment of Rs 100 million. A spinning mill having a capacity of 14,400 spindles was established at Bhai Pheru, Tehsil Chunian and commercial production started on March 10 1991.
In 1998, this capacity was enhanced to 19,200 spindles. In the same year, the company diversified its business interest by venturing into a weaving project with the installation of 99 air jet looms. A new state-of-the-art spinning unit started production in November 2000, increasing the total spinning capacity to about 40,872 spindles. Subsequently weaving capacity was increased to 212 air jet looms while the spinning capacity was increased to 50,952 spindles.
During the period ended June 30, 2005, the Nishat Chunian (NCL) enhanced its spinning capacity substantially by acquiring the operating assets of Umer Fabrics Limited comprising of 38,544 spindles and by addition of a new spinning unit with 40,128 spindles. In 2006, the company also diversified into the home textiles business. NCL is currently operating with 147,926 spindles, 293 looms, a modern dyeing and finishing plant having capacity of 71,000 meters per day and captive power plants with a total capacity of 33MW.
Nishat Chunian Power Limited (NCPL), incorporated in February 23, 2007, is a subsidiary of NCL. The gross capacity of the NCPL is 200MW and it is operating as an independent power producer, selling its electricity to National Transmission & Dispatch Company. It successfully commenced commercial operations on 21 July 2010.
FINANCIAL ANALYSIS OF NISHAT CHUNIAN LIMITED
Profitability Sales revenue has shown an upward trend since 2006, with the best performance in this regard in FY10. Sales during the year were the highest ever at Rs 13.34 billion, as compared to Rs 9.96 billion during last year which is an increase of 33.9 percent.
Part of this rise owes to home textiles; sales of which increased to $48 million in FY10 from $25 million in FY09, resulting in better capacity utilisation. Sales revenue increased because of higher product prices, higher exchange rate parity and better capacity utilisation. At the same time, cost of sales increased by 27 percent from FY09 to FY10.
In spite of the increase in the cost of goods sold, profit after tax increased by 801 percent from FY09 to FY10. Major contribution to the increase in profitability in FY10 came from the sharp increase in prices of yarn which is used in the spinning business. The positive variances in the sales, gross profit and profit after tax led to 30 percent return on shareholder's equity during FY10.
The EBIT ratio increased from 12 percent in FY09 to 16 percent in FY10, signalling an increase in the company's profitability. The company's net profit margin significantly improved to 7.06 percent in FY10 as compared to 1.0 percent in FY09 due to the year-on-year reduction in interest expenses from 10.85 percent of sales in FY09 to 8.25 percent of sales in FY10.
Liquidity The current ratio has increased gradually from 0.81 in FY09 to 0.85 in FY10, which suggests that short run liquidity is not a problem for the company. Even though a decline from 0.43 to 0.37 has been observed in the quick ratio, the liquidity position is strong as this decline only signals towards the investment committed by the company on its subsidiary, NCPL.
Debt Management Despite capital expenditure on textile machinery and investment made in NCPL, leverage ratios of NCL have improved over last year. This is credited to the company's conservative capital structure. Total debt to equity ratio also improved to 69:31 in FY10 as compared to 74:26 for the previous year. Long term debt has fallen by 14 percent in FY10.
High interest rates and the company's requirement for higher level of borrowing for investment in NCPL led to a 53 percent increase in the borrowing cost from FY08 to FY09. Till the end of FY10, this cost remained high, with a small increase of 1.8 percent coming from FY09. With NCPL now operational and no new investment or expansion projects in the pipeline, it is expected that this cost will reduce in coming years.
Operational Efficiency The company has been able to improve its overall production efficiency and resource utilisation capacity. This can be seen by the jump in its fixed asset turnover ratio from 1.20 in FY08 to 2.24 in FY10. Profit after tax attributable to shareholders has increased by 839 percent from FY09 to FY10.
Market Value There has been a phenomenal improvement in the earnings per share of the company. It rose from 0.22 in FY08 to 1.19 in FY 09, moving up to 7.89 in FY10.
Future Prospects Pakistan's main cotton growing areas in Punjab and Sindh have been severely affected by the devastating floods of 2010.
On account of damage to the cotton crop in Pakistan and less cotton production in China, cotton rallied to the highest price in more than 15 years, before receding sharply in recent weeks. The outlook for the performance of the textile sector for the remainder of this year remains uncertain, so far given the relatively weak performance of cotton on international markets.
In order to raise equity from the capital markets, NCL planned a privately-placed Term Finance Certificate issue worth Rs 500 million. Proceeds from this TFC issue were disbursed to NCL in September 2010. NCPL is fully operational and is dispatching electricity as per the requirement of WAPDA.
It is expected to have healthy profitability with minimum variation in profits. The company expects to receive cash dividends of around PKR 300-400 million every year from NCPL. It is hoped that steady stream of dividends from NCPL will help NCL smoothen out variations in its earnings.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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