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Nishat Chunian Limited

BR Research Updated 22 Oct, 2019

Nishat Chunian Limited (PSX:NCL) is part of the Nishat Chunian Group. The conglomerate has presence in Textile and Power Generation sectors.  NCL stands at an advantage arising from the synergy of the group and technical expertise, which are transferable across companies.

NCL began operations in 1990 as a spinning mill with a little over 14000 spindles. Today, it operates as a vertically integrated company with over 200,000 spindles. Spinning is also the largest business segment of the company accounting for more than 50 percent of the turnover, while the rest of the pie is divided amongst home textile and weaving segment. In the preceding five years, exports of the company have accounted for 50 percent of the revenue but a declining trend seems to have emerged on export as a percentage of the total revenue.

Nishat Chunian Limited
Rs FY19FY18chg
Sales########################11%
Cost of sales########################10%
Gross Profit4,887,512,5614,271,343,82014%
Administrative Expenses278,123,593222,242,17625%
Distribution Cost944,021,613908,398,2024%
Other expenses273,865,080129,114,178112%
Other income2,454,439,9301,131,881,730117%
EBIT5,845,942,2054,143,470,99441%
Finance Cost2,177,576,1491,383,364,85457%
EBT3,668,366,0562,760,106,14033%
Taxation500,774,516397,022,29326%
PAT3,167,591,5402,363,083,84734%
EPS (Rs)13.199.84
Gross Margin12.42%12.01%
Profit Margin8.05%6.65%
Source: Company Accounts

The company's production capabilities in the spinning segment stand at 75000 tons of yarn while 4 million meters in greige fabric and 4 million meters of finished fabric. Addressing the escalating energy demand, the company has set up a 200 MW Independent Power Plant as well.

Pattern of Shareholding

General public has the biggest chunk of the shareholding pie recorded at 33 percent followed by directors and their spouses accounting for about 26 percent stake in the company. Banks, Development Financial Institutions & Non-Banking Financial Institutions and insurance companies collectively own less than 10 percent of the company.

Industry Dynamics

The textile industry contributes to more than half of the exports of the country, the employment of 40 percent of industrial labor force and amounting to 8 percent of the total GDP of the country. Despite that, challenges loom.

Pattern of Shareholding (as on June 2019)
Categories of Shareholders Share
Directors/Chief Executive Officer and their spouse and minor Children25.8%
Associated Companies, Undertakings and related parties16.6%
Banks, Development Financial Institutions & Non-Banking Financial Institutions7.5%
Insurance companies2.3%
Modarabas & Mutual Funds6.9%
Joint Stock Companies3.76%
General Public33.0%
Others4.0%
Total100%
Source: Company accounts 

The industry operates through a value chain, a sequence of nodes adding value at each stage. Since the chain is interconnected, challenges trickle down towards the other nodes. It starts with the ginning process, which requires separating cotton fiber from the seed. The extracted fiber then goes through spinning, turning it into yarn, which then moves over to weaving to complete the fabric. Once the fabric is in place, it goes for dyeing before making it to retail. Combine this process and you have a composite.

In the preceding fiscal year, the industry faced challenges emanating from a global slowdown, tentative Brexit situation, trade dispute between the economic giants USA and China over tariff rationalization. These created impediments in the smooth functioning of the industry during the year. On the domestic front, a massive devaluation of more than 20 percent during the year and an interest rate hike of more than 5 percent also posed threats.

In the wake of FY20 some of the prior issues have slipped through the cracks while some new challenges have surfaced particularly in respect to curtailing costs. In more recent light, the imposition of the 17 per cent sales tax and the CNIC condition for transactions are also considered challenged by local industry.

Industry sources say, a timely sales tax refund is required to be materialized otherwise the export sector will face serious working capital implications. For the time being, the export-oriented sector is facing technical challenges in processing the sales tax refunds which the government needs to address.

Company Performance

FY19 proved to be another year of growth for the company in review. The topline grew by 11 percent during the year- in line with the 5-year CAGR.  Revenue picked momentum on the back of rising spinning and home textile sales, dragging the overall top line higher, with an increase of 12.5 percent and 15.5 percent respectively.

Spinning, the first operational segment of the company, accounts for more than 50 percent of the entire turnover. Sales for this segment are largely concentrated in domestic markets, accounting for 70 percent of the segments turnover. Despite a decline in exports by 17 percent, an increase of 37 percent in domestic sales was able to more than offset the impact during the period under review. The company attributes the decline of exports to the ongoing trade war between China and USA while suggesting domestic revenues rose at the back of rising yarn prices. Industry source suggests that skewedness towards domestic sales is due to local producers fetching lower prices in the export markets. Company accounts also add that the impact of rising cotton prices was successfully transferred to its customers.

The pie is further divided between home textiles and weaving accounting for 26 percent and 14 percent respectively as of June-19.  Sales in home textiles are majorly directed towards exports, with a meager 7 percent in domestic markets. As for weaving, it is a 50-50 bag. Sales in home textiles during FY19 grew by 15.5 percent year-on-year while weaving witnessed a decline of 4 percent during the same period. According to the management of the company, the increase stems from the rupee depreciation and the expansion in its retail company called 'The Linen Company' (TLC). On the other hand, the declines in weaving export are reasoned to have been a cause of withdrawal of duty drawback.

Healthy sales increase is followed by a sticky gross margin recorded at 12.04 percent (SPLY: 12 percent). The gross margin inched slightly as simultaneous cost increases weighed in on the overall gross margin.  Even though cost of sales increased about 10 percent, the increase in revenues overshadowed, keeping the upward trajectory in place.

Having interest rates increase by more than 5 percent, the company still managed to keep the finance costs at a stable one percent of sales. Net profit for FY19 stood at 8 percent (SPLY: 7 percent). The management attributes the increase to improved spinning margins and Balancing Modernization and rebalancing activities.

The company over the past 5 years has exhibited signs of stability as corroborated by the stable Margins during the preceding 5-years remaining within a close proximity of the average, calculated at 10 percent for GP Margin and 6 percent for NP Margin.

Future Outlook

Prevailing uncertainties do not pose much threat to the company due to its sheer size and diversified product segments, although they will create impediments along the way.  Risks arising from movements in currency can be mitigated through rebalancing its product segments in line with the current dynamics, as it occurred during FY19. Although this is only true if demand in either of the markets remains robust, as this way the company can direct its sales towards the lucrative areas. If domestic markets work in tandem with the declining global market then the ability to utilize its diversification strategy will fade.

As hefty refunds remain to be disseminated by the incumbent government on its sales refund policy, decay in working capital is plausible. Although, due to it's strong profile, acquiring finances will not be much of a hassle.

It is pertinent to note that expansions are taking place at a time when interest rates have almost doubled during the past two years. Sky-high interest rates will take a toll on the bottom line as finance costs would swell, unless the policy rates revert in the opposite direction.

The company in the future has plans to branch out its retail network under the 'The Linen Company' brand across major cities. In fact, an outlet opened in Karachi during FY19 while the company already had its presence in Lahore and Islamabad.

In home textile division, embroidery machines are being added to enhance capacity and reduce production costs and time.

As cutthroat global competition surfaces, the company will need to focus on both cost reduction and diversification as a means to maintain or increase its market share in the coming times.

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