OVERVIEW: Nishat Mills Limited (PSX: NML) was established in 1951. Its name is widely known in the textile sector of the country. It is one of the companies of the larger Nishat group of companies. The latter is present in quite a few of the sectors: textiles, cement, banking and insurance, power generation, hotel industry, agriculture, dairy and paper products.
Nishat Mills has spinning, weaving processing, home textile and garments units, in addition to power generation. It also has its own retail store for the sale of its textile related products.
A little over 25 percent of the total shareholding is with the directors, CEO, their spouses and minor children. Of this Mr. Mian Umer Mansha, the CEO and director of the company owns 12.6 percent of the shares while Mr. Mian Hassan Mansha, the director and chairman of the company holds 12.6 percent. Around 24 percent of the total shares are distributed with the local general public, while close to 14 percent is held by foreign companies.
Historical operational performance
Nishat Mills has mostly seen positive growth in its topline in a little more than a decade, with the exception of a few years. Although profit margins have been fluctuating over the period, they have remained in the green.
Looking at the last five years, profit margins declined for three years before recovering in FY19. During FY15, the topline reduced by almost 6 percent owing to rupee appreciation which made exports uncompetitive in the international market, while demand was already low. Prices also did not increase much. On the costs side, cost of production increased as a percentage of revenue to make up 88 percent of the revenue- up from 85 percent in FY14. This was due to increase in minimum wages; salary and wages expense went up by almost 10 percent. All other expenses as a percentage of revenue also increased thus contracting year on year profit margins.
Despite the near stagnant growth in the textile industry of the country owing to low demand and intense competition from regional peers, the company managed to improve its profit margins. However, the lower sales for the year were reflective of the poor performance of the sector. Nishat's topline reduced by a little over 6 percent; gross profit increased due to effective cost controls and focus on value added business, although as a percentage of revenue, it only declined by 1 percent. Other income derived from dividend income played a significant role to improve operating margins whereas a major reduction in finance costs helped lift the net margin. Finance cost reduced due to better cash flows as well as a decline in borrowing cost from 6.8 percent in the previous year to 4.6 percent in FY16.
In FY17, the company saw its topline recovering as it registered a marginal growth of 2.6 percent. Export sales contributed to this as local sales actually reduced in FY17. Although the international market was still noted by slow demand, the company managed to increase sales. However, this was accompanied by an increase in costs as the latter consumed 89 percent of the revenue; this kind of consumption of revenue was seen for the first time in a decade. The rise in costs was mostly driven by an increase in wages and salaries expense in response to a rise is minimum wages; fuel and power expense also saw a 17 percent incline. In spite of other income increasing year on year, it could not keep with the rise in costs which reduced the net margin to 8.65 percent, down from 10 percent in FY16.
Revenue continued to increase gradually as it grew by 9 percent year on year. In addition to an increase in export sales due to favourable exchange rate, the company also earned revenue in duty drawback incentive of Rs443 million. However, the increase in revenue again failed to lift profit margins as cost of production further climbed to consume more than 89 percent of the revenue; raw material cost and salaries and wages expense contributed mostly to this incline. Other income which largely supported the operating and net margins also reduced for the year which further lowered profitability.
Topline doubled relative to last year to grow at 18 percent in FY19. Majority of the increase was brought in by increase in exports sales as currency devalued by around 35 percent during the year. Costs reduced only marginally, despite the availability of electricity at subsidized rates. Another factor for this was the currency devaluation also had an adverse impact on imported raw material. Other income, again, helped in uplifting profitability as it made up 8 percent of the revenue and 60 percent of the operating profit; the effect of this was seen in the improved net margins for the year.
Quarterly results and future outlook
Although topline grew by 6 percent year on year during 9MFY20, due to favourable exchange rate, it could not offset the increase in costs; currency devaluation caused price of imports to rise. Cost of production made up 88 percent of the revenue, while other costs also an increase which crippled profit margins year on year. Other income was also lower for the year due to decreased dividend income. Thus there was a nearly 30 percent reduction in net margin year on year in 9MFY20.
Since Pakistan depends on China for its raw materials, the outbreak of Covid-19 and the resultant shut down of manufacturing facilities in China put the supply of raw material into question. As the virus spread, manufacturing facilities within the country were also shut down and operating at less than optimum capacity. While the third quarter did not reflect the full effect of reduced business activity, the last quarter of FY20 may see the impact.
NML: Pattern of shareholding as at June 30, 2019
Categories of shareholders %
Directors, CEO, their spouses and minor children 25.22
Associated companies, undertakings and related parties 8.64
NIT & ICP 0
Banks, DFIs, NBFIs 4.28
Insurance companies 6.87
Modarabas and mutual funds 11.88
Foreign companies 13.88
Investment companies 0.09
Joint stock companies 2.11
Provident/pension funds and miscellaneous 2.19
Source: Company accounts
NML: Quarterly results
Rs (000s) 9MFY20 9MFY19 YoY
Net revenue 50,052 47,159 6.13%
Cost of sales (44,053) (41,121) 7.13%
Gross profit 5,999 6,038 -0.65%
Distribution costs (2,305) (2,028) 13.66%
Administrative expenses (938) (833) 12.61%
Other income 2,343 2,926 -19.92%
Other expenses (283) (228) 24.12%
Operating profit/(loss) 4,816 5,875 -18.03%
Finance cost (1,120) (1,188) -5.72%
Profit/(loss) before taxation 3,696 4,687 -21.14%
Taxation (781) (551) 41.74%
Profit/(loss) after taxation 2,915 4,136 -29.52%
EPS 8.29 11.77
GP margin-RHS 11.99% 12.80%
OP margin-RHS 9.62% 12.46%
NP margin-RHS 5.82% 8.77%
Source: Company accounts