Nishat Mills Limited

INTRODUCTION: The flagship company of the Nishat Group, NML is the largest vertically integrated textile manufacturer in the country, with a major portion of the company's earnings coming from exports. The company owns 198,120 spindles along with 655 Air-jet looms, two stitching units for home textile with annual capacity of 24 million meters per annum.

Over the years, NML has achieved significant geographical diversification in its export sales and is fast becoming a force to be reckoned with in the value-added garment sector in the region. Nishat's apparel division has the capacity to produce 7.2 million garments per annum.

REVENUES During the period under review Nishat Mills' financials saw significant strengthening in comparison to the corresponding nine month period. Sales for the period increased by 19.63 percent; an increment of Rs 6.4 billion out of which Rs 5.2 billion was on account of volume growth in a number of crucial segments. Falling slightly short of most analyst predictions, a six percent quarter-on-quarter sales drop was however witnessed during the third quarter, a fact which can be explained by a quarter-on-quarter decline in volumes for the home textile segment which saw a lull in demand due to a generally gloomy global market.

The firm's spinning segment was also uncharacteristically quiet, managing to scrape together a six percent growth year-on-year at the nine month mark. During the period the unsupportive surge in raw cotton prices at home remained a major culprit. Moreover export business also slowed down significantly as a result of Chinese attempts to bring down yarn prices in the market during this period.

The strongest contribution to the top line during this period came from the weaving and garments segment. Sales of grey cloth to European markets saw a 20 percent volumetric growth whereas apparel sales grew by 37.78 percent year-on-year backed by a strong 36 percent growth in volumes.

PROFITABILITY The cost of sales rose along inflationary lines and was reined in with an increase of16.54 percent, while raw material consumption cost as a percentage to sales has been reduced from 19.34 percent in the corresponding period to 16.90 percent in the current nine months period. Resultantly, gross profit margin has increased by 37.38 percent.

During the period NML's dividend income from associate companies has gone up exponentially, hitting the Rs 1.5 billion mark at the close of nine months. Additionally, the firm was able to significantly scale down their finance costs on account of the lower borrowing rates and an improved working capital management. The lower operational costs thus have resulted in allowing the profit before tax to jump by 54.13 percent at the close of the third quarter.

OPERATIONAL HIGHLIGHTS The third quarter saw fiber prices in the local markets tighten as final implications of the lower than expected cotton crop finally hit home. Climbing up by as much as 15 percent, the hiking cotton prices towards the end of the third quarter coincided with the severe energy crunch in Punjab, taking up operational costs for the textile sector.

However since Nishat Mills had purchased cotton in the first half of year providing the firm coverage till October, the firm was largely able to escape the clutches of the crisis and keep their cotton consumption rates under control. For the spinning sector these price hikes also meant that exports (export prices do not follow the trends of price movements of raw cotton) were a more attractive option.

Additionally local buyers remained on the sideline during this period and the biggest chunk of yarn produced was shipped abroad ensuing a sudden dearth of supplies in the local market. This situation however could not be fully utilised to Nishat's benefit as the firm had sold some of their looms during this period, which caused a capacity shortfall of nearly seven percent.

These looms are slated to be replaced by new Air jet looms which are proposed to be in operation by the close of the forth quarter. Since yarn and greige fabric continues to be one of Nishat's strongest performers in the last few years, the firm continues to work on capacity expansion in the segment, and already has plans to install a new weaving shed with 100 looms in the near future.

Additionally, NML has recently revised their sales strategy and is engaged in supplying the top foreign retailers with direct shipments instead of going through importers, a step which is allowing the company to rapidly acquire business from the world's leading retail brands. This increasing demand for RMG's has also prompted NML to seek expansion of their stitching units

OUTLOOK With the costs of production escalating in China, the biggest retailers and luxury apparel brands in the world are seeking larger production capacities in the South Asian region. This fact, coupled with the much awaited GSP plus status (which might come into effect at the close of the year) means that there is unlimited potential for Pakistani producers of made-ups and processed textiles to grow into an important sourcing hub of apparel in the region.

Additionally there also remains a lot of upside potential in the denim and dyed fabric segment. Spinners and weavers are also expected to retain good selling positions, with China remaining an important driver of growth for the foreseeable future. For Nishat as of now, the focus (as is indicative of their priorities in capacity enhancement endeavours) remains the value-added garment and processed textile segment which will continue to offer excellent margins and avenues of growth for the firm in the coming quarters.

Source: Company Records

Source: Company Records

Copyright Business Recorder, 2013