Although challenges continue to hover over the country's textile sector, the first quarter for FY13 has yielded much improved results for Nishat mills. The quarter saw the company's sales climb by 18.41 percent on the back of skyrocketing demand for the yarn produced by the firm's Spinning divisions. Additionally, improved marketing initiatives have resulted in much better gross profit margins, which has climbed to 15.74 percent, up from 10.74 percent recorded during the same period last year.
Business activity during the first quarter saw a slight upsurge on account of stable cotton prices locally. Consequently, on the whole, the country's textile sector yielded better results. However, concessions given by the EU to Pakistan relating to 75 categories of export items passed by the EU parliament did not figure into the improved results as notification in this regard was still due by the time the quarter came to an end.
But by and large, Nishat has remained the most profitable amongst the various local textile units. The company's excellent long term performance is evident through its gross profits, which have grown over by 143 percent over the last 5 years in monetary terms. Moreover, the gross profit in percentage terms has remained consistently within the range of 14- 20 percent, which remains one of the highest within its direct competitors.
Moreover, the firm's bottom line has also exhibited similar growth, remaining steady between five-10 percent throughout the last five years. Despite general consensus that the textile sector was not going to perform well during the year, the firm's markedly consistent performance has been the biggest reason it has managed to compete with higher cost in an international market and still manage to churn respectable profits this quarter.
Yarn prices during the last three months remained supportive in the local market, which was a factor playing into the profitability for the company's spinning division. Demand for the company's carded yarn from Hong Kong and China remained strong during the aforementioned period, however, demand from other markets including Europe and USA remained insignificant.
News on the weaving front however, has remained subdued during the first quarter of FY13. The segment, which had remained under the clouds at the close of FY12, has managed to recuperate only slightly from various issues including the non-implementation of import duties abolition decision of WTO by European Union and higher fabric prices in spite of relatively stable cotton prices in the local market.
This quarter, there has been a sharp decline in work-wear business involving poly/cotton blends because polyester fibre prices have remained largely bullish and the fact that price for cotton fibre remained stable could not offer much respite to exports. However, demand for cotton fabric has picked up during the first quarter, especially from Far Eastern quarters. Also, business from Europe has come steadily, owing mainly to summer holidays.
Demand for Home textiles have also remained steady and the company has been focused on increasing capacity for apparel dying and apparel printing. The company's production capacities during the last quarter were fully booked and to meet future order influxes, the firm is expected to increase its production capacity shortly. In this lieu, the firm has already committed to buy machinery worth 4.5 million Euros as of September.
Additionally, the firm's processing division also saw an unprecedented increase in demand for its dyed fabrics. There is reportedly a significant shift of orders from China to this region, which has come as a major capacity crunch for spinners, weavers and dyeing/finishing mills. Demand is projected to remain strong throughout the next year and despite there being sufficient supply of raw materials, prices are unlikely to come down anytime soon due to the demand factor.
Analysts believe that stable cotton prices and improved textile demand from China will likely continue to remain the driver behind profitability of the textile sector during the coming year. This in addition with the recent reduction in interest rates, duty free export to EU and reduction in GIDC is expected to support bottom-line further.
Although domestic issues such as higher production costs, expensive imported inputs etc continue to hamper industry growth, the aforementioned factors are going to back Nishat's growth during the next three months.
Overall, analysts report that the textile sector profitability increased to Rs 1.2bn in 1QFY13 as compared to loss of Rs 0.5bn in the same period last year, and Nishat, being one of the largest local players, is set to profit heavily on the back of improved yarn sales throughout the year.
Source: Company Records