Textile: NISHAT MILLS LIMITED - Analysis of Financial Statements - Financial Year 2005 - 3Q 2011

Nishat Mills Limited (NML) is the largest textile composite unit of Pakistan engaged in the business of textile manufacturing and of spinning, combing, weaving, bleaching, dyeing, printing, stitching, buying, selling and otherwise dealing in yarn, linen, cloth and other goods and fabrics made from raw cotton, synthetic fibre and cloth, and to generate, accumulate, distribute and supply electricity.
The shares of the company are listed on all stock exchanges in the country. Its manufacturing facilities are located at five different locations in three districts of Punjab. From the foregoing it can be seen that it is a gigantic and wider diversified unit and textile processing functions are fully integrated by means of information technology as business processing is dependent on timely providing information and data.

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COMPANY SNAPSHOT

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Name of company        Nishat Mills Limited

Nature of Business     Apparel and Textiles

Ticker                                  NML

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At NML, the management has built comprehensive information systems for all the locations of the company providing relevant information accurately to ensure thoroughness in decision making and managing company's resources. For reliable and cheaper power, Nishat has installed its power generation plants. These are cutting edge technology highly efficient reciprocating engines and gas turbines generators, which besides generating power are supplying steam and air conditioning, being produced using so called "waste heat", to the production units. In fact, Nishat Mills is the trendsetter in this type of power generation in the country. On the marketing side it has entrenched customer bases in Hong Kong and Europe and during the past few years it set its goal to achieve greater market share in Central American, Spanish, French, Portuguese markets which it managed to achieve.
RECENT RESULTS 3Q'11:
Sales increased by 54% to be Rs 34.8 billion on back of both higher volumes in all segments along with higher prices. Due to sharp increase in raw material prices along with energy issues that hiked up the cost of production, gross profits increased only by 41%, driving down the GP margin to 16.5% from 18.25 in the same period last year. There was an increase of 201.78% in other operating income of the Company from Rs 558.159 million for the period ended March 31, 2010 to Rs 1,684.406 million (for the period ended March 31, 2011). This increase was mainly comprised of dividend received on the new investments made in Lalpir Power Limited and Pak Gen Power Limited, increase in dividend received on old investments, gain on sale of investment in Nishat Power Limited and large financial gain on foreign exchange derivatives.
The increase in distribution and administrative expenses was 26.62% and 18.81% respectively. Meanwhile, financial costs increased by 49.50% (March 2010: Rs 808.800 million, March 2011: Rs 1,209.133 million) from the previous corresponding period. PAT increased by 92% to be Rs 3,481.882 million compared to Rs 1,810.674 million in the previous corresponding period ended March 31, 2010.
The above results were the result of excellent performance of all the segments. Yarn sales were up by 71%, mostly contributed by a 70% increase in sales. Grey cloth sales increased by 62%, mostly driven by a 35% increase in sales. Processing and home textile sales also increased by 41%, again driven by 31% increase in prices. NML basically capitalized on its timely purchase of cotton stock at reasonable prices. Also diversification into newer categories and variants like dyed yarn has received good response from the customers.
SALES:
The sales have shown a consistent inclining trend except a decline in 2005 mainly due to abolition of the MFA agreement. The sales have increased by 12.15% in FY'08, 23.89% in FY'09 and 32% in FY'10. The breaks up composition of sales are as follows:
SPINNING:
NML achieved growth in its sale quantities as well as sale prices and increased its profitability with timely investment in cotton to stabilize fluctuations in the cotton prices. In FY09-10 local cotton purchase price was Rs 4,016 per maund and imported cotton purchase price was Rs 6,004 per maund. Furthermore, continuous diminution in Pak Rupee, increasing demand of cotton yarn, slight improvement in global economic scenario favorably supported export of cotton yarn.
Nishat Mills has also upgraded its spinning machinery with erection of most modern and efficient Ring Frames and Cone Winding machines in two spinning units and replacement of similar machines of other units to help increase automation, reduce labour cost and produce better quality yarn. The installation of Yarn Dyeing facility of 7 Tons / day is in progress which is expected to start operating from July 2010.
WEAVING:
Financial year 2009-2010 was a very turbulent. Sharp increase in cotton prices, high volatility in yarn prices together with continued effects of global economic recession started during the previous year made the current year extremely challenging. Sharp increase in cotton and yarn prices and pressure on selling prices in Europe and America has squeezed profit margins since this sharp rise in cotton and yarn prices could not be fully passed on to customers. It has been very difficult for us to get appropriate price increase particularly from the customers in Europe.
PROCESSING AND HOME TEXTILES
During the current financial year the markets had been very volatile owing to impact of continued global economic recession, significant increase in cotton, yarn and grey fabric prices and lower demand in international markets that had resulted in negative impacts on processing and home textile business also.
However, during the current year, global economic recession in American and European markets slightly eased out. Despite these challenges, Nishat has once again proved its ability to survive in the difficult times and it has achieved growth of 25.76% in sales volumes, however, with the significant increase in prices of raw material NML could only maintain profitability levels of the previous year
GARMENTS
The current financial year started with challenges of high prices of cotton and frequent electricity and gas shut downs. Energy bills are much higher compared to the previous years. However, with strong commitment, effective management planning and better business strategies towards facing these challenges, NML has been successful in achieving excellent results.
POWER GENERATION:

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POWER PLANTS     GENERATION      DIESEL /       GAS      GAS /

                   CAPACITY   FURNACE OIL   ENGINES      STEAM

                       (MW)       ENGINES             TURBINES

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FAISALABAD            31.38             2         5          -

BHIKKI                14.71             3         4          1

LAHORE                29.17             7         8          4

FEROZEWATWAN            9.7             4         4          -

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In order to mitigate the power crises being faced by the country, Nishat Mills is supplying surplus power from its different sites to PEPCO distribution companies.
PROFITABILITY:

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Profit and loss                                    2009          2010

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Net Sales                                    23,870,379    31,535,647

Cost of goods sold                           19,518,838    25,555,462

Gross profit                                  4,351,541     5,980,185

Administrative, general, distribution

 and selling expenses                         1,942,250     2,548,844

Operating profit                              2,409,291     3,431,341

Other income                                    599,006       981,650

EBIT                                          3,008,297     4,412,991

Financial and other charges                   1,446,796     1,126,922

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Workers' participation fund

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Share of profit in associated companies

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Profit for the period/year before taxation    1,561,501     3,286,069

Provision for taxation                          293,500       370,608

Profit after taxation                         1,268,001     2,915,461

Earnings per share (Rs)                            6.81          10.5

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The net sales for the period rose by 32% from Rs 23,870 Million to Rs 31,535 Million in FY'10. Both the sales quantity and sales volume rose for the period. The exports rose from Rs 18,624 Million to Rs 23,928 Million whereas the local sales rose from Rs 5156 Million to Rs 7312 Million. The cost of sales also rose by 31% from Rs 19,518 Million to Rs 25,555 Million in FY'10. This was basically due to cloth and yarn purchased, salaries wages and other benefits, and stores, spares and loose tools used. However, the overall effect on the gross profit was an increase of 37% from Rs 4351 Million to Rs 5980 Million.
All business segments of the Company have been able to realize benefit from the slightly improved economic scenario during the current year for the textile sector of the country compared to the corresponding previous year and have contributed towards the excellent results. In particular spinning and garment businesses of the Company has performed tremendously well in the current year by generating higher margins.
The spinning business through effective planning, timely investment in cotton and excellent production facilities has grasped optimum benefits offered by the sharp rise in demand of cotton yarn and its selling prices even though later in the year the sales margins were affected by imposition of additional duties by the Government. The timely investment in garments segment has started showing positive results in the current year and it has shown a growth in revenue and gross margin of 107% and 335% respectively.
Administrative, General, distribution and Selling expenses rose by 31% for the fiscal year basically due to Outward freight and handling, commission to selling agents, travelling and conveyance and salaries and benefits. Overall the operating profit rose by 42% for FY'10.
A major portion of other operating expenses was formed by worker's profit participation fund and worker's welfare funds which overall rose from Rs 191 million to Rs 289 Million. In other operating income (from financial assets) NML earned Rs 847 Million as opposed to Rs 512 million in FY'09. NML earned dividend income from MCB bank for Rs 537 Million and Security General Insurance Company for Rs 20 million. Other operating income from non financial assets rose from Rs 86 Million to Rs134 Million. This was basically due to gain in property, plant and equipment for Rs 29 Million
The finance cost declined for the fiscal year by 22% owing to improved cash inflows resulting from excellent profits earned by the Company, interest rates subsidy given by the Government and more effective funds management. Although the long term borrowing rose from Rs 253 million to Rs 320 Million, the short term borrowings fell from Rs 986 Million to Rs 636 Million. Bank charges and commission also fell for the period from Rs 203 Million to Rs 168 Million.
The profit after taxation, thus, rose by a huge 130% from Rs 2915 Million to Rs1268 Million. EPS for the period is Rs 10.5
In the past 6 years, NML has witnessed a mixed trend in the profitability ratios. 2008 was the best year where all the profitability ratios had reached their peaks. In 2009, the profitability ratios declined severely. However, in FY'10, there was only a slight increase in gross profit margin whereas a prominent rise in Net profit margin, Return on assets and Return on equity.
LIQUIDITY:
The liquidity analysis shows that the liquidity improved in FY'10. After a consecutive decline of 2 years, the liquidity position improved in FY'10. The current ratio improved from 0.86 to 1.11 whereas the quick ratio improved from 0.38 to 0.47. The current assets rose by 41% for FY'10 whereas current liabilites rose by 10%, thus causing a rise in current ratio for NML. The quick assets rose by 36% as well. Although cash balances fell by 1%, yet the trade debts rose by 57% and other receivables rose by 124%. This was basically due to increase in export rebate and claims, sales tax refundable, fair value of forward exchange contracts and markup rate support receivable from financial institutions.
ASSET MANAGEMENT:
The operating cycle has increased from 89 days to 100 days. The inventory turnover in days has decreased from 70 days to 77 days. The days sales outstanding has increased from 19 days to 23 days. These changes are indicative of not so effecient inventory management by the company and an inefficient credit policyt towards in debtors.
The total asset turnover decreased from 0.86 to 0.58 in FY'10. The sales to equity has decreased from 1.23 to 1.01. The last two ratios show that the sales collection have become worse and were lower relative to both assets and equity.
DEBT MANAGEMENT:
The debt burden of the company had reduced considerably over the past eight years till FY'08 but is slowly tipping towards risky scales in FY'09. The condition improved in FY'10. The debt to asset has decreased from 0.39 to 0.32 and debt to equity decreased from 0.63 to 0.47. However, long term debt to equity rose by 1% from 0.13 to 0.14 and TIE ratio increased from 2.08 to 3.92.
Although the total liabilities rose by 22% and total non current liabilites rose by 64%, equity rose by 62% for the fiscal year causing the debt management ratios to show a positive picture. The Company issued 109,117,194 Ordinary Right Shares of Rs 10 each @ 45% to be paid at Rs 40 per share including premium of Rs 30 per share. Thus, the paid up capital of the Company has increased from Rs 2,424,826,540 to Rs 3,515,998,480 by issue of said right shares. The funds were utilized by the Company to earn higher dividend income through investments in power projects namely AES Lal Pir (Private) Limited and AES Pak Gen (Private) Company, production capacity enhancement and resultantly improved margins, strengthening of the equity and improved financial health and liquidity of the Company.
INVESTMENT
The investment ratios depict a positive picture whereby the dividend per share rose to Rs 2.5 from Rs 2 in Fy'09. The EPS rose from Rs 6.81 to Rs 10.50 due to better profibility in FY'09 because of higher sales and higher income from other operations. The Book value per share also show a rise from Rs 79.72 to Rs 89 per share depicting a positive outlook for the company.
Although the ratios improved for the period, these are nowhere near the 2007 levels. However, after a consective decline in 2008 and 2009, a rise in investment ratios in 2010 depict a positive future.
FUTURE OUTLOOK:
With the recent floods, the rising raw material costs are of the concern to the business. Although exact details of the damage to crops have not yet been released by the government, initial impressions and conversations with industry experts suggest that expected cotton crop damage is around two million bales, according to JS Global Capital. This coupled with the news of fungus attack on the crop could exert an upward pressure on cotton prices in the near future, said JS Global Capital analyst Bilal Qamar. Rising local and international cotton prices will strain the profitability, but NML has considerable sources to generate incomes from.
With respect to processing and textiles, in order to cope with these circumstances NML is taking all necessary measures, which include ensuring timely sufficient and cheap purchase of grey cloth, negotiating prices with all customers based on prevailing market conditions, focusing on maintaining certain contribution margins and retaining key customers. Furthermore, NML has already started focusing on further developing business in up-market brands over and above the regular mill-runner articles. NML's local retail business of Nishat Linen shops has also expanded during the current year.
With respect to garments, NML's future strategies include investments in building and machineries, thus increasing the capacities to well over 600,000 units per month. For this purpose NML has already ordered world's best laundry machines and is in process of acquiring modernized equipment to add two new production lines.
Moreover, NML has upgraded processing plant with the narrow width printing machine. NML is further focusing on to improve production capacities as well as production efficiencies along with optimum utilization of human resources. The company has also planned installation of a new bleaching plant and increasing sewing capacity with the purchase of number of new sewing machines which will help further enhance ability to handle large volumes and on time deliveries.
To combat ever increasing energy costs, Pakistan's vertically integrated fabric producer, Nishat Mills has ordered six Energy Towers from A. Monforts Textilmaschinen. Nishat Mills, has ordered six Energy Towers from Monforts to ensure significant energy savings. This will further enhance profitability in the upcoming years.
The government steps for the promotion of Textiles Industry and its exports coupled with recent incentives in the budget and trade policy can facilitate NML in becoming one of the top candidates to reap the benefits of the ongoing developments in the industry.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Copyright Business Recorder, 2011