Nishat Chunian Limited

Nishat Chunian Limited (PSX: NCL) has grown from its humble origins of a spinning mill comprising of 14,400 spindles to become the fourth-largest textile company by sales. The company has managed to become a vertically integrated unit with annual spinning production of 75,000 tons of yarn, 3 million meters of greige fabric in weaving and 4 million meters of finished fabric.
Apart from textiles, the group also entered the power sector in 2007 by setting up a 200 MW power plant to cater to the rising energy demand. Venturing into entertainment sector, NC Entertainment was founded in 2015 to further diversify business interests.
As of now, Nishat Chunian Group consists of five companies which include Nishat Chunian Power Limited (a power generation company), Nishat Chunian USA Inc. (Incorporated in USA), Nishat Chunian Electric Corporation Ltd.(a captive power generation company), apart from the textile and entertainment companies mentioned above.
Stock & pattern of shareholding
NCL's stock price movement has been volatile over the past year with both periods of out performance and underperformance against the benchmark KSE-100 index. However, since July-17 the script gained momentum to cross the KSE-100 index but recently the price has decreased again. Fundamentally, the stock seems to be a good choice given the pick-up in exports of home textile, diversification into other sectors, as well as the considerable balancing, modernization and replacement (BMR) investment.
The pattern of shareholding shows that NCL's majority shareholding lies with the general public. The second-largest is with associated companies. Shahzad Saleem, CEO of the company owns 11.62 percent of the company while Nishat Mills Limited (NML) owns 13.61 percent.
Prior performance
NCL has managed to maintain its top line growth trajectory over the past several years while margins have tended to fluctuate in comparison. FY13 was a good year for the company in light of the dollar appreciation, good contribution from the yarn segment while also implementing cost-minimization.
But FY14 was an entirely different story where NCL saw margins drop on account of several factors which included rising expenditures and intense competition in the global markets which led to unutilized capacity in the spinning segment. Exchange rate fluctuations were also unfavourable taking a toll on margins.
In FY15, the demand for textile products in general and cotton yarn in particular declined, with a Rupee appreciation further hurting the company's margins. However, the subsequent year was definitely stolen by strong performance from the home textile division while the company was also able to undertake further cost rationalization.
When talking about Nishat Chunian's bottom-line, however, it becomes pertinent to mention the huge role played by 'other income,' which has often times been higher than the bottom-line itself! This is mostly in the form of dividend income from one of its subsidiary companies, Nishat Chunian (Power) Limited.
FY17 saw profitability grow in light of the investment on BMR activities and the shining performance of the Home Textiles Division which managed to augment its exports. According to the Director's report NCL invested almost Rs 2754 million in capacity addition and modernization. The bulk of this went to the spinning division with an investment of Rs 1914 million resulting in an addition of 53,664 spindles out of which 40,608 were replacements.
Segment-wise, constitutes the largest chunk of Nishat Chunian's revenue, followed by processing & home textile, and then weaving. Seemingly, the sales mix has not changed much over the years, as spinning has accounted for 54-60 percent of sales over the past five years, while processing has remained around 29-31 percent. However, for FY17, the home textile's division contributed 29 percent to the top line which might be indicative of a gradual shift in the sales mix.
Being primarily an export-oriented company NCL earns roughly 69 percent of its revenues from exports. In terms of segments, the home textile segment earns the highest foreign exchange (93% of its sales are exports), while both spinning (57%) and weaving (37%) have a relatively stronger domestic presence. However, the company has taken steps to increase the home textile segment's domestic market share by launching "The Linen Company" to enter the retail space in Pakistan which has been doing well.
Recent performance
For the 1QFY18 NCL has seen revenues registering an increase of an impressive 21 percent as compared to the corresponding period in the previous year. The primary factor behind this surge could be attributed to the increase in yarn sales in the local market. The company also booked export duty drawback amounting to Rs 99 million during the period which will be realised in the future according to the Director's report.
However NCL notes that the increase in cost of production coupled with more intense competition from the international market continue to be challenges. This is reflective of the dip in profitability for the company during the period. Gross profit margins almost halved whereas net profit margin took a dip by 9 percent as compared to 1QFY17. Other income of the company also plunged on account of absence of dividend from subsidiaries especially NCPL.
Future outlook
Nishat Chunian has successfully diversified into the power and entertainment sectors while continuing to upgrade its textile business. Last year, the company invested in restarting one of its defunct spinning units in addition to the 99 looms it acquired last year. The company has also invested Rs 340 million in its dyeing and printing unit. Moreover, NCL's presence in the retail segment is increasing with the launch of two more of its flagship "The Linen Company" outlets in Lahore and Islamabad. This diversification coupled with sizeable investment in BMR activities is sure to reap healthy dividends for NCL going forward.

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Pattern of Shareholding Shareholders Category

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                                                    Percentage

                                                    of holding

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Directors, CEO, their spouses and minor children        14.18%

Executives                                               0.00%

Associated Companies, Undertakings & Related Parties    16.64%

Public Sector Companies & Corporations                   0.00%

NIT and IDBP (ICP UNIT)                                  0.00%

Banks, DFIs, Non-Banking Financial Institutions         10.29%

Insurance Companies                                      2.72%

Modarabas and Mutual Funds                               4.52%

Joint Stock Companies                                   13.15%

Others                                                   0.89%

General Public                                          37.61%

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Source: company accounts

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Nishat (Chunian) Limited

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Rs (Million)               1QFY18   1QFY17     YoY

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Sales                       8,368    6,897     21%

Cost of Sales               7,837    6,101     28%

Gross Profit                  531      795    -33%

GP Margin                      6%      12%

Distribution Cost             202      186      9%

Administrative Expenses        53       45     18%

Other Operating Expenses        5       35    -86%

Other Operating Income         19      365    -95%

Finance Cost                  308      227     36%

Profit before Tax              18      668    -97%

Taxation                       77      103    -25%

Profit after Tax              -95      565   -117%

NP Margin                     -1%       8%

EPS                          -0.4     2.35   -117%

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