Nagina Cotton Mills Limited

Nagina Cotton Mills Limited (PSX: NAGC) was established as a public limited company in 1967. The company is part of the Nagina Group of companies; it is principally engaged in the business of manufacturing and sale of yarn.

Shareholding pattern

More than 50 percent of the shares are held by the directors, CEO, their spouses, and minor children. Roughly 17 percent shares are held by each of the following directors of the company: Mr. Shahzada Ellahi Shaikh, Mr. Shaukat Ellahi Shaikh and Mr. Shafqat Ellahi Shaikh. About 18 percent of the shares are distributed with the local general public, followed by 16 percent held under the category of associated companies, undertakings and related parties that include Haroon Omer (Pvt) Limited, Monell (Pvt) Limited and Icaro (Pvt) Limited.

Historical financial performance

Nagina Cotton Mills profits gradually bottomed out after FY13 before picking up again in FY17 and onwards. Topline has primarily seen growth except for FY15.

The textile exports of the country saw a decrease in FY15 with the spinning segment seeing the most decline. Globally demand for textile product, yarn in particular, reduced, due to high inventory levels. Topline for the company fell by almost 8 percent during FY15 mostly due to fall in unit price of yarn. Cost of production increased to almost make up 91 percent of the revenue, reducing gross margins to a single digit. With most other factors remaining similar, the effect of this trickled down to the bottomline as net margin nearly halved year on year.

There was marginal growth in revenue in FY16, low demand, especially from primary export markets of China and Europe greatly impacted the textile sector of Pakistan. Where historically exports made a major chunk of the sales distribution, FY16 saw local sales picking up, crossing the Rs 1 billion mark, as manufacturers turned towards the domestic market to seek better returns. Cost of production also increased to its highest consuming a little over 96 percent of the revenue, leaving little room for the absorption of other costs. Thus, the year concluded with a loss of Rs 93 million.

In FY17, Nagina Cotton Mills witnessed its highest increase in sales revenue by nearly 23 percent. This was brought in by local as well as domestic sales, however, increase in local sales exceeded the increase in export sales. This was due to not only better yarn prices but also better volumes. Local cotton production could not fulfill demand therefore, the manufacturers had to resort to imported cotton, however, with the increase in revenue, cost of production was relatively lower at 93 percent of revenue. With other factors remaining unchanged, the company was able to post positive net margin.

Topline continued to grow during FY18. This was due to a combination of factors. Firstly, there was an improvement in the yarn prices; secondly, the company benefitted from the export drawback scheme, and lastly devaluation of the Pakistani Rupee allowed exports to regain its lost competitiveness. However, exports reduced by 8 percent, whereas local sales were almost equal to export sales. Previously local sales hovered around and below Rs 300 million. As a result, the company was able to bring down its cost of production as a percentage of revenue to around 91 percent. Other income also supported the bottomline as the former nearly doubled due to dividend income. Thus, net margin reached close to 3 percent.

In FY19, sales revenue saw an incline of almost 18 percent, owing to several factors including better yarn prices, better volumes and lastly currency devaluation also helped in boosting exports; the latter registered a 16 percent increase. Local sales also increased by 26 percent. Thus, cost of production was brought down, below the 90 percent mark, consuming 88 percent of the revenue. There was a sharp increase in finance cost making up 3 percent of the topline, due to rising interest rates. However, the effect of double-digit revenue growth prevented the net margin from reducing.

Quarterly results and outlook

During 9MFY20, the company saw its revenue climbing by 19 percent year on year. This was brought in by better volumetric sales. However, the increase in cost of production offset the increase in revenue, lowering gross margins slightly. Finance costs rose further not only due to higher interest rates, but borrowings were also obtained to procure imported cotton. Thus, net margin reduced to a little over 1 percent whereas net margin in the same period last year was close to 3 percent.

The outbreak of Covid-19 has greatly impacted the financial performance of the company, especially for the last quarter of FY20. With nation-wide lockdowns in place, keeping manufacturing facilities shut, trade and production halted, caused delay or cancellation of orders. The company acknowledges government’s efforts to support industries and emphasizes on releasing stuck up income tax and sales tax refunds.