Nishat Mills Limited (PSX: NML) is part of the Nishat group of companies. The company was set up in 1951 and is engaged in a variety of businesses; from spinning, weaving, bleaching and dyeing to dealing with yarn, cloth and other fabrics. It also generates, distributes and sells electricity.
As at June 30, 2020, over 25 percent of the shares are with the directors, CEO, their spouses and minor children. Of this, the CEO, Mian Umer Mansha and the chairman, Mian Hassan Mansha hold roughly 12 percent shares, each. The local general public owns 27 percent, followed by nearly 10 percent by modarabas and mutual funds; about 8 percent shares are held by insurance and associated companies, each. The remaining 22 percent shares are with the rest of the shareholder categories.
Historical operational performance
Topline for Nishat Mills has been fluctuating over the years, while profit margins have remained more or less stable with some decline seen in FY20.
After contracting consecutively for two years, revenue for the company grew by 2.6 percent during FY17. Over 70 percent of the total revenue is contributed by export sales. During the year, export sales increased by a marginal 2 percent, while an additional Rs 841 million was earned in duty draw back. However, cost of production increase to 89 percent of revenue did not allow for gross margins to improve, that reduced to nearly 11 percent of revenue. This was attributed to increase in minimum wages from Rs 13,000 to Rs 14,000; increase in fuel costs and a rise in raw material costs. The effect of this was also reflected in the net margin that fell to 8.7 percent, compared to over 10 percent in the year before.
In FY18, revenue grew by 9 percent, despite the raw material prices and low international demand for textile products. Export sales in value terms grew by nearly 6 percent, reaching nearly Rs 39 billion; duty drawback added another Rs 443 million in sales. Cost of production, on the other hand, grew very marginally, keeping gross margin hovering around 10 percent. The prices of cotton fluctuated throughout the year, rendering local spinners uncompetitive in the international market. Price for cotton crop was low only until the end of the first quarter. With other elements of the financial statement remaining largely unchanged, the effect of this was also seen in net margin that reduced marginally to 7.6 percent, down from 8.7 percent in FY17.
In FY19, the company witnessed the highest growth in revenue seen since FY12, at 18 percent. All the divisions, weaving, dyeing, and home textile performed well during the year, with export sales rising by almost 23 percent. The currency devaluation helped make exports more favorable in the international market. Thus, a lot of the companies in the textile sector that focused on exports, benefitted from the currency devaluation in FY19. With increase in revenue exceeding the increase in cost of production, gross margin improved to 12 percent. This was further supported by Rs 5 billion brought in by other income, primarily earned through dividend income, while net exchange gain was also significantly higher year on year at Rs 1.4 billion. Although finance expense also increased due to high interest rates and greater borrowings, yet the rise in revenues exceeded it. Thus, net margin also increased to over 9 percent.
Revenue was lower in FY20 by 4 percent, mostly due to the Covid-19 pandemic that brought business activity and global trade to an abrupt halt. Export sales fell for the first time since FY16, by 5 percent. This was due to a strict lockdown in place in Europe, China and USA, primary export destinations for the company. In contrast, local sales increased by 2.5 percent. Since exports make a more prominent share in revenue, the decrease in the same led to lower profitability. With other income also reducing to Rs 3 billion, compared to Rs 5 billion in FY19, this further trimmed profit margins. Thus, net margin fell to nearly 6 percent for the year.
Quarterly results and future outlook
During the first quarter of FY21, revenue was marginally higher year on year by less than 1 percent. Exports were impacted due to the Covid-19 pandemic that kept business activity limited. Therefore, orders were also lower. Moreover, India and Vietnam gave stiff competition in the yarn category, while major export markets for Pakistan were under the impact on Coviid-19 with only China operating actively. In the weaving segment, home textile sales grew primarily, whereas the dyeing division witnessed lower sales. With support coming from other income, net margin for the quarter stood at almost 6 percent, that was less than half when compared to same period last year, but higher than that in 2QFY21.
As business resumed gradually by the second quarter of FY21, topline was higher than 1QFY21; revenue in 1HFY21 was also higher than 1HFY20, albeit by nearly 1 percent. During 1HFY21, cotton prices increased, but were not matched by increase in yarn prices. The latter only increased when there was a ban on cotton yarn import from India, where in the international market, yarn prices increased later in the period. In the weaving section, home textile sales remained stable. Thus, due to slightly higher prices, and lesser contribution from other income, net margin was marginally lower in 1HFY21 year on year. while exports did benefit from Covid-19, textile sector has many challenges overcome – one of them being the shortage of cotton production.