Textile: NISHAT MILLS LIMITED - Analysis of Financial Statements Financial Year 2001 - 2003 Q 2009
Nishat Mills Limited (NML) is the largest textile composite unit of Pakistan engaged in the business of textile manufacturing and 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 company has a significant free-float of about 44.1% in equity markets. Its shares are listed on all the three stock exchanges of 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. 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 turbine 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 trend-setter in this type of power generation in the country. On 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 America, Spanish, French and Portuguese markets which it managed to achieve.
Since 2006, a subsidiary company of Nishat by the name of Nishat USA Incorporation is working in the US. It is a corporation service company. A previous US company was bought by the Nishat Group and the transaction was completed on 1st October 2008. It provides marketing services to Nishat in US. Hence the company is on the right track and taking visible steps to increase operations and to face challenges.
RECENT PERFORMANCE (3Q09) The net profit after tax has increased to Rs 1,216.744 million as compared to Rs 754.459 million for the previous corresponding period, thus showing an increase of 61.27%. The gross profit has increased to Rs 3,516.103 million as compared to Rs 1,989.839 million, thus showing an increase of 76.70%. The increase in gross profit is mainly due to increase in sale quantities and sale rates of the products manufactured by the company. Devaluation of the rupee against the dollar played a key role in increasing sale rates.
However, there were various factors negatively affecting the profitability of the company that includes increase in borrowing rates, minimum wages of workers and gas tariff as compared to previous period. Finance cost increased by 76.64 % (March 2009: Rs 1,086.161 million, March 2008: Rs 614.888 million) as compared to previous period as the average borrowing rates of the company increased from 8.11% to 10.92% and, in addition to this, average borrowings of the company increased by 28.49 % during the period under review. Moreover, other income decreased by Rs 148.804 million as compared to corresponding period mainly due to decrease in dividend income.
SPINNING The third quarter for the year 2008-09 inherited confronts of last two quarters. Cotton prices remained on higher side with price at Rs 3,300/mnd. Although an increase was observed in cotton price during the quarter under review but due to its inconsistency, prices of yarn did not improve. During the quarter under review, demand of 100% grey cotton yarn was low and so the export prices of yarn. However, local market came up with accommodating approach and improved demand and prices helped the spinners to survive. Earlier part of the quarter under review was very challenging for Nishat. However, it ended up with better results due to increasing demand by export customers. The Far East market came up with increase in demand and prices of carded and combed yarn. USA and Europe became quieter due to their economic conditions.
WEAVING The quarter under review was very tough in terms of weaving business and our profitability fell gradually as per expectation. Cotton market showed a bullish trend at the end of quarter under review and caused an increase of almost 12% in cotton yarn prices and further provoked the problems for weaving sector. The coming quarter seems to follow the similar trend. Global recession has caused a major decline in the sales to the European market, but the Far Eastern market again provided support to the company.
GENERAL MARKET SCENARIO FY08 In FY08, there were extraordinary circumstances for the global economy and all sectors and textile sector was among the worst hit. FY08 witnessed crude oil touching the record high of $140 per barrel, substitution of food crops to bio-fuel crops, rising capital and commodity economies of the world. Overall there was a major shift in fuel, labor and operating costs of all business activities. For textile sector, matters were further complicated by an unprecedented rise in cotton prices in September and October 2007, with no signs of stability by the year-end.
Additional factors were energy crises at domestic level, low yield of cotton in Pakistan and a very weak demand from the US and European and credit crunch for general consumers. Although softening of the Pak rupee against the US dollar helped to cover a small factor of this accumulated cost pressure, the overall picture for domestic textiles industry was that of rising costs and declining consumer demand.
SALES 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%. The break up/composition of sales is as follows:
SPINNING The local yarn sales have increased considerably in the current fiscal year from 9.3 million kgs to 15.9 million kgs - an increase of 70.4%. The export quantity rose to 15.8 million kgs. The yarn export rates on the other hand have gone up which should increase the revenues earned. The cotton prices started with Rs 2900/maund but rose up to Rs 4000/maund but the company benefited from a one-time cotton buying policy. The number of spindles has also increased. Demand of yarn for exports remained steady. Moreover state of art ring frames are under installation in some spinning units.
WEAVING
High yarn and other raw material prices made winning orders difficult. Political instability, energy crisis, oil prices have made the company uncompetitive for exports. Due to price factor, Far East market showed a weak demand. The South American market showed an 80% decline due to competition from cheaper players. Nishat now has looms with width wider than 90 inches. Bringing innovative technologies and diversifying markets are two options in present competitive environment.
It also plans to set up a PFD plant as European customers demand more for PFD fabrics than weaved fabrics. Customer lead time is being improved by better services and stocks of special filaments, yarn and fibres. New markets in France, Denmark, Turkey and Poland have been tapped to fulfil the gap created by weak demand in the American and Far East markets. Business in the special and technical fabric (Anti-static, fire retardant, and military fabrics) has also increased with continuation of orders.
PROCESSING AND STITCHING The company has increased the sales volumes to Nishat Dyeing and Finishing with a better product mix. They have launched several new products like viscose lycra, cotton/kapok/lycra, bamboo lycra and linen-based items etc in fairs/exhibitions and developed the same in different markets. The challenges faced were: recession of American market further slowed down the entire business cycle. Retailers were stuck up with high inventory levels, which hindered the new ventures. Unanticipated bankruptcy of some major textile businesses including, Dan River, Linen & Things, Goody's Family Inc also gave unprecedented setback to an already fading market.
This situation did not allow suppliers to increase any prices to overcome excessive overhead costs and ease out the worsening condition. Nishat focused on increasing production efficiency to curb losses. With reference to this cost cutting strategy, an important step was taken by shifting the Faisalabad stitching unit to Lahore, adjacent to the processing plant. This adaptation is expected to play an extra ordinary role in improving the supply, operations' management and reduction in transportation costs. It will overcome unnecessary operational delays and costs. Moreover, this stitching unit is being upgraded with the latest machinery and a state of the art switch-track system that will enhance product quality. Caustic soda recovery plant is being installed for further value addition, resources. New gerbur cutting equipment is installed in the sewing operation.
PROFITABILITY
The profitability of the company has shown a positive trend despite the general poor performance of the textile sector. The profit margin has increased from 9.74% in FY07 to 31.86% in FY08. The gross profit margin has slightly decreased from 16.56% in FY07 to 15.41% in FY08. The ROA and ROE have increased substantially from 4.25% in FY07 to 16.19% in FY08 and 5.59% in FY07 to 24.41% in FY08 respectively. This is due to an enormous increase in net income by 267% from Rs 1.67 billion in FY07 to Rs 6.14 billion in FY08. The sales have increased by 12.15%. There is a nominal increase in cost of production and financial charges by 13.7% and 10.76% respectively.
Financial cost increased due to a 5% increase in average lending. Other income has also increased by 931.95%. In this the component of capital in on MCB investment by Rs 5.06 billion was mainly responsible for the massive increase in income. The increase in dividend income by Rs 230.765 million also boosted the profits for the company. These factors have contributed to an overall positive picture for the year under consideration. Gross profit did not increase in proportion to sales as the cost of cotton had increased by 22.62%. The price of cotton in FY08 was Rs 3047/maund while in FY07 the price of cotton was Rs 2485/maund.
POWER GENERATION
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Power Diesel/ Gas Steam Gas
Plants Furnace Engines Turbines Turbines
Oil
Engines
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Faisalabad 2 7 1 -
Bhikki 3 4 - 1
Lahore 6 4 - 4
Feroze Watwan 3 4 - -
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Nishat has a capacity to generate 80 MW of electricity. Nishat is self-sufficient in its power and energy needs compared to other companies in business and has reaped gains due to this competitive advantage. There are efficient machines to reduce fuel consumption. 46MW is processed through most advanced and modern generators. These are based on "tri-generation" concept that together with electricity generation produce steam to be used in processing, for further power generation and air conditioning. Nishat also sold some of its excess power to government and made gain.
LIQUIDITY The liquidity analysis shows that the liquidity has declined in FY08. The current ratio has declined from 1.74 in FY07 to 1.19 in FY08 while the quick ratio has declined from 1.28 in FY07 to 0.80 in FY08. The increase in current liabilities in FY08 is 53.24% while the increase in current assets is by 4.66%. There is a decline in quick assets by 4.55% against a more than substantial increase in current liabilities. Despite improved profitability the firm has low working capital available for short-term funding needs.
ASSET MANAGEMENT The operating cycle has increased from 91.37 days to 110.66 days. The inventory turnover in days has also increased from 73.95 days to 85.83 days. The days sales outstanding has increased from 17.43 days to 24.83 days. The total asset turnover increased from 0.44 in FY07 to 0.51 in FY08. The sales to equity has increased from 0.57 to 0.77. The last two ratios show that the sales collections have improved and were higher relative to both assets and equity.
DEBT MANAGEMENT The debt burden of the company has reduced considerably over the past eight years. Debt to asset has increased from 0.24 in FY07 to 0.34 in FY08. The increase in total assets is by 65.7% while increase in debt is by 35.51%. Debt to equity ratio has increased from 0.31 in FY07 to 0.51 in FY08. Again the increase in equity is 61.3% against increase in debt by 35.51%. The long term debt to equity ratio has decreased from 0.06 in FY07 to 0.4 in FY08. The tie interest earned ratio has improved from 2.52 in FY07 to 8.05 in FY08, showing an ability of the company to meet all short-term interest charges. This is due to a greater increase in operating income by 253.40% than increase in financial charges by 10.76%. One of the reasons of declining debt burden is that TFC is close to maturity in September 08 so most of the debt taken under that has already been retired.
MARKET VALUE The price to earnings ratio shows a decline mainly on account of a hefty increase in the EPS by 406.86%. The prices also declined from a high of Rs 111.93 in FY06 to Rs 85.97 in FY08. The dividend per share has declined from Rs 3.5/share to Rs 2.5/share. The book value has shown a decline due to increase in the number of shares outstanding. The stock prices show a downward trend towards the end of fiscal year. The prices had touched peaks in April and May FY08 but depressed afterwards due to looming recession and bad performance of economy and stock market.
FUTURE OUTLOOK The future prospects depend on the cotton market, which seems bullish. Cotton production is short by 30-35% compared to domestic demand. Government must chalk out a long-term textile policy. New markets need to be explored and marketing; production and operation techniques should become more efficient. Pakistan can benefit from devaluation of currency while that of competitors like China has appreciated. FY08 saw major expansions in all businesses of Nishat Mills. In almost all divisions, old machines were replaced with new and up-graded technology. The company has acquired new finishing equipment and is in the process to expand on its value added products divisions - stitching, dyeing and finishing to improve margins, stay ahead of the competition and continue the existing growth pattern.
The merger of Nishat Apparel Limited into Nishat Mills Limited has also been approved. Currently, the company holds 25.72 percent shares in Nishat Apparel Limited. The shareholders of both companies have approved the scheme on 29 November 2008. The swap ratio in the scheme is one share of Nishat Mills Limited for every 19 shares of Nishat Apparel Limited. The rupee devaluation by about 10% during one year has helped the textile sector compete in the international market eased out Pakistan exporters competing with China and India. The value of rupee also eroded against Emirates dirham, euro and pound, which has also provided opportunities to NML for boosting exports and earn better profits, which in turn would help ease out the increasing pressure on the exports and the cost of business relating to exports could be reduced.
Textile sector cost of production has soared up by 20 percent due to sweeping hyperinflation in the country, while the shipping companies are charging Rs 70 for a dollar. Power and petroleum products' price-hikes have jacked up chemicals and dyes prices by 60 percent, cotton yarn by 25 percent and freight rates by 20 percent. Besides the raw materials' price-hikes, shipping companies have enhanced the containers' rent to $400 per day. In this scenario of increasing costs and deteriorating conditions of the major buyers, it is imperative for Nishat to stay attuned to the needs of the customers and carry out aggressive marketing.
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NISHAT MILLS LIMITED (NML) - FINANCIALS
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Balance Sheet 2001 2002 2003 2004 2005 2006 2007 2008
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ASSETS
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NON CURRENT ASSETS
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Property, plant and equipment 6,815,862 7,057,198 7,383,661 8,132,083 9,151,096 10,611,353 10,586,159 10,647,310
Long Term Investments 1,390,552 658,615 2,166,157 3,198,405 5,003,177 10,793,026 15,466,506 13,321,088
Long term loans, deposits, 100,136 73,604 99,995 17,243 16,912 16,507 18,865 18,663
prepayments and deferred costs
Total non-current assets 8,306,550 7,789,417 9,649,813 11,347,731 14,171,185 21,420,886 26,071,530 23,987,061
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CURRENT ASSETS
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Stores, spares and loose tools 541,611 468,009 409,013 434,934 424,827 471,520 422,428 490,229
Stock-in-trade 1,966,667 2,382,829 1,905,278 2,797,208 2,897,392 3,003,174 3,106,436 4,103,648
Short Term Investments 5,938 302,930 563,018 718,530 2,173,530 4,350,146 8,118,459 7,129,154
Trade debts 2,027,613 802,916 1,047,025 1,517,143 877,358 1,026,884 831,653 1,329,027
Advances, Deposits and prepayments 377,918 444,750 457323 374,023 463,713 449,319 437,665 433,695
Other receivables 630,440 496,425 178,293 370,830 388,598 407,147 322,839 370,013
Cash and bank balances 365,707 108,546 1,044,865 615,382 520,999 50,250 69,607 73,752
Total current assets 5,915,894 5,006,405 5,804,815 6,828,050 7,746,417 9,758,440 13,309,087 13,929,518
TOTAL ASSETS 14,222,444 12,795,822 15,454,628 18,175,781 21,917,602 31,179,326 39,380,617 37,916,579
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EQUITY AND LIABILITIES
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SHARE CAPITAL AND RESERVES
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Authorised capital 1,500,000 1,500,000 1,500,000 1,500,000 1,784,700 1,784,700 1,784,700 1,784,700
150,000,000 ordinary shares of Rs 10 each
Issued, subscribed and paid-up capital 1,113,444 1,113,444 1,224,788 1,224,788 1,452,597 1,452,597 1,597,857 1,597,857
Reserves 3,604,070 3,141,783 4,893,336 6,626,552 10,468,761 17,120,114 28,359,567 23,549,323
Surplus on Revaluation 12,118 12118
of operating fixed assets
Total Equity 4,729,632 4,267,345 6,118,124 7,851,340 11,921,358 18,572,711 29,957,424 25,147,180
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NON CURRENT LIABILITIES
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Long term loans 155,639 81,784 2,617,117 2,796,512 2,982,353 1,773,820 1,047,794
Deferred liabilities 843 -
Redeemable Capital 2,205,907 2,155,175 2,706,249
Liablilities against assets 235220 230,525 47140 5,756 61,643 33,031 -
subjected to financial lease
Total non-current liabilities 2,597,609 2,467,484 2,753,389 2,622,873 2,858,155 3,015,384 1,773,820 1,047,794
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CURRENT LIABLITIES
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Short term finances 5,001,841 3,742,001 4,479,400 5,608,985 4,284,815 4,315,708 5,018,664 9,175,518
Current portion of long term liabilities 768,264 1,244,353 926,908 816,545 711,164 1,342,771 1,341,565 926,025
Accrued markup 88,449 151,236 131,744 201847
Trade and other payables 979,011 796,533 882,645 1,085,349 812,216 960,436 926,593 1,141,227
Provision for taxes 146,087 278,106 294,162 190,689 356,689 281,382 230,807 276,988
Total current liabilities 6,895,203 6,060,993 6,583,115 7,701,568 6,253,333 7,051,533 7,649,373 11,721,605
Total liabilities 9,492,812 8,528,477 9,336,504 10,324,441 9,111,488 10,066,917 9,423,193 12,769,399
TOTAL EQUITY AND LIABILITIES 14,222,444 12,795,822 15,454,628 18,175,781 21,032,846 28,639,628 39,380,617 37,916,579
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Profit and loss 2001 2002 2003 2004 2005 2006 2007 2008
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NetSales 11,662,457 11,947,783 13,209,299 14,875,877 11,374,630 16,417,358 17,180,192 19,267,633
Cost of goods sold 9,605,013 9,919,836 11,321,308 12,941,953 9,239,731 13,701,626 14,335,254 16,298,857
Gross profit 2,057,444 2,027,947 1,887,991 1,933,924 2,134,899 2,715,732 2,844,938 2,968,776
Administrative, general, distribution 710,360 796,354 831,767 924,850 756,264 1,007,167 1,340,738 1,471,249
and selling expenses
Operating profit 1,347,084 1,231,593 1,056,224 1,009,074 1,378,635 1,708,565 1,504,200 1,497,527
Other income 116,363 94,183 151,094 371,283 621,569 277,961 562,710 5,806,873
EBIT 1,463,447 1,325,776 1,208,128 1,380,357 2,000,204 1,986,526 2,066,910 7,304,400
Financial and other charges 1,049,756 974,580 635,296 427,144 407,696 755,054 819,267 907,432
Workers' participation fund 20,960 17,666 28,697 47,711 - - - -
1,070,716 992,246 663,993 474,855 407,696 755,054 - -
Share of profit in associated companies 440,846 527,394 571,527 -
Profit for the period/year before tax 392,731 333,530 544,135 905,502 2,033,354 1,758,866 1,819,170 6,396,968
Provision for taxation 77,769 132,019 133,556 154,442 166,000 126,000 145,000 258,000
Profit after taxation 314,962 201,511 410,579 751,060 1,867,354 1,632,866 1,674,170 6,138,968
Earnings per share (Rs ) 2.83 1.81 3.35 6.13 12.86 11.24 10.48 38.42
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FINANCIAL RATIOS 2001 2002 2003 2004 2005 2006 2007 2008
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PROFITABILITY RATIOS
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Profit Margin 2.70% 1.69% 3.11% 5.05% 16.42% 9.95% 9.74% 31.86%
Gross profit margin 17.64% 16.97% 14.29% 13.00% 18.77% 16.54% 16.56% 15.41%
Return on Assets 2.21% 1.57% 2.66% 4.13% 8.52% 5.24% 4.25% 16.19%
Return on Equity 6.66% 4.72% 6.71% 9.57% 15.66% 8.79% 5.59% 24.41%
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LIQUIDITY RATIOS
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Quick Ratio 0.49 0.36 0.53 0.47 0.71 0.89 1.28 0.80
Current Ratio 0.86 0.83 0.88 0.89 1.24 1.38 1.74 1.19
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ASSET MANAGEMENT RATIOS
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Inventory Turnover(Days) 77.43 85.90 63.07 78.22 105.15 76.19 73.95 85.83
Day Sales Outstanding (Days) 62.59 24.19 28.54 36.72 27.77 22.52 17.43 24.83
Operating cycle (Days) 140.02 110.09 91.61 114.93 132.91 98.71 91.37 110.66
Total Asset Turnover 0.82 0.93 0.85 0.82 0.52 0.53 0.44 0.51
Sales/Equity 2.47 2.80 2.16 1.89 0.95 0.88 0.57 0.77
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DEBT MANAGEMENT RATIOS
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Debt to Asset 0.67 0.67 0.60 0.57 0.43 0.35 0.24 0.34
Debt to Equity Ratio 2.01 2.00 1.53 1.31 0.76 0.54 0.31 0.51
Long Term Debt to Equity 0.55 0.58 0.45 0.33 0.24 0.16 0.06 0.04
Times Interest Earned 1.39 1.36 1.90 3.23 4.91 2.63 2.52 8.05
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MARKET RATIOS
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Earning per share 2.83 1.81 3.35 6.13 12.86 11.24 10.48 38.42
Price/Earnings Ratio 7.14 9.13 8.96 9.16 7.37 9.96 9.05 2.24
Dividend per share 1.50 1.00 1.50 2.00 2.50 2.50 3.50 2.50
Book value per share 42.48 38.33 49.95 64.10 82.07 127.86 206.23 157.38
No of Shares issued 111,344 111,344 122,479 122,479 145,260 145,260 145,260 159785
Market prices(Year end) 20.20 16.53 30.03 56.13 94.80 111.93 94.80 85.97
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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].