OVERVIEW (March 13 2010): BACKGROUND 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 shares of the company 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 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 1H10
NML, in these trying times for the textile sector, achieved 13.36% growth in net revenue to Rs 14,152 million from the previous corresponding period. NML has earned an after tax profit of Rs 1,010.491 million in the half year ended 31 December 2009 as compared to Rs 1,137.790 million in the corresponding period ended December 31, 2008, with a decrease of 11 .19%. During the previous corresponding half year, devaluation of dollar against rupee played a key role in improving sale rates and resulted in higher profitability. Whereas, unlike the previous corresponding half year, dollar remained stable against rupee to a greater extent during the current half year under review and eventually caused the lower profitability. Finance cost has decreased by 25.82% (December 2009: Rs 546.828 million, December 2008: Rs 737.156 million) as compared to the previous corresponding half year.
During the first half of the current financial year, cotton prices had increased overall by more than 20% owing mainly to an approximate 74% reduction in cotton imports, reduced cotton crop of China and increasing demand of cotton yarn in the Far East. However, demand for cotton in Europe and USA has not improved significantly. Although increased cotton prices, power shortages and resulting production process losses significantly increased the cost of production yet increase in demand of cotton yarn and higher selling prices helped the spinners to remain profitable.
However, the whole cost increase could not be passed on to the customers and consequently profit margins have squeezed for the spinning sector as compared to the previous corresponding period. Weaving also has seen a decline in revenue due to increase in the yarn prices, however the grey cloth demand as well as the prices have remained sluggish. Although quantity demanded from the segment increased due to increase in work-wear and military uniform and abrasive business, the pressure still remained. 12.14% increase was witnessed in the processing and home textiles business both on account of better prices and quantities. This is mostly due to diversifying the business to new customers and due to better demand from existing customers due to the slight recovery from the economic recession in the Thanksgiving and Christmas period.
118% increase in garment sales was witnessed, mostly on account of 84.35% increase in volumes.
General market scenario:
The fiscal year 2008-09 was a year of recession for most businesses including textile sector worldwide. Deep recession in the US and European markets led to lower sales at retail level and a stiff competition for suppliers. Pakistan's textile exports were hit hard by intense competition from the regional countries in FY09. This, alongside rising interest rates and prolonged power cuts proved to be a hindrance to earnings of the textile industry in FY09 as depicted by a decline of 57%YoY For textile sector in Pakistan, the year was also one of the most volatile due to a number of reasons. Decelerated business volumes, along with the electricity shortage crises have taken its toll and many small and medium size production houses have shut down already or at the verge of closure. A record increase of cotton and yarn prices in the first quarter and steep increase of interest rates had their impact on the textile sector on varying degrees. Domestic textile units gained as well as lost in all these volatilities as per their strengths and relative positioning in the market. Nishat survived well due to its long and rich history of expertise, vertical integration and minimum dependency on other manufacturing entities.
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 FY08 and 23.89% in FY09. The break up/composition of sales are as follows:
Spinning:
During the year ended June 30, 2009, spinning division had many ups and downs and finally had a good ending. Cotton prices were higher as the year started. However, diminution in value of rupee against dollar and ample cotton stocks resulted in good results during the earlier part of the year 2009.
However, 2nd and 3rd quarters were worst affected by world economic recession and radical fall of cotton prices. This resulted in ever-lowest yarn rates. The lowest yarn demand and rates restricted the generation of room for new product development. As a marketing strategy, NML made extensive and quick changes in production planning to produce the yarn qualities, having good market demand. This was helpful to get better rates and eventually resulted in good profits for the year ended June 30, 2009. This has also helped NML to get good business orders in the local market and eventually a good business support for the overall division.
: nneewzWeaving
During the year 2009, Weaving Industry witnessed difficult time mainly due to world economic recession, instability in cotton, oil and polyester prices. There has been almost 20% decrease in business volume with all major European customers. Cost of production has gone up with increase in labor, energy and finance cost. One major problem faced during the year ended June 30, 2009 was the deteriorating financial position of major customers. Our marketing strategy has been to diversify both customer wise and product wise. During the year
2009, the company has succeeded to revive its work-wear business in the UK and Holland.
NML is trying to enter the technical textile area which has unlimited scope that needs to be tapped according to its needs. The business for specialized fabric for military and corporate clothing has increased during the year. Product diversification is important to spread the risk. NML has launched several new products like sulphur dyed warps, fair trade cotton fabrics, polyester filament covered yarn fabrics and dyed polyester filaments. NML has also been trying to minimize its stocks and at the same time offer quick deliveries to its customers.
NML has plans for expansion of production capacity at one of its units by installing 50 new state of the art Toyota air jet looms. These will be operational by the end of December 2009. Besides increasing its production capacity, the expansion will allow NML to be more flexible in terms of range of its products.
Processing and stitching
During the year 2009, for processing business, NML has given primary attention to increase the plant and production efficiency by optimal utilization of human resources to cater its customer's demands in best possible manners. Considering its mega infrastructure and capabilities to handle huge volumes and on time deliveries, more customers have inclined towards the company during the past months. Moreover, some potential growth with more US-based clients is expected, as the US market is expected to revive rapidly in the days to come. Other than traditional markets of Western Europe and North America, NML had also explored new markets in Eastern Europe which showed potential growth opportunities and NML gained some early success in that region. During the year, a big relief came with the abolition of anti-dumping duty, which has given an edge to NML for having a strong presence in European market. Moreover the products launched during the year received encouraging response from the customers and orders are being materialized now. The new products for embellished articles and complex confections were also taken into consideration more effectively and by achieving a slot in confection articles, different fabrications and embellishments, a sizeable business volume has been generated. For this purpose, NML has developed a separate production line with highly skilled and trained work force to efficiently cater the high expectations of its up-market clientele. Nishat has successfully maintained its relations with existing clients and attracted a number of new ventures too and being the market leader NML is developing new products and diversifying product mix to furnish ever-changing market demands. Last quarter of the year showed an upward trend due to strengthening of the US economy. This has started showing some good early signs of possible improvements in upcoming months and orders influx may increase sharply in next two quarters.
Nishat Dyeing and Finishing
Given the circumstances of textile industry and all challenges, Nishat Dyeing and Finishing performed brilliantly during this period with bookings crossing the actual production capacity. The major reason for this success was NML's marketing strategy ie addition of new customers like JCP and Carreman as well as generating new businesses from existing customers like Dockers and Gap. In addition, most of these incremental businesses were in special finishes, which helped to get better margins. Almost the entire capacity of special finishes including aero, blotch printing, lafer peaching, pigment as well as sulphur dyeing was utilized during the year ended June 30, 2009. With the global recession continuing, its impact on all sectors including textiles is getting more pronounced by the day. Thus, the competition is expected to get even stiffer in the next fiscal year.
Nishat is however all geared up to meet the new market challenges. The salient features of marketing strategy for the next fiscal year includes diversifying into new markets like work-wear and performance finishes, selling the surplus bleaching capacity in European markets, offering vertical packages through Nishat Apparel to penetrate further into European market as well as building momentum on marketing efforts in existing markets and with existing customers.
Nishat Apparel (formerly Gulf Nishat Apparel Limited):
Due to its nature of business and harmony of its products, Gulf Nishat Apparel Limited was merged with Nishat Mills Limited successfully during the year ended June 30, 2009. The board of directors of the company in their meeting held on November 01, 2008 had approved the scheme of arrangement for merger of Gulf Nishat Apparel Limited into Nishat Mills Limited. The scheme was approved by the shareholders of both companies on November 29, 2008. The scheme became effective after approval of Honorable Lahore High Court, Lahore.
The swap ratio in the scheme is one share of Nishat Mills Limited for every 19 shares of Nishat Apparel Limited. Nishat Apparel, a Project of Nishat Mills Ltd is in business of making pants of piece dyed and denim fabrics. With its advanced technology machines in cutting, sewing and garment washing it is providing a one window solution to customers of Nishat Mills, thus creating a complete integration of Yarn, Weaving, Dyeing and Printing and finally finished garments, sold directly to the world known retailers in US and EU markets.
Nishat Apparel commenced its business in 2007 with a capacity of 20 lines. The sales increased to three times within two years. With a dedicated team of professionals, its efficiencies have been remarkable and comparable with its competitors operating in the same business.
The world economic recession hit Nishat Apparel as well during the year and sales dropped significantly. The major retail customers faced a decline in sales by 30% to 40%. However, NML's strategies helped it to recover from the recession and NML is now back on track with capacities fully booked for the next financial year. The project is getting into a third phase of its operations that includes further enhancement of sewing and washing capacities and that will be done in the coming year. There is an immense focus on product development, which will result in value addition of NML's existing business mix.
Profitability:
The profitability of NML has declined considerably, in line with the textile industry. Despite a rise in the gross margin from 15.41% in FY08 to 18.23% in FY09 on the back of improved top line, the profit margin reduced to 5.31% in FY09 as against 31.86% in FY08. The factors contributing to this fall in bottom line are the 32% increase in operating costs and 59.4% increase in the financial charges. The 6-month KIBOR rate surged up by 380 bps, which in turn increased the finance costs by 50% for the textile sector. Return to equity and return to asset demonstrate a similar negative trend, declining my 75% and 73% respectively.
Power generationL
Nishat's own power generation plants provided a huge competitive edge over others to keep running Spinning, Weaving, Processing and Stitching and Apparel units without any failures. This also played a vital role to maintain an extraordinary record of timely shipments. Nishat Mills has installed captive power plants at all its sites. Most modern machinery is chosen for the power plants in order to keep the cost of power generation low at the same time taking environmental concerns into consideration. The plants are based on natural gas fired generators, which besides generating electricity efficiently produce steam through exhaust gas and chilling through hot water from engine cooling system. This concept utilizes the fuel to the fullest at the same time reducing atmospheric pollution. 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.
Liquidity
The liquidity analysis shows that the liquidity has declined in FY09. This has been the second consecutive year of declining liquidity position. The current ratio has declined from 1.19 in FY08 to 0.86 in FY09 while the quick ratio has declined from 0.80 in FY08 to 0.38 in FY09. The decrease in current liabilities in FY09 is 18.08% while the decrease in current assets is by 40.46%. There is a decline in quick assets by 52.5% against a more than substantial decline in quick assets of the company. In order to comply with the requirements of IAS 39 and in view of market conditions and current economic scenario in the country, the Company decided to record full impairment of Rupees 17.259 million against those available for sale securities where fair market values were less than their cost as at 30 June 2009. Despite improved revenue the firm has low working capital available for short-term funding needs.
Asset management:
The operating cycle has decreased from 110.66 days to 89.80 days. The inventory turnover in days has also decreased from 85.83 days to 70.19 days. The days sales outstanding has decreased from 24.83 days to 19.61 days. These changes are indicative of better inventory management by the company and an efficient credit policy towards in debtors.
The total asset turnover increased from 0.51 in FY08 to 0.76 in FY09. Sales-to-equity has increased from 0.77 to 1.23. 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 had reduced considerably over the past eight years till FY08 but is slowly tipping towards risky scales in FY09. Debt to asset has increased from 0.34 in FY08 to 0.39 in FY09. The decrease in total assets is by 16.9% while decrease in debt is by 4.61%. Debt to equity ratio has increased from 0.51 in FY08 to 0.63 in FY09. The decrease in equity is 23.13% against decrease in debt by 4.61%. The fall in equity is on the back of shrunken unappropriated profit, which was eroded by the impairment costs. The long term debt to equity ratio has increased from 0.04 in FY08 to 0.13 in FY09. The tie interest earned ratio has deteriorated from 8.05 in FY08 to 2.03 in FY09, showing a strain on the company's ability to meet all short-term interest charges. The company acquired a long-term loan from Habib Bank of Rs 1 million. The 6-month KIBOR rate surged up by 380 bps during the period, which in turn increased the finance costs by 50% for the textile sector. The effects are evident on NML's result.
>Market value: The price to earnings ratio shows a positive surge despite the prevalent uncertain market conditions. EPS declined by 82.27% due to the eroded profitability. The prices displayed an overall declining trend amongst several fluctuations from a high of Rs 85.97 in FY08 to, as low as Rs 22 but recovering to Rs 34.29 at the end of FY09. The dividend per share has declined from Rs 2.5/share to Rs 2/share. The book value has shown a decline due to increase in the number of shares outstanding. The company issued 79,892,858 ordinary shares of Rs 10 each, paid at Rs 25 per share (inclusive of premium of Rs 15 per share). Thus, the paid up capital of the Company has increased from Rs 1,597,857,170 to Rs 2,396,785,750 by the issue of said right shares. The funds were utilized by the company to meet the working capital requirements and to counter the liquidity crunch of the banks.
Future outlook
The ensuing years appear to be positive for NML, as the economy turns on to the road of recovery. Rising local and international cotton prices will strain the profitability, but NML has considerable sources to generate incomes from. NML has the plan to start the functioning of the operational product development department to help it better focus on clients. NML's plans to harness the benefits from increasing international demand for apparel and garments particularly in the western economies can help maintain a healthy bottom line.
In August 2009, government of Pakistan looked in framing of a five-year textile policy which incorporates the strategies that are essential to address the challenges confronting this sector on a sustainable basis besides meeting the expectations of the industry.
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, 2010 
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