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Textile: Nishat Mills Ltd - Analysis of Financial Statements Financial Year 2008 - 03 Q 2010

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Highlights - Corporate News

OVERVIEW  : Nishat Mills Limited (NML) is the largest textile composite unit of Pakistan.

It is engaged in the business of textile manufacturing as well as 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. It is a gigantic and wider diversified unit and textile processing functions that are fully integrated by means of information technology as the business processing is dependent on timely providing information and data.

 

COMPANY SNAPSHOT

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Name of company    NISHAT MILLS LIMITED

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Nature of Business  Apparel and Textiles

Ticker                 NML

Share price (current)       Rs 44.15

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Market Capitalisation    10,705,609,170

At NML, the management has installed comprehensive information systems for all its locations 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 and highly efficient reciprocating engines and gas turbine generators, which besides generating power, are supplying steam and air-conditioning, being produced by using the 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 America, Spanish, French and Portuguese markets which it managed to achieve.

RECENT RESULTS 3Q10

The after tax profit of the NML in the nine months period ended
March 31, 2010 has significantly increased to Rs 1,810.674 million compared to Rs 1,100.421 million in the corresponding period ended March 31, 2009, showing an increase of 64.54%. Similarly, the gross profit for the current period has increased to Rs 4,076.012 million compared to Rs 3,495.323 million in the previous corresponding period. The significant increase in gross profit and net profit is mainly attributable to increase in quantities and prices of the products manufactured and sold by the company.

All business segments of the company have contributed excellent results in the current period over the previous corresponding period; however, spinning business of the company has performed tremendously well in the current period. Spinning business reaped the benefits of significant increase in cotton prices due to global shortage of the crop. Moreover, increasing demand for cotton yarn from
China and the Far East was another reason behind the soaring yarn price. Along with higher yarn prices, timely procurement of cotton in the early part of the year also helped the company post better margins in the spinning business.

Though the weaving segment contributed notably to the total revenues (Rs 33.25 million) in the nine months period ended
March 31, 2010, the segment still remained under pressure, due to high cost of yarn and cloth purchased.

The timely investment of NML in garments segment has started showing positive results and this segment has earned good profit in the current period of nine months. The garments segment of NML has performed commendably registering a growth of 85.14% in revenues in the nine months period ended
March 31, 2010. This was supported by the gradual global economic recovery and better orders from its existing clientele.

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Financial Highlights    Nine months period ended   Increase/

                 March 31,2010  (decrease) %age

                2010     2009

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                      (Restated)

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Net Sales ( 000 Rs)     22328698   18066232     23.59%

Gross Profit ( 000 Rs)    4076012   3495323     16.61%

Pre-tax Profit ( 000 Rs)   2050674   1311421     56.37%

After-tax Profit ( 000 Rs)  1810674   1100421     64.54%

Gross Profit (%)         18.3%    19.3%       -

After-tax Profit (%)       8.1%     6.1%       -

Earnings per Share (Rs)      7.47     6.79       -

Furthermore, the company was able to reduce its financial cost by 28.26% (March 2009: Rs 1,127.478 million, March 2010: Rs 808.800 million) in the current period compared to the previous corresponding period owing to huge profits earned by the company and subsidy on interest rates given by the government and more effective funds management.

GENERAL MARKET SCENARIO

Textile industry is going through one of the toughest period in decades. Global recession, which has hit the textile sector world-wide and led to lower sales at retail level and a stiffer competition for suppliers, is not the only cause of concern. Serious internal issues also affected textile industry quite badly. The high cost of production resulting from higher cotton prices, rising energy costs, increasing prices of imported inputs due to depreciation of Pakistani rupee, double digit inflation and prolonged power cuts are posing serious threats to textile sector.

Nishat Mills did extremely well during the first nine months of the current financial year and achieved 23.59% growth in net revenue from the previous corresponding period. Overall textile industry of
Pakistan has been going through a tough period due to the effects of global economic recession and serious internal problems of the country. Despite all the challenges, Nishat achieved this success through full utilization of its production capacity, effective business planning, aggressive marketing strategy, strong customer base and diversified product range.

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 due to 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.

WEAVING

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 labour, 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 got success 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 specialised 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 minimise 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 in near future, as the US market is expected to revive rapidly in 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 materialised 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 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 (NDF)

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 Sulpher dyeing was utilised 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 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 the approval from Lahore High Court.

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 380bps 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 GENERATION

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             Diesel/

      Generation  Furnace    Gas   Gas/

Power     Capacity    Oil  Engines   Steam

Plants      (MW)  Engines      Turbines

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Faisalabad    38.32     2          1

Bhikki      13.80     3     4     1

Lahore      28.54     7     7     4

Ferozewatan    7.80     3     5     -

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 utilises 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 is supplying surplus power from its different sites to the Pepco.

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%, as 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 Rs 17.259 million against 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 70.19days. 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. The sales to equity has increased from 0.77 to 1.23. The last two ratios show that sales collection has improved and was 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% as 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 its 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 by 380bps during the period, which in turn increased the financial 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 utilised by the company to meet the working capital requirements and to counter the liquidity crunch of banks.

FUTURE OUTLOOK

The ensuing years appeared 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 the framing 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.

In the future, the company can face tough competition from the neighbouring countries and slower sales of textile products in the
US and European markets. Also, the 15% regulatory duty on the exports of cotton yarn can affect the exports growth of NML. As a part of our future marketing strategy, NML is exploring new avenues and particularly focusing on developing work wear business.

NML aims to add further value added products and systems by capitalising its capabilities and competencies, vertically integrated production facilities that can turn raw cotton to a final finished consumer product.

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                   2004     2005     2006     2007     2008     2009

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                               (Rupees in Thousands)

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PROFIT AND LOSS

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Net sales           14,875,877  11,374,630  16,659,607  17,180,192  19,589,804  23,870,379

Gross Profit          1,933,924  2,134,899  2,957,981  2,844,938  2,811,746  4,351,541

Profit before tax         905,502  2,033,354  1,758,866  1,356,208  6,118,687  1,561,501

Profit after tax         751,060  1,867,354  1,632,866  1,211,208  5,857,587  1,268,001

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CASH OUTFLOWS

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Taxes paid            141,850   116,675   196,772   146,751   238,252   257,289

Financial Charges Paid      443,665   351,094   692,267   838,759   875,636  1,458,602

Fixed capital expenditures   1,703,273  1,743,535  2,331,519  1,076,493  1,239,492   917,312

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BALANCE SHEET

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Current assets         8,074,343  7,746,417  9,743,720  13,309,087  8,818,379  8,294,838

Current liabilities       7,456,610  6,253,333  7,051,533  7,649,373  12,053,926  9,602,265

Operating fixed assets-Owned  7,631,620  7,926,838  8,398,310  10,309,611  11,188,560  11,102,355

Total assets          19,581,627  21,917,602  30,661,326  39,587,091  40,277,289  31,512,686

Long term loans and finances  2,622,873  2,858,155  3,015,384  1,773,820  1,321,912  2,334,411

Share holders Equity      9,502,144  12,806,114  20,594,409  30,163,898  26,492,070  19,330,767

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RATIOS

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Current ratio           1.08:1    1.24:1    1.38:1    1.74:1    0.73:1    0.86:1

Gearing ratio            48.65     37.7    29.49    21.17    30.62    34.34

Gross profit %             13    18.77    17.76    16.56    14.35    18.23

Net profit % (before tax)      6.09    17.88    10.56     7.89    31.23     6.54

Earning per share          5.17    12.86     1022     7.58    36.86     6.81

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].

 

 

Courtesy: Business Recorder

 


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