Nishat Mills Limited

The flagship company of the Nishat Group, NML is the largest vertically integrated textile manufacturer in the country, with a major portion of the company’s earnings coming from exports.

Financial highlights

During 1Q FY14, Nishat’s profit after tax increased significantly by 47.89 percent as compared to corresponding quarter of the last year-mainly on account of increase in sales by 4.81 percent. Performance of the firm’s weaving division was especially remarkable during the current quarter, with sales of Grey cloth seeing a major boosted in European market.

However, profitability for both the processed textiles and garments division of the company remained depressed during the first quarter of the year, primarily because of low sales in the US and EU regions.

Improved productions efficiencies and better cost management, however, saved the day, keeping the increase in cost of goods sold to a minimal 1.5 percent. As a result, NML’s gross profit margin increased from 15.7 percent in the corresponding quarter to 18.4 percent in the current quarter.

Other major profitability measures that contributed to the firm’s improved bottom line were increased dividend income of Rs488.8 million and a one-time gain of Rs95 million mainly on sale of partial investment in Lalpir Power Limited.

Decrease in finance cost by 10 percent in the current quarter as compared to corresponding quarter in the last year through better working capital management and reduction in borrowing rates was also key contributor to the profitability during a quarter that saw largely depressed sales.

Operational highlights

The cotton prices remained mostly steady during the first month of the current quarter of financial year. However, some panic was created in the market early on this season regarding the health of the incoming crop, allowing prices to swing up sharply at the start of August.

Preempting an even worse situation in the coming months and to fulfil its immediate spinning production requirements, Nishat started buying raw cotton as soon as new crop arrived in the market. While the company’s hasty purchase decisions had small bearings on the first quarter results, phutti prices have subsequently seen a substantial decrease.

Going forward, NML might find their expensive cotton procurement to have a tad gloomy effect on their margins. However, the company is poised to reap some great rewards of a well-timed and concentrated expansion effort, which will not only bring about a great increase in production capacity of their spinning, processing and garments division, but will also bring down their cost of operations in the long run.

All the machinery that the company had purchased for the aforementioned expansion moreover has already arrived in Pakistan and sources report that most of the newly installed capacity should come online by the end of the next quarter.

Once the entire planned expansion is completed, the production capacity of the home textile division will increase by approximately 25 percent. Additionally, five hundred thousand meters of added production capacity will also be available to the Processing unit at the start of next calendar year.

Outlook

In a major positive development for the country’s economy in general and textile industry in particular, the European parliament approved Pakistan’s request this month for more favourable trade regime under euro-zone’s GSP plus system.

The new regime would be applicable from 1st Jan 2014 and will largely benefit Pakistan’s value-added exports to EU as it will effectively remove the 11 percent tariff our textiles are slapped with upon entry into the market. According to industry reports, this would translate into $550-700mn incremental exports to EU during the upcoming year.

One player that is all set to make good use of this development is Nishat Mills Limited-being well poised as a result of their higher concentration in the value-added segment. Furthermore, while a majority of the mills are currently not in the position to fully benefit from this upside due to their power related shortcomings, NML’s plans for installing a 9MW coal fired plant, a 2MW gas fired generator and a plan to replace their existing gas turbines will ensure the firm supply of cheaper power-thereby helping them reap the greatest benefit out of the GSP status.

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