NISHAT MILLS LIMITED

An overview of performance for 2004

By MUHAMMAD BASHIR CHAUDHRY
Mar 14 - 20, 2005

Nishat Mills Limited (NML), the flagship company established in 1951, listed on all the stock exchanges in the country, has grown from a cotton export house into the premier business group concentrating on Textiles, Cement, Banking and Power Generation. In terms of quality of products and management skills, it is easily rubbing shoulders with multinational companies operating locally. It is among the top few foreign exchange earning companies of the country, with exports during FY04 at Rs12.344 billion (Rs11.249 billion exports in FY03). NML in FY04 had 13,108 persons in employment as against 12,677 employees last year.

NML's production facilities comprise spinning, weaving, processing and stitching. During FY04, it had 182,586 spindles (capacity: 58 million kgs. 20s yarn), 586 Sulzer/Airjet looms (capacity: 169 million sq. mt. cloth), processing facilities comprising 3 each of Thermosole Dyeing and Rotary Printing machines (capacity: 34 million mt. cloth). Besides, it has over 500 modern stitching machines. During the year under review, capacity utilization for Spinning, Weaving, Dyeing and Finishing has been over 95%, which is exceptional in a period when supply of cotton, the basic raw material, was somewhat restricted due to low production world-wide and prevailing high prices. Consequently, yarn prices were also on the higher side, affecting many textile manufacturers.

The addition of a modern Stitching Unit to a composite textile mills is a good move. It has enabled NML to produce and market high-value-added items such as Quilt Covers, Quilted Throw-over, Flat Sheet, Fitted Sheet, Pillow Cases, Cushions, Valances, Curtains, Baby Sets, Table Linen, and Embroidery. NML is also producing and marketing a broad range of different cotton and blended yarns and cloth, largely for the export market. Versatility in product range, modernization and expansion of production facilities, research laboratories for maintaining and improving quality of products, in-house power generation capability, and extensive use of Information Technology are the important factors enabling NML to squarely meet the challenges emerging from the end of quotas from 2005 under WTO arrangements. During FY04, the company made fixed capital expenditure of Rs1.7 billion as against Rs1.2 billion in the previous year.

Net sales during FY04 at Rs14.876 billion witnessed an increase of 12.6% over FY03 net sales of Rs13.209 billion. The increase, however, was not fully reflected in the gross and operating margins. Gross profit margin at 13% during FY04 was lower than the margin for the previous year at 14.3% largely due to increase in cost of raw material consumed. Operating profit for FY04 was Rs1.009 billion, slightly lower than the level of the previous year at Rs1.056 billion. Due to strict control over costs, the company was able to maintain the proportion of other manufacturing costs; as well as the administration, and selling expenses at the level of the previous year. In the absence of cost control measures, decline in gross or operating margins would have been bigger.

Due to increased other income at Rs371 million during FY04 (Rs152 million in FY03), and reduced financial charges at Rs425 million for FY04 (Rs635 million for FY03), the company was able to close FY04 with higher net profit at Rs751 million (5% of net sales) as against Rs410 million (3% of net sales) in the previous year. Gain on sale of investment and dividend income formed major portion of other income in FY04. Return on equity also improved from 7% in FY03 to nearly 10% in FY04. Earning per share increased from Rs3.35 in FY03 to Rs6.13 in FY04. This is a big improvement. Prospects for FY05 appear to be better due to easy supply of cotton at reasonable prices.

On overall basis the company enjoys satisfactory short-term and long-term financial position. Current ratio for FY04 and FY03 is blew one but it might be interpreted with reference to the investments made by the company as part of the group strategy. Debt equity ratio of 25:75 at end FY04 is quite healthy, though equity includes, as per company policy, a significant element of Fair Value Gains (on investments) due to differences in the cost and prevailing market value of the shares in its portfolio.

There have been two developments to which the company management might pay more attention. As percentage of Total Assets, Stock-in-Trade was 15% in FY04 (Rs2.797 billion) as against 12% (Rs1.905 billion) in FY03. Inventory level rose from 53 days in FY03 to 69 days in FY04. Also, Trade Debts in FY04 were 8.3% (Rs1.517 billion) as against 6.8% (Rs1.047 billion) in the previous year. That is, the Receivables increased to 37 days in FY04 from 29 days in FY03. Due to these increases, Cash Generation from Operating Activities during FY04 has been less than FY03. Cash shortfall was met through additional short-term finances, which were Rs5.609 billion at end FY04 as against Rs4.479 billion at end of previous year. As percentage of total current liabilities, the short-term finance is 73%, which is high and exceptional. One reason for this phenomenon is that the company has diverted substantial funds to investment in associated companies. Apart from strategic reasons, the investment has been a source of substantial cash income by way of dividends and gain on sale of shares.

NML does not provide separate statements of income and expense pertaining to spinning, weaving, dyeing & finishing, and stitching unit. As such, it is not possible to review the performance of each division individually or to compare the results with other similar manufacturers.

The company claims that in the normal course of business it carries out transactions and contracts with related parties at an arm's length price determined in accordance with comparable uncontrolled price method. Purchase of goods, services and fixed assets during FY04 were Rs98 million (FY03: Rs248 million). Sales of goods and fixed assets during FY04 were Rs165 million (FY03: Rs131 million). These purchases and sales are only a fraction of the total purchases and sales by the company during the period under review.

The Board of Directors had five meetings during FY04. Seeing attendance position of all the directors provided in the annual report, one can only wish that the directors representing the financial institutions improve their attendance and fulfill the purpose for which they are nominated as institutional directors.

The Audit Committee comprising three directors has been instituted in compliance with the Code of Corporate Governance. It is felt that the purpose of the Committee would be served better if more members are from the independent directors.

COMPANY INFORMATION:

Chief Executive/Chairperson: Mrs. Naz Mansha;
Director: Mian Raza Mansha
Company Secretary: Khalid Mahmood Chohan
Auditors: Riaz Ahmad & Company, Chartered Accountants
Registered Office: Nishat House, 53, A, Lawrence Road, Lahore.
Head Office: 7, Main Gulberg, Lahore.
Website: www.nishatmills.com
Mills: (i) Nishatabad, Faisalabad (Spinning, Processing, Stitching Units & Power Plant);
(ii) 12 K.M. Faisalabad Road, Sheikhupura (Weaving units & Power Plant);
(iii) 21 K.M. Ferozepur Road, Lahore (Stitching unit);
(iv) 5 K.M. Nishat Avenue, Off 22 K. M. Ferozepur Road, Lahore (Weaving, Dyeing & Finishing unit and Power Plant); and
(v) 20 K.M. Sheikhupura Faisalabad Road, Feroze Watwan (Spinning unit).

PERFORMANCE STATISTICS

Balance Sheet

(Million Rupees)

As at September 30,

2004

2003

Share Capital-Paid-up:

1,225

1,225

Reserves & Surplus

6,626

4,893

Shareholders Equity

7,851

6,118

LT Debt

2,623

2,753

Capitalization

10,474

8,871

Current Liabilities

7,702

6,584

Total Liabilities and Equity

18,176

15,455

Tangible Fixed Assets

8,132

7,384

LT Investments

3,199

2,166

LT Loans, deposits, etc

17

100

Current Assets

6,828

5,805

Total Assets

18,176

15,455

Ratios:

   

Current ratio

0.89:1

0.88:1

Debt-Equity Ratio

25:75

31:69

Book Value per Share

64.09

49.94

Share Price- Rs (on 11-2-05)

96.85

-

Price/Book Value Ratio

1.51

-

INCOME STATEMENT

(Million Rupees)

Year ending Sep. 30

2004

2003

Net Sales

14,876

13,209

Gross Profit

1,934

1,888

Operating Profit

1,009

1,056

Profit before Taxation

905

544

Profit after Taxation

751

410

RATIOS:

Gross profit to sales

13.00%

14.29%

Operating profit to sales

6.78%

7.99%

Profit after tax to sales

5.05%

3.10%

Net profit to Equity

9.57%

10.85%

ROA

4.13%

2.65%

ROCE

7.17%

4.62%

Earnings per share (Rs)

6.13

3.35

Inventory turnover (times)

5.32

6.93

Receivable turnover (times)

9 81

12.62

Cash Dividend - %

20%

15%

Price/Earning Ratio

15.80

-

Asset Turnover (times)

0.83

0.85

Days Receivable

37

29

Days Inventory

69

53

Debt Service Cover (times)

1.35

1.20