NISHAT MILLS LIMITED

MARIAM NASIR
Manager Research

Aug 27 - Sep 02, 2007

Nishat Mills Limited (NML) is among the largest vertically integrated textile mills in Pakistan which was established in 1951. It is Pakistan's largest integrated textile company, with an export-oriented focus (more than 80%). Its key products include bed linens and fabric. Its holding company status as one of the country's largest business groups provides it a steady income stream through dividends and associate company's share of profits. The Company manufactures, spins, combs, weaves, bleaches, dyes, prints, stitches, buys and sells textiles. The Company deals in yarn, linen, cloth and other goods and fabrics made from raw cotton, synthetic fibre and cloth. The Company also generates, accumulates and distributes electricity. In the past few years, the company has propelled itself up the value chain, with focus on the bed linen and home textiles segments. Over FY05-07, the share of finished products in NML's sales increased from 44% to 47%. In July 2006, the company completed expansion of its dyeing and processing facilities by 33% from 36mn meters to 48mn meters of annual production. The expansion is directed towards NML's most profitable segment - the home textiles and apparel division - and bodes well for both future growth and margin stability. NML cements its position as a textile plus theme, where less than dazzling textile performance is mitigated by higher other income.

THE GROUP

The Group behind the company has grown from a cotton export house into the premier business group of Pakistan with 5 listed companies, concentrating on 4 core businesses; Textiles, Cement, Banking and Power Generation. The group holds the majority shares of Nishat Mills. The company has a big equity portfolio by virtue of its investment in associate companies. NML garners dividend income and share of profit from held companies, hedging cotton dependant volatility of core operations and indirect exposure to some of the biggest names in Pakistan's cement and banking sectors. Today, Nishat is considered to be at par with multinationals operating locally in terms of its quality products and management skills.

SPINNING, WEAVING, PROCESSING AND STITCHING UNITS

NML spinning is operationally organized into eight spinning units, each with a distinctive product range and capacity to keep a check on the quality standards. Every cone undergoes inspection before packing to ensure that our buyer gets only the best out of the lot. Company's weaving units are operationally divided in two cities i.e. Faisalabad and Sheikhupura. Both of the units are ISO 9002 Certified. The unit has been producing top quality fabrics for export as well as for the consumption of our own processing unit. The processing unit of the company is ISO 9001 certified. It is one of the largest and most modern processing facilities of Pakistan with an array of custom-made machinery. It has the capacity to produce 3 million meters of fabric /month. The product range of the processing departments includes: Home Textiles, Table Linen and Garments. The stitching department has an average capacity to process up to 1.3 million meters of fabric per month. The product line is customized to manufacture products of various styles and sizes according to the requirements of the customers, wholesalers, retailers and contract textile business.

FINANCIAL RESULTS NINE MONTHS ENDING MARCH 2007

Nishat Mills net profit for the nine month showed a growth of 3% to stand at Rs1.169 bn (EPS: Rs7.3) versus Rs1.133bn (EPS: Rs7.09) recorded in previous corresponding period. Sales stood at Rs12.9bn a growth of 5%, mainly due to its exports sales. Gross margins, however, squeezed by 76bps on account of higher input costs. Moreover, a steep rise of 16% in distribution and admin expenses further dented the profitability of its textile operations. Operating profits from the textile operations (excluding other income) declined by 7%.

(RS IN MILLION)

9M/FY06

9M/FY07

CHANGE

Turnover

12,322

12,991

5%

Cost of Sales

10,240

10,895

6%

Gross Profit

2,082

2,096

1%

Administrative Cost

194

229

18%

Distribution Cost

502

580

15%

Finance Cost

547

626

14%

Other Income

175

264

51%

Other Expenses

63

71

12%

Share of Profit from Associate

353

476

35%

Profit Before Tax

1,304

1,331

2%

Taxation

171

162

-5%

Profit After tax

1,133

1,169

3%

Earning Per Share (Rs.)

7.09

7.31

3%

However, other income that Nishat Mills receives in the form of dividend from its investment portfolio provided some cushion to the operating profits. Also a healthy growth of 35% in the profitability of the associated companies provided some relief to the bottom line. Alone in the 3QFY07, net profit of the company was Rs293mn, a decline of 9% y-o-y and 35% q-o-q. This huge q-o-q decline is mainly attributable to 61% and 27% decline in other income and share of profit from associated companies, respectively. Moreover, the sales revenue and gross margins of the company also declined 3% and 7% respectively on q-o-q basis.