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Nishat Mills remains our primary textile sector pick as the company’s integrated business model and diversified product base provides a competitive edge to the company. Over the last five years (1999-2004), Nishat Mills’ earnings have grown at an impressive compound annual growth rate of 15%. FY04 earnings at Rs751m portrayed a massive 83% upsurge compared to Rs411m last year. Revenue growth during FY04 stood at 13% attributable to the company’s continuous expansions and penetration into new markets. With the exception of its weaving plant, Nishat Mills has made expansions in almost all areas including spinning, printing, dyeing, stitching and finishing with additional projects in the pipeline. Moreover, dividend income of the company marked a substantial growth of 77% ensuing from sizeable receipts from DG Khan Cement and improved dividend proceeds from other investments.
On the back of the soaring stock market, Nishat Mills’ investments in associated concerns is expected to result in significant revaluation gains during the first quarter ended December 2004. Another contributing factor for Nishat Mills — that derives over 80% of revenues from export sales — is the upbeat trend of Pakistan’s textile exports. Pakistan’s textile exports during the first five months of the current fiscal (July-November 2004) portrayed a 3% increase to US$3,210m. We expect the company’s profitability to remain strong ensuing from buoyant sales volume and better fabric prices coupled with the company’s ongoing focus on value addition, product innovation, developing strategic alliances with major players and exploration of untapped opportunities. Therefore, we recommend a positive stance on the scrip.
Overview of the company
Nishat Mills was incorporated in 1959 as a private limited company and subsequently in May 1961 was converted into a public limited company. The company is engaged in the business of textile manufacturing and of spinning, combing, weaving bleaching, dyeing, printing, stitching and buying. Moreover, it deals in yarn, linen, cloths and fabrics made from raw cotton, synthetic fibre and cloth. The company also generates, distributes and supplies electricity.
Textile sector — Major beneficiary of the FY05 export strategy
The export strategy for FY05 is mainly based on driving volume, value and creating an enabling environment. For this purpose, the government intends to enhance the share in the world market of its major exports through proactive export promotion, develop exporters’ capabilities and capacities to compete and improve in product range and quality to achieve sustainable value addition. Moreover, this would encourage domestic exporters to pursue a multilateral, regional and bilateral market access aggressively and leverage trade development with OIC countries. With the textile sector having a major share in the economy and trade, some of the major supportive measures that have been taken include the elimination of sales tax on ginned cotton to reduce costs for the spinning sector and almost all restrictions on relocation of used textile machinery and related equipment have been removed to encourage aggressive establishment of enhanced textile production capacity.
Demand expected to spur during the WTO regime
The current year is particularly important for the country as all remaining quotas on the textile exports will be phased out with effect from January 1, 2005, as per the requirements of the WTO agreement on textiles and clothing. Enjoying a comparative advantage in the sector, the end of quota regime is expected to bode favorably for textile exports on the back of the resultant higher access in the international market after the implementation of the WTO regime which would ultimately increase the sales volume of the sector thereby strengthening the bottom-line. Reportedly, the government on the highest level is negotiating with the European Union (EU) to minimise anti-dumping duty on Pakistani bed linen. Moreover, the prospects of acquiring zero-rated tariffs in the new European GSP and bilateral free trade agreements are expected to boost textile exports in the markets of Europe, the US, China and many other countries. Textile manufacturers, being stimulated by the quota-free regime, have raised their focus towards extensive capacity expansion and BMR activities to cater to a larger international market.
Nishat Mills’ financial figures sound
The company’s historical financial performance has shown strength with both the top and bottom-line depicting a fast growing trend during the last six years. Sales, gross profit, net profit of the company have portrayed respectively an impressive 10%, 3% and 15% CAGR during the period 1999-2004. Table 2 illustrates the details:
Nishat Mills’ earnings for the year ended September 2004 at Rs751m depicted an 83% growth as against Rs411m during the previous year. Higher earnings primarily ensued from a 13% upsurge in sales and 33% decline in financial charges in the wake of the declining balance of long-term debt and softened domestic interest rate environment. Though the top-line of the company depicted a 13% increase, gross profit grew by a marginal 2% whereas gross margins were down 2pps to 13% on the back of higher cotton procurement costs earlier during the year. A 144% growth in other income, attributable to dividends from associated companies, mainly DG Khan Cement, lent strong support to the bottom line. EPS during the year stood at Rs6.13 compared to Rs3.35 during FY03. The company also announced Rs2/share cash dividend compared to Rs1.5/share previously.
Nishat’s product diversification and expansions
Nishat Mills is a highly integrated textile concern with a diversified product base ranging from yarn and grey cloth to bleached, dyed and finished fabrics. The company has a lifelong strategy of upgrading, replacing and innovating its machineries and exploring new avenues in order to enhance operational efficiencies and produce quality products.
During FY04, Nishat Mills made expansions in almost all areas including spinning, weaving, printing, dyeing, stitching and finishing. The company’s weaving products penetrated the Central American, Spanish, French and Portuguese markets.
The company has communicated its intention to tap new markets in the value-added segment in order to boost revenues and profits.
Subdued cotton prices to improve the margins going forward
With domestic cotton prices having receded to below the Rs2,000/maund mark, both the top-line and margins of the company going forward are expected to improve substantially.
Moreover, a simultaneous rise in prices in the PSF cycle is expected to spur demand back into the textile sector thus improving sales. Exports are expected to be fuelled on the back of higher market access for Pakistan’s products to the European Union and the United States coupled with improved capacity utilisation amidst Nishat Mill’s extensive focus towards stretching its product line with high value-added products for the niche markets, especially in the European Union and US.
Greater synergies to result from Umer Fabric’s merger
Umer Fabrics Limited has been merged into Nishat Mills and Nishat Chunian following the approval for amalgamation by the Lahore High Court. The following swap ratio has been determined regarding the merger of Umer Fabrics into Nishat Mills and Nishat Chunian.
The ratio suggests that a shareholder who holds 1 share of Umer Fabrics is entitled to receive 0.051 shares of Nishat Chunain and 0.949 shares of Nishat Mills. Moreover, Nishat Chunian and Nishat Mills would receive net assets of Umer Fabrics at Rs66.971m and Rs1.405bn respectively. We believe that the merger of Umer Fabrics would allow Nishat Mills to take advantage of the resulting technological and marketing synergies in enhancing its production capacity for value addition, thereby, consolidating the bottom-line.
Moreover, the overhead cost would be capped thereby resulting in operational efficiency and an optimum level of utilisation would be achieved. The merger would also cut the funding cost of the company substantially as it will reduce the multiple arrangements for obtaining loans and other credit facilities.
— the writer is Financial Analyst, JSCM |
