Fuel costs burn out textile export revenue
Nishat Mills Limited (NML) —the Nishat group’s flag ship company is the largest composite textile unit in the country.
The conglomerate has half a dozen other group companies listed on the Pakistan Stock Exchange (PSX) which include MCB Bank, Adamjee Insurance, DG Khan Cement Company, Nishat (Chunian) Ltd, Nishat Power, Lalpir Power and Pakgen Power.
But with a balance sheet footing of over Rs110 billion and total equity at Rs79bn NML towers above the rest.
NML has 236,496 spindles and 795 Toyota air jet looms. The company also maintains a textile dyeing and processing unit; two stitching units for home textile, two stitching units for garments and power generation facilities with a capacity of 130MW.
According to the unconsolidated, condensed interim balance sheet at Dec 31, 2017, NML had a paid-up capital of Rs3.5bn, while its reserves stood at Rs75bn.
At the last count on June 30, 2017, the company directors, CEO, their spouses and minor children held 25.22pc equity in NML, followed by Modarabas and Mutual Funds with 12.33pc, associated companies, undertakings and related parties with 9.01pc and Insurance companies with 5.68pc of the company stock.
The share price movement in NML is closely watched by investors on the stock exchange. Last Thursday’s closing price of NML stock of par value Rs10 stood at Rs163.
Most analysts concede that unlike several other shares, the price spiral in NML’s scrip has less to do with speculators and punters and more to do with long-term buying by the fundamental value hunters.
Core earnings of the company that accrue from home textile garments (value added segment) contribute around 50pc to the company’s profit before tax.
“Higher product prices combined with the rupee devaluation is expected to provide breathing space for the textile dynamics of the company, going forward, although higher fuel prices may somewhat dampen margin accretion” analyst at Inter-market Securities say.
However, higher product prices and increased contribution by denim — following the commissioning of the new facility that doubled the existing garments capacity in fourth-quarter 2016 — is a good trigger to higher profitability.
A textile producer with a mid-sized plant reckoned that export oriented companies were expected to be the major beneficiaries of the recent rupee devaluation. Textile companies may see a significant increase in revenue as a result of the currency devaluation and offer of rebate at 3-7pc on textile exports.
Like most other companies in various sectors of the stock market, NML is in the throes of expansion and diversification.
Mian Umer Mansha, the company CEO, in the director’s report appended to the accounts for the quarter ended Dec 31, 2017 says: “The Company regularly invests to upgrade its power plants for cheap energy sources to meet the increasing demand of its textile manufacturing facilities.
“A 10 tonne coal fired boiler installed at manufacturing facility of the company at Bhikhi was commissioned in July 2017. The new captive power plant to cater for spinning production facilities located at Faisalabad Industrial Estate was commissioned in Dec 2017”.
Investors are excited over the company’s latest initiative of a venture with Hyundai Motors.
For textile companies the government’s export package and expectations of incentives in the upcoming budget 2018-19 are major reasons that could boost earnings.
On the flip side, escalating cotton prices and higher furnace oil costs could eat into gross margins as happened in the first half of the year ended March 31, 2017. As fuel and power accounts for 10pc of the total cost of sales and NML still derives approximately 40-50pc of power requirements from furnace oil, its price increase has a direct bearing on the company’s bottom line.
In their budget proposals to the government, textile manufacturers have urged that the cost of doing business for the sector be decreased, primarily through reduced electricity tariff, to compete with regional players.
Other proposals include timely release of pending refunds; continuation of drawback duties and reduction or elimination of custom duties on import of synthetic yarn and Polyester Stable Fibre (PSF).
The recently announced financial results of NML for the 2QFY18 showed unconsolidated earnings of the company at Rs1.9bn which took the first-half financial year 2018 profit after tax at Rs2.7bn.
The growth in 1HFY18 earnings emanated from sales revenue rise by 6pc resulting from upsurge in textile exports and increase of 5pc in other income.
The company’s total export for the year 2017 stood at a massive Rs37bn. Home textiles being the major revenue contributor, the segment chipped in sales growth of 15pc in 1HFY18, mainly due to volumetric growth as product prices remained depressed.
Overall, the textile sector witnessed a collective increase in revenue by 10pc for the 2QFY18 but the benefit did not travel down to the bottom line with profitability remaining at Rs7bn due mainly to increase in finance costs.