Introduction:

Nishat Group is one of the most expanded and leading business groups in South East Asia with
the fixed/ current assets of over Rs.300 billion (US$ 5 billion) Nishat Group ranks amongst the
top five business houses of Pakistan. The group has strong position in the three most important
business sectors of the region and that are Textiles, Cement and Financial Services. In addition,
the Group also has reasonable market share in Insurance (Adamjee and Security General), Power
Generation, Paper products ( Nishat Shoaiba Paper Mills) and Aviation ( Phonix Aviation). Each
sector is the largest payer. The Group has a outstanding position in the market and it is as good
as any multinationals operating locally in the country in terms of its quality of products, services
and management skills.

Nishat Mills Limited is the leading company of Nishat Group. It was established in 1951. It is
one of the most up-to-date, largest vertically integrated textile companies in Pakistan. The
symbol of Nishat Mills Limited is NML and it is listed on Pakistan Stock Exchange. Its annual
turnover for the year is over Rs.17 billion (US$ 283 million). Nishat Mills Limited has 227,640
spindles, 805 Toyota air jet looms. The Company also has the most modern textile dyeing and
processing units, 2 stitching units for home textile, Two stitching units for garments and Power
Generation facilities with a capacity of 120 MW. The Company’s total export for the year 2016
was Rs. 35.931 billion (US$ 344.744 million). Due to the application of prudent management
policies, consolidation of operations, a strong balance sheet and an effective marketing strategy,
the growth trend is expected to continue in the years to come. The Company's production
facilities comprise of spinning, weaving, processing, stitching and power generation.

Nishat Mills Limited engages in the textile manufacturing business in Pakistan, Europe, and
other Asian countries, Africa, Australia, the United States, and Canada. It operates through
Spinning at Faisalabad and Feroze Wattwan, Weaving at Bhikki and Lahore. Home Textile,
Garments, Power Generation, Hotel, and Automobiles segments are the products of Nishat
group. The company offers yarns using natural and artificial fibers; greige fabrics using yarns;
dyed fabrics using various greiges; and garments using processed fabrics. It also provides home
textile, including quilt covers, quilted throw-overs, flat and fitted sheets, pillow cases, cushions,
valances, curtains, baby sets, table linens, and embroidery products. In addition, the company
generates, transmits, and distributes power using gas, oil, steam, coal, and biomass; engages in
the hotels, cafes, restaurants, lodging or apartment houses, bakery, and confectionery businesses;
and imports, assembles, and distributes passenger and commercial category automobiles.
Further, it provides marketing services; sells and trades in textile and related products through
retail outlets and wholesale operations; and invests in, builds, owns, operates, and maintains a
solar power project.
Examples of Risk Disclosure Risk Risk Classification/
Disclosure Disclosure Coding
Category Sub-
Category

Financial year 2016-17 was another

tough year for the textile sector in
Pakistan. A significant drop was
recorded in the textile export which
is mainly attributable to high cost of Non-Financial Business Past / Negative/
production as compared to that of ( Operational Processes and Qualitative / Non-
our competitors. The cost of doing Risk) procedures / Monetary
business such as high labour cost, Operations
expensive gas, soaring power tariff
and over-valued Pak rupee created
pressure on textile sector. Decline in
textile exports is the continuation of
consistent trend due to which textile
exports have decreased by around
14% over the last ten years.

Despite the difficulties faced by the

textile sector, our Company
performed considerably well and
top line grew by 2.60% in the
current year as compared to the
corresponding last year. However,
above mentioned high cost of Non-Financial Business Future/ Positive/
production and intense competition (Operational Processes and Quantitative /
were the main reasons for decrease Risk) procedures / Qualitative / Non-
in profits during the year. The Board Operations Monetary
and management of the Company
are committed to enhance the rate of
return for the shareholders of the
Company. The Company expects
better performance during the
financial year 2017-18. The
Company is also focused to fulfill
the needs of its customers and
several BMR projects are underway.
Profitability of the Company
decreased during the financial year Past / Negative /
ended 30 June 2017 as compared to Financial Commodity Quantitative /
the profitability of corresponding Prices Monetary
last year ended 30 June 2016 mainly
due to increase in cotton prices,
increase in labor cost due to
increase in minimum wages from
Rs. 13,000 to Rs. 14,000 per month,
increase in fuel and power cost and
decrease in profit margins due to
low demand in international market.

The reason for increase in cost of

sales by 5.05% in the current year as
compared to the corresponding last
year was increase in cotton prices, Financial Commodity Past / Negative/
increase in labor cost due to Prices Non- Monetary
increase in minimum wages,
increase in fuel & power cost and
increase in depreciation charge of
the Company due to commissioning
of new Garment unit.

Start of the financial year 2016-17

was an obvious continuation of the
last year’s unfavorable
circumstances for spinning industry
as spinners were having expensive
cotton stocks from the purchases of
the last year. However, new cotton
crop prices could not help spinners Non-Financial GDP Past / Negative /
in making a good cotton price mix (Strategic Risk) growth/market Non-Monetary
because local cotton prices stayed at demand/aggreg
higher level due to continuous ate demand
buying by spinners during first three
quarters. The Company, in order to
mitigate the cotton supply and price
risk, completed the purchase of raw
cotton in December 2016 to fulfill
the production requirements for the
whole financial year. On the other
hand, throughout the year,
international cotton prices remained
depressed due to reduced demand
from major markets which was one
of the reasons for low prices of
yarn.

Although for a short period of time,

high volume of trading in local
cotton market increased the prices
of yarn in local market but this trend
didn’t last long. Spinning Division
of the Company successfully Non-Financial GDP Negative /
avoided negative results through (Strategic Risk) growth/market Qualitative/ Non-
improved pricing. The main market demand/aggreg Monetary
of cotton yarn, Hong Kong / China, ate demand
remained low toned however,
marketing team kept working hard
to get business from Malaysia,
Japan, Korea, Taiwan Bangladesh
and Turkey.

We are operating in a competitive

environment where innovation,
quality and cost matters. This risk is
mitigated through continuous Non- Financial Money Supply / Good / Qualitative/
research & development and (Strategic Risk) Quantitative Non-Monetary
persistent introduction of new easing
technologies under BMR. Strategic
risk is considered as the most
crucial of all the risks. Head of all
business divisions meet at regular
basis to form an integrated approach
towards tackling risks both at the
international and national level.

The supply and prices of cotton is

subject to the act of nature and
demand dynamics of local and
international cotton markets. There Non-Financial GDP Good/ Non-
is always a risk of non-availability (Strategic Risk) growth/market Monetary
of cotton and upward shift in the demand/aggreg
cotton prices in local and ate demand
international markets. The Company
mitigates this risk by the
procurement of the cotton in bulk at
the start of the harvesting season.

The exports are major part of our

sales. We face the risk of
competition and decline in demand
of our products in international
markets. We minimize this risk by Non- Financial GDP Negative / Non-
building strong relations with (Strategic Risk) growth/market Monetary
customers, broadening our customer demand/aggreg
base, developing innovative ate demand
products without compromising on
quality and providing timely
deliveries to customers.

The rising cost and un-availability

of energy i.e. electricity and gas
shortage is a major threat to
manufacturing industry. This risk, if
unmitigated, can render us misfit to
compete in the international
markets. The Company has
mitigated the risk of rising energy Non- Financial Oil Price Qualitative / Non-
cost by opting for alternative fuels (Strategic Risk) Monetary
such as coal, furnace oil, bio-mass
and diesel. The measures to
conserve energy have also been
taken at all manufacturing facilities
of the Company. Likewise, risk of
non-availability of the energy has
been minimized by installing power
plants for generating electricity at
almost all locations of the Company
along with securing electricity
connections from WAPDA and
installation of 1.2 MW solar plant at
new Apparel Denim Plant.

The Company is exposed to

currency risk arising from various
currency exposures, primarily with
respect to United States Dollar
(USD), Arab Emirates Dirham Financial Exchange Rate Non- Monetary
(AED) and Euro. The Company’s
foreign exchange risk exposure is
restricted to the bank balances and
the amounts receivable/ payable
from/to the foreign entities.

The Company’s credit exposure to

credit risk and impairment losses
relates to its trade debts. This risk is
mitigated by the fact that majority
of our customers have a strong Positive /
financial standing and we have a Financial Credit / Default Qualitative/ Non-
long standing business relationship Monetary
with all our customers. We do not
expect nonperformance by our
customers; hence, the credit risk is
minimal.

Liquidity risk is at the minimum due

to the availability of enough funds Financial Liquidity Positive/
through committed credit facilities Qualitative/ Non-
from the Banks and Financial Monetary
institutions.

When managing capital, it is our

objective to safeguard the
Company’s ability to continue as a
going concern in order to provide
returns for shareholders and benefits Financial Capital Positive/
to other stakeholders and to adequacy / Quantitative /
maintain an optimal capital structure Insolvency Qualitative / Non-
to reduce the cost of capital. The Monetary
Company maintains low leveraged
capital structure. We monitor the
capital structure on the basis of the
gearing ratio. Our strategy is to keep
the gearing ratio at the maximum of
40% equity and 60% debt.

The Company’s interest rate risk

arises from long term financing,
short term borrowings, loans and Positive/
advances to subsidiary companies, Financial Interest Rates Qualitative/ Non-
term deposit receipts and bank Monetary /
balances in saving accounts. Fair
value sensitivity analysis and cash
flow sensitivity analysis shows that
the Company’ profitability is not
materially exposed to the interest
rate risk.

Conclusion:
Nishat Mills Limited is one of the leading groups in Pakistan. The system, the management style,
the policies & decentralized decision making environment is really remarkable. This report is
basically an attempt to identify the areas which need to be improved.

In this era of technology, the "Information" is the key to success in the business. This means that
the successful businessman will be who will have the right information at the right time. This
comment leads to the conclusion that the Information Sharing Process should really be improved

Recommendations:
The Company’s activities expose it to a variety of financial risks: market risk (including
currency risk, other price risk and interest rate risk), credit risk and liquidity risk. The
Company’s overall risk management program focuses on the unpredictability of financial
markets and seeks to minimize potential adverse effects on the Company’s financial
performance. The Company should use derivative financial instruments to hedge certain risk
exposures. Risk management is carried out by the Company’s finance department under policies
approved by the Board of Directors. The Company’s finance department evaluates and
hedges financial risks. The Board should provides principles for overall risk management, as
well as policies covering specific areas such as currency risk, other price risk, interest rate risk,
credit risk, liquidity risk, use of derivative financial instruments and non-derivative financial
instruments and investment of excess liquidity.

In Currency risk, the fair value or future cash flows of a financial instrument will
fluctuate because of changes in foreign exchange rates. Currency risk arises mainly from
future commercial transactions or receivables and payables that exist due to transactions
in foreign currencies. The Company should exposed to currency risk arising from various
currency exposures, primarily with respect to the United States Dollar (USD), Arab Emirates
Dirham (AED) and Euro. Currently, the Company’s foreign exchange risk exposure is restricted
to bank balances and the amounts receivable / payable from / to the foreign entities.

Other price risk represents the risk that the fair value or future cash flows of a financial
instrument will vary because of changes in market prices (other than those arising
from interest rate risk or currency risk), whether those changes are caused by factors
specific to the individual financial instrument or its issuer, or factors affecting all similar
financial instruments traded in the market. The Company should not exposed to commodity
price risk. This represents that the risk will vary because of changes in market interest rates.

The Company’s interest rate risk arises from long term financing, short term borrowings,
term deposit receipts, bank balances in saving accounts and loans and advances to
subsidiary companies. Financial instruments at variable rates expose the Company to
cash flow interest rate risk. Financial instruments at fixed rate expose the Company to fair
value interest rate risk.

Liquidity risk is the risk that an entity will face difficulty in meeting obligations associated
with financial liabilities. The Company should manages liquidity risk by maintaining sufficient
cash and the availability of funding through an adequate amount of committed credit facilities.
The management should believe that the liquidity risk to be low.

The Company’s should have the objective when managing capital are to safeguard the
Company’s ability to continue as a going concern in order to provide returns for shareholders
and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost
of capital. In order to maintain or adjust the capital structure, it should may adjust the
amount of dividends paid to shareholders, issue new shares or sell assets to reduce debt.
Consistent with others in the industry and the requirements of the lenders, the Company should
monitor the capital structure on the basis of gearing ratio.