Security Analysis Project 3

Financial Modeling
Report on Nishat Mills
Submitted by: Yashra Naveed-14142
Contents
Textile Sector of Pakistan .............................................................................................................................. 2
Nishat Textile Mills ........................................................................................................................................ 4
Introduction .............................................................................................................................................. 4
Financial Analysis ...................................................................................................................................... 6
Income statement analysis ................................................................................................................... 6
Balance sheet analysis .......................................................................................................................... 7
Valuation ................................................................................................................................................... 8
References .................................................................................................................................................. 10
Textile Sector of Pakistan
Textile sector is the biggest industrial sector of Pakistan contributing to 60% of Pakistan’s export. . The
textile sector comprises of 46% of the total Manufacturing sector in Pakistan, giving employment to
almost 40% of total labour force. Globally, Pakistan is the 8th largest exporter of textile products in Asia
and fourth largest producer of cotton. The textile contribution to the GDP is 8.5% (2018) and meets the
global demand of 1.2 trillion dollars (2018). 57% of the total textile products produced are exported,
major market comprise of USA and European Union. The following charts and graph show the textile
export and its trends of Pakistan over the years;

The textile sector currently consists of highly organized sector including firms listed on stock exchange as
well as small scale factories or cottage industry. As of June 2019, Pakistan has total 517 units, in which
477 are spinning units and 40 composite units. The tables below show the province wise number of
composite and spinning units;
The textile sector can be divided into several segments based on its value chain and most of the
companies are vertically integrated including all of these segments. The segments are Spinning,
Weaving, Processing and Garments. The capacity of each unit in Pakistan includes;

 Spinning: 11.3 million spindles and 03 million rotors.

 Weaving: 350,000 power looms and 18,000 knitting machines.
 Processing: 5.2 billion square meters

Most of the textile companies are listed on stock exchange. Aggregate Market capitalization of textile
spinning, textile weaving and textile composite was Rs. 40.88 billion, Rs. 2.62 billion and Rs. 257.18
billion respectively in April 2019. The downstream industry of weaving, finishing, garments and hosiery
has a great export potential thus can earn greater revenues if it well grown to international scale. The
chart below shows the exports of value added textiles different products category wise;
Nishat Textile Mills
Introduction
The Nishat Mills Ltd. is a holding company, which engages in the manufacture of textile and of spinning,
combing, weaving, bleaching, dyeing, printing, stitching, apparel, buying, selling, and otherwise dealing
in yarn, linen, cloth, other goods, and fabrics. It is one of the most modern, largest
vertically integrated textile companies in Pakistan. Nishat Mills Limited has 227,640
spindles, 805 Toyota air jet looms.

The firm operates through the following segments: Spinning, Weaving, Dyeing, Home
Textile, Garments, Power Generation, and Terry. The Spinning segment produces
different quality of yarn using natural and artificial fibers. The Weaving segment
engages in the production of different quality of greige fabric using yarn. The Dyeing
segment produces dyed fabric using different qualities of greige fabric. The Home
Textile segment is engages in manufacturing of home textile articles using processed
fabric produced from greige fabric. The Garments segment manufactures garments
using processed fabric. The Power Generation segment engages in generation and
distribution of power using gas, oil, steam, coal and biomass. The Terry segment
manufactures terry and bath products. The company was founded in 1951 and is
headquartered in Lahore, Pakistan.
The charts below show the performance of Nishat Mills Ltd over the past 5 years;
Financial Analysis
Income statement analysis
The regression was run on the Sales figures, separately on local sales and exports, to forecast the sales
of 2021-2023. Five years of data of sales and input was used in regression, input variables for local sales
were GDP per capita and inflation rate while for exports the input variables were exchange rate and
textile exports. Forecasted sales show an increasing trend in FY 2020-2021, 2021-2022and 2022-
2023with an increase of 1.9%, 3% and 3.15% respectively. While the percentages change in Cost of sales
of year 2020-2021, 2 and 2022-2023 has been 23.11%, -4.49% and 4.19% respectively.

In FY 1, the increase in cost of sales surpasses the increase in sales hence the gross profit figure is
negative. While in year 2021-2022and 2022-2023the forecasted gross profit is a positive figure. The
gross profit margins in FY 2020-2021, 2021-2022 and 2022-2023 are -6.38%, 1.39% and 0.40%. The excel
excerpt below shows the forecasted data of sales, cost of sales and gross profit;

The profits from operations of the forecasted years are shown in the table below. The Profit from
operations margins has for forecasted FY 2020-2021, 2021-2022 and 2022-2023 is -6.82%, 0.67% and -
.050%. The gross profit of the FY 2020-2021 was also negative but the negative profit shows that the
other expenses of this FY were greater than the other income, thus giving out the greater negative profit
from operations margin. In FY 2021-2022, the profit from operations was lesser than gross profit again
due to expenses outweighing the other income. In FY 2022-2023, the gross profit margin was already
very thin which was consumed by all expenses giving a negative profit from operations margin.

The forecasted Profit after taxation is negative throughout the FYs 2021-2023. However the profit after
taxation was a bigger negative figure in all 2022-2023 FYs due to higher negative profit from operations
and forecasted finance cost was also higher in FY 2020-2021 as compare to subsequent FYs. The FY
2020-2021 and 2022-2023have relatively lower finance cost but FY 2022-2023 also experienced loss due
to loss from operations carried forward. Taxation also expense is forecasted to remain stable over the
2022-2023FYs.
Balance sheet analysis
The forecasted total equity has increased in FY 2020-2021 but has decrease in FY 2021-2022 and 2022-
2023, due to decrease in reserves as the paid up capital has remain constant over the FYs. The
forecasted percentage change in equity in FY 2020-2021, 2021-2022 and 2022-2023 is 7.71%, -1.36%
and -3.39%. Non-current liabilities have shown a forecasted decreasing trend with percentage decrease
in FY 1, 2021-2022and 2022-2023 being -40.77%,-6.52% and -9.14%, resulting because of decrease in
long term financing of the business. The forecasted current liabilities in FY 2020-2021 are expected to
decrease by -22.58%, then increase 2021-2022 by 8.90% and again increase in 2022-2023 by 5.24%.
Finally the total equity and liabilities have are forecasted to decrease by -4.60% in FY 2020-2021, then
increased in FY 2021-2022 by 0.60% and again decreased by -1.64% in FY 2022-2023. The excel excerpt
below shows the figures of liabilities and equity:

The total non-current assets are forecasted to increase in FY 2020-2021 by 7.75%, then decrease in
2021-2022 by -1.37% and then again decrease in 2022-2023 by -3.76%. However the Current Assets are
forecasted to decrease in FY 2020-2021 by -25.96%, then increase in FY 2021-2022 by 5.56% and then
again increase by 3.33% in FY 2022-2023. Total Assets are forecasted to decrease overall by -4.60% in FY
2020-2021, as decrease in Current assets have outweighed the increase in fixed assets. Then in FY 2021-
2022 and in FY 2022-2023 the Total Assets are forecasted to increase in 5.56% and 3.33% respectively.
The excel excerpt below shows the figures of Assets of the forecasted years:
Valuation
The cost of equity was calculated using CAPM model and then WACC was calculated which used in the
DCF model to determine the value of equity, subsequently the value of share. The excerpt from the
excel shows the figures used for valuation:
The share price of the Nishat Textile mills on 30th June 2020 was Rs.78 but the value per share is coming
to Rs. 63.46 so the share is overvalued as it is upside to the fair value by 19%. Hence the investor should
take the sell call and sell the company stocks if it is present in the portfolio or else should short sell to
earn a handsome amount of profit.
References
https://www.wsj.com/market-data/quotes/PK/XKAR/NML/financials

https://www.wsj.com/market-data/quotes/PK/XKAR/NML/company-people

https://www.researchgate.net/publication/341134482_The_Rise_and_Fall_of_Pakistan's_Textile_Indust
ry_An_Analytical_View

http://www.tco.com.pk/documents/fdb907090a.pdf

https://www.icap.org.pk/paib/pdf/guidelines/textileindustry.pdf

https://www.textileinfomedia.com/textile-industry-in-pakistan

https://invest.gov.pk/textile#gallery

https://textilelearner.blogspot.com/2015/12/textile-industry-of-pakistan-overview.html