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Nagina Cotton Mills Q3 FY26: Sales Volume Rises, but Tax Absorbs the Margin Gain

Nagina Cotton Mills grew Q3 sales volume and improved gross margin as energy and finance costs eased, but a prior-tax charge cut PAT. Nine-month cash flow improved through a large inventory release.

Sep 24, 2026

Verdict

Nagina Cotton Mills Limited’s third quarter ended March 31, 2026 improved at the gross-profit and financing lines but weakened sharply at the bottom line. Q3 revenue rose 4.9% year on year to Rs5.15 billion, driven primarily by higher sales volume according to management, while gross profit increased 9.5% and gross margin edged up to 8.04% from 7.71%. Finance cost also fell 10.5%. Yet profit after tax dropped 45.0% to Rs24.55 million because the benefit from better gross economics was absorbed by higher operating expenses and, most importantly, a much larger tax charge.

The nine-month picture is steadier. Revenue was almost flat at Rs15.44 billion, gross profit rose 6.1%, finance cost declined 13.4%, and profit before tax rose 66.6%. Profit after tax, however, increased only 6.0% to Rs80.14 million because taxation more than doubled. Cash generation improved dramatically, but the change was heavily working-capital driven: a Rs2.19 billion release from inventory was the biggest single contributor. The result is therefore a mix of genuine operating improvement, a meaningful balance-sheet release and a tax burden that masks much of the progress.

Results at a glance

  • Company: Nagina Cotton Mills Limited
  • Ticker: NAGC
  • Reporting period: quarter and nine months ended March 31, 2026
  • Basis: company-level condensed interim financial statements; unaudited and prepared under IAS 34
  • Q3 revenue: Rs5.153 billion, up 4.9% year on year
  • Q3 gross profit: Rs414.5 million, up 9.5%; gross margin 8.04% versus 7.71%
  • Q3 operating profit: Rs272.2 million, up 0.4%
  • Q3 finance cost: Rs124.1 million, down 10.5%
  • Q3 profit after tax: Rs24.55 million, down 45.0%; EPS Rs1.31 versus Rs2.39
  • 9MFY26 revenue: Rs15.444 billion, broadly flat year on year
  • 9MFY26 profit after tax: Rs80.14 million, up 6.0%
  • 9MFY26 operating cash flow: Rs3.08 billion versus a Rs1.84 billion outflow

What improved

The clearest operating improvement was the relationship between sales and production cost. Revenue increased 4.93% in Q3, and management says the increase was primarily volume-led. The company does not disclose quarterly yarn tonnage or an average selling price in the interim report, so the exact split between volume and price cannot be reconstructed from public evidence. What is visible is that cost of sales rose more slowly than revenue, by about 4.5%, allowing gross profit to grow 9.5%.

Management attributes the lower cost-of-sales ratio mainly to lower energy costs. That explanation is supported by the cost note: Q3 fuel expense fell to about Rs376.1 million from Rs465.3 million, a decline of roughly 19.2%. As a result, cost of sales eased to 91.96% of revenue from 92.29%, and gross margin improved by about 34 basis points to 8.04%. The absolute margin is still thin, but the direction was positive.

This is notable against a mixed spinning-sector backdrop. Gadoon Textile Mills, a larger and not perfectly comparable listed peer, reported higher nine-month sales volumes but said weak yarn prices and elevated energy costs compressed its gross margins. Nagina’s Q3 outcome was comparatively more favorable on energy and gross margin. That does not prove superior pricing or productivity, because the companies have different product mixes, plants and customer bases, but it does show that margin pressure was not mechanically identical across the sector.

Financing pressure also eased. Q3 finance cost declined 10.5% to Rs124.1 million, while nine-month finance cost fell 13.4% to Rs460.8 million. The State Bank of Pakistan kept the policy rate at 10.5% at its March 9, 2026 meeting, a much easier financing environment than the high-rate backdrop that had burdened textile working capital in prior periods. Company-specific deleveraging mattered as well: short-term borrowings were materially lower by March 31.

What weakened / needs attention

Operating expenses absorbed much of the gross-profit improvement. Distribution cost rose 33.9% to Rs87.7 million, administrative expenses increased 14.5% to Rs68.7 million, and other operating expenses also rose. Total operating expenses increased roughly 24% while revenue grew only 4.9%. Consequently, Q3 operating profit was almost flat at Rs272.2 million despite the better gross margin.

The biggest swing came below operating profit. Profit before levy and taxation rose 11.8% to Rs148.0 million and levies actually declined 25.8%. Profit before taxation therefore increased 24.1% to Rs123.9 million. But the tax charge rose 79.8% to Rs99.3 million, leaving only Rs24.55 million of PAT.

The tax note is especially important for interpreting that drop. Q3 FY26 taxation included a Rs41.65 million prior-year tax charge, while current-period tax was Rs57.69 million versus Rs55.25 million in Q3 FY25. In other words, a large part of the year-on-year increase in reported tax was a prior-period adjustment rather than a deterioration in the quarter’s operating economics. Management also refers more broadly to the burden of turnover-based taxation. Investors should therefore distinguish the recurring operating result from the timing and composition of tax charges instead of reading the 45% PAT decline as a 45% deterioration in the underlying business.

Nine-month economics: profit quality improved, but tax absorbed much of it

For the nine months, revenue was essentially unchanged at Rs15.44 billion, but gross profit increased 6.1% to Rs1.215 billion and gross margin improved to 7.86% from 7.42%. That is a modest improvement in unit economics. Operating profit nevertheless declined 3.1% to Rs809.9 million because operating expenses rose and other income fell to Rs68.0 million from Rs146.5 million.

Lower finance cost then became the main bridge to stronger pre-tax earnings. Finance cost declined by about Rs71.3 million, lifting profit before levy and taxation 15.0% to Rs349.1 million. Levies fell 42.1%, so profit before taxation rose 66.6% to Rs265.6 million. Yet taxation more than doubled to Rs185.5 million, meaning PAT increased only 6.0% to Rs80.14 million.

The recurring positives are therefore better gross economics and lower finance cost. The tax line is more complicated: some tax burden is structural to the company’s circumstances, but the current period also contains a prior-year adjustment. Other income declined, so the nine-month improvement was not manufactured by a large non-operating gain. That is a useful quality signal, even though the final PAT growth looks modest.

Cash flow and balance sheet: a major working-capital release

The most dramatic change was in cash flow. Net cash generated from operating activities was Rs3.08 billion in 9MFY26 versus a Rs1.84 billion outflow a year earlier. Cash generated before finance cost and taxes reached Rs3.92 billion. This is a substantial improvement, but the source matters.

The largest driver was inventory. Working-capital movements released Rs2.69 billion of cash, including about Rs2.19 billion from lower inventory. Trade receivables released another Rs119 million, while changes in advances and payables also helped. Inventory on the balance sheet fell 47.1% to about Rs2.46 billion from Rs4.64 billion at June 2025. This is economically valuable because it frees cash and reduces funding needs, but it is not a source of cash that can repeat indefinitely. Once inventory normalizes, future cash generation will need to rely more heavily on earnings and disciplined replenishment.

The balance sheet reflects that release. Short-term borrowings fell about 59.8% to Rs1.13 billion from Rs2.80 billion, cash and bank balances increased to about Rs342.6 million from Rs107.1 million, and current liabilities declined faster than current assets. The current ratio improved to roughly 1.93x from 1.72x. Gross borrowings, including long-term finance and its current portion, also declined materially to roughly Rs5.93 billion from Rs7.72 billion.

Nagina was simultaneously investing. Purchases of property, plant and equipment were about Rs672.3 million, capital work in progress rose sharply, and net investing cash outflow was about Rs1.03 billion. Management says solar capacity is being expanded from 4.45 MW to 5.40 MW. The capital spending may support future energy savings, but those savings should not be assumed until subsequent results show actual generation, utilization or cost benefits.

Sector and demand context

Pakistan’s export backdrop was mixed at the end of the quarter. Pakistan Bureau of Statistics data show total exports for July-March FY26 were down 7.99% in US-dollar terms from the comparable period. Cotton-yarn export value in March, however, was 8.03% higher year on year but 16.88% lower than February. That combination suggests that the sector was not facing a uniform collapse or a clean recovery.

For Nagina, the company-specific evidence is more useful than the macro data: management says Q3 sales growth came from higher volume, while gross margin improved because the cost-of-sales ratio eased. The public data cannot establish whether the company gained share or enjoyed better pricing. The prudent conclusion is simply that Nagina generated modest top-line growth in a difficult and uneven sector environment.

Historical pattern: stabilization, not a return to old margins

The longer history puts the 8.04% Q3 gross margin in perspective. Nagina’s annual gross margin was 22.32% in FY2022, 10.45% in FY2023, 7.89% in FY2024 and 8.10% in FY2025. Q3 FY26 therefore looks more like stabilization near the recent 8% range than a return to the much stronger profitability seen several years ago.

That distinction matters when judging the quarter. The latest period improved on several operating metrics, but profitability remains sensitive to energy, yarn pricing, operating expenses, finance cost and taxation. Small changes in these lines can have an outsized effect on PAT because the net margin is narrow.

Recurring versus non-recurring drivers

The most repeatable positives are the volume-led sales growth, lower energy cost, slightly better gross margin and reduced finance expense. Their durability still needs confirmation because the company has disclosed only one quarter of this combination, and sector demand remains uneven.

The Rs41.65 million prior-year tax charge is different. It affected Q3 reported PAT but is not an operating expense of the current quarter. The large inventory release also deserves separate treatment: it improved liquidity and allowed debt reduction, but it is a balance-sheet normalization benefit rather than recurring earnings. Future results should therefore be assessed using operating profit, pre-tax profit, cash generation before working-capital swings and debt alongside headline PAT.

What to monitor next

  • Sales volume and pricing: whether higher Q3 volume persists and whether yarn pricing improves enough to widen gross margin beyond the recent 8% range.
  • Energy economics: whether lower fuel cost continues and whether the solar expansion produces measurable savings.
  • Taxation: whether prior-period tax adjustments normalize and how turnover-based taxes affect conversion of pre-tax profit into PAT.
  • Working capital: whether inventory remains disciplined without constraining sales, and whether future operating cash flow stays positive after the one-time scale of the inventory release fades.
  • Debt and finance cost: whether the sharp reduction in short-term borrowings continues. The SBP raised the policy rate to 11.5% effective April 28, 2026, after the reporting period, creating a tougher next-cycle rate backdrop that may partly offset the benefit of lower debt.
  • Capital expenditure: whether the increased investment and solar program translate into better conversion cost and cash returns rather than simply higher capital intensity.

AlphaGen model outputs

  • Alpha QoQ Score: 61.64
  • TTM Performance Score: 48.49
  • 3Y Business Perf Score: 19.23
  • Sector Leadership Score: 45.2992

These four measures are AlphaGen model outputs, not company-reported figures.

Sources

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