Morning Call about Nishat Mills Limited Personal Goods – Arif Habib Limited

Karachi : Earnings declined by 24% (YoY) in 1QFY12

According to Arif Habib Limited, in 1QFY12 Nishat Mills Limited posted a profit after tax (PAT) of PKR 1,031mn (EPS: PKR 2.93) compared to PKR 1,350mn (EPS: PKR 3.84) in the same period last year, depicting a decline of 24% YoY on standalone basis. This decline was mainly due to higher priced inventory along with 34% increase in fuel and power charges due to none availability of gas which dragged down gross margin to 10.7% from 21.5% in 1QFY11.

 

Financial Highlights (PKRmn) 1QFY12 1QFY11  %Chg.
Sales 10,941 9,961 10%
Cost of Sales 9,766 7,822 25%
Gross Profit 1,175 2,138 -45%
Distribution Cost  517 433 19%
Admin Expenses 184 151 22%
Other Operating Expenses 94 119 -21%
Other Operating Income 1,314 357 268%
Operating Profit  1,693  1,792 -6%
Finance Cost 451  315 43%
Profit before Tax 1,242 1,478 -16%
Taxation  211 128 65%
Profit after Tax  1,031 1,350  -24%
EPS 2.93 3.84 -24%
Source: AHL Research

 

High cost eats away gross margins

NML’s top-line inched up by 10% YoY to PKR 10.94bn in 1QFY12 as compared to PKR 9.96bn last year. The growth is attributable to higher selling prices and 1% depreciation of PKR against USD which further supported revenue from the export sales in 1QFY11. On the other hand Cost of sales increased by 25%YoY resulting in gross margins to decline by 10.7% as the cost of goods sold outpaced the growth in sales.

The spinning segment came under immense pressure as its gross margins declined to just 3.5% in 1QFY12 from 22.9% in 1QFY11 as the company sold off its expensive inventory at cheaper rates. Whereas similar trend was witnessed in weaving and processing and home textile segments where margins came down to 6.7% and 12.7% respectively from 13.6% and 16% in 1QFY11. During 1QFY12 company was forced to use Furnace Oil and High Speed Diesel due to lower gas availability which jacked up Fuel and Power expense by 34% YoY.

Other operating Income has supported the bottom-line

During 1QFY12 distribution cost and admin expenses went up by 19% YoY and 22% YoY respectively whereas financial cost increased by 43% YoY on the back of increased short term borrowing. On other hand, other operating income of the company has augmented by 268% YoY from PKR 357mn in 1QFY11 to PKR 1,314mn in 1QFY12. This improvement is mainly due to the higher dividend income received from MCB, Pak Gen and AES Lalpir.

Recommendation

Based on Arif Habib’s valuation, its target price for June 2012 works out to be PKR 66.75/share, which offers an upside potential of 53.2% from its last closing price of PKR 43.6/share. Besides attractive upside potential, the stock offers FY12F dividend yield of 6.9%. Thus Arif Habib Limited recommends a Buy

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