AKD Securities Limited – Nishat Mills Limited – the best to continue with its test

Karachi, April 03, 2015 (PPI-OT): In 2QFY15, Nishat Mills Limited (NML) posted NPAT (unconsolidated) of PkR1.54bn (EPS: PkR4.38), lower by 32%YoY. On the back of sluggish demand and ample supply putting pressure on the topline (down by 4%YoY), and COGS stepping up by 5%YoY due to increased power costs and charging of further depreciation, NML’s GMs radically came off by 720bps YoY to 11.6% in 2QFY15.

In line with recent pressure at the bourse, NML also shed 14.7% in Mar’14, to trade at a FY15E/FY16F PE of 8.1x/6.6x. Based on AKD Securities Limited’s Dec’15 TP of PkR168.5, the scrip offers a potential upside of 59% where AKD Securities Limited a BUYs stance on the scrip. Our call is underpinned by its well diversified portfolio and ~70% revenue generation from the value added segment. The Dec’15 TP includes ~109/sh from NML’s well diversified portfolio, discounted at 40%.

1HFY15 Result Review: NML posted unconsolidated NPAT of PkR1.54bn (EPS: PkR4.38) in 2QFY15 vs. NPAT of PkR2.28bn (EPS: PkR6.49) in 2QFY14, lower by 32%YoY. On the back of sluggish demand against surplus supply, the company faced difficulties in maintaining its topline as NML’s revenue came off by 4%YoY.

Conversely, cost of sales stepped up by 5%YoY due to increased power costs and addition depreciation of newly installed production units, restricting the company to benefit from the falling cotton prices. Resultantly, NML’s gross margins eased off by 720bps YoY to 11.6% in 2QFY15 from 18.8% in 2QFY14. Other income (up by 19%YoY) – contributing ~PkR3.85/sh to the total EPS, again veiled the depressing performance of the core operations.

The company witnessed an increase of 19%YoY in its financing costs, which resulted from additional borrowings intended to be lent to the associated companies. Subsequently, 1HFY15 NPAT was realized at PkR1.94bn (EPS: PkR5.52) vs. NPAT of PkR3.85bn (EPS: PkR10.96) in 1HFY14, down by 50%YoY.

Going forward: With questions still hovering over the international demand (China to curtail its imports by ~50% in the MY2014/15) and supply remaining smooth (India to provide ~30.5mn bales in MY2014/15, in addition to strong local arrivals), the company is expected to continue with its testing days to augment its topline.

However in such dynamics, AKD Securities Limited foresees NML to improve its profitability on the back of its access to the major global markets (~56% of its total sales) and better negotiated agreements locally. Although weakening European market might test NML on pricing fronts, GSP+ status is expected to aid the company in offering its products at better competitive rates. That said, AKD Securities Limited sights benefits of cheaper buying in the 1HFY15 to translate into better earnings from the 2HFY15 (improving 36%HoH).

Investment Perspective: In line with recent pressure at the bourse, NML also shed 14.7% in Mar’14, to trade at a FY15E/FY16F PE of 8.1x/6.6x. Based on AKD Securities Limited’s Dec’15 TP of PkR168.5, the scrip offers a potential upside of 59% where AKD Securities Limited a BUYs stance on the scrip. Our call is underpinned by its well diversified portfolio and ~70% revenue generation from the value added segment. The Dec’15 TP includes ~109/sh from NML’s well diversified portfolio, discounted at 40%.

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