Morning Call about – Conference Call Takeaways – Arif Habib Limited

Karachi, November 27, 2013 (PPI-OT): In the backdrop of recent spree of PKR to USD depreciation (8.4% FYTD) and its relative impacts on Pakistan’s Textile sector, rising energy costs and GSP-Plus status expected (to be granted for a period of 10 years) when the EU Parliament meets on 6 th Dec’13 to vote, Arif Habib Limited has held a conference call with the management of one of the key Textile giants, Nishat Chunian Limited (NCL), to have an industry as well as the company view on the same.

According to Arif Habib Limited following are the key takeaways from Arif Habib Limited call:

– NCL regressively procures its cotton without any major stoppage; NCL’s average cost of cotton procurement is one of the lowest in the industry

– 70% – 75% of cotton procured is local while the remaining is imported

– Close to a million cotton bales is total procurement requirement for NCL in the entire year, with majority procurement taking place in September onwards when cotton prices are relatively lower from the rest of the year

– 80% of the yarn produced by the spinning division of NCL is exported to China while the remaining towards European markets

– NCL’s management is against the view of a major trend shift in yarn exports post GSP-Plus scenario, from China to the EU

– Though foresees an uptake in yarn prices post GSP-Plus era, as demand of value adding goods will increase, the management sees this as a major gross margins lifter for NCL, going forward

– USA retail markets contribute almost 80%-85% of the total value addition (Processing and Home Textiles) exports of NCL while the remaining mostly to EU markets

– Adding to continuing PKR depreciation against the USD, NCL’s forecast for FY14 end stands at PKR 115

– With the addition of the 6 th spinning unit (22,000 spindles), major Capex of the expansion has already occurred (PKR ~1.0-2.0bn), this will not only aid in catering to the increasing demand from the Chinese markets, but will also help in containing increased demand from the EU in the post GSP-Plus era

– The recently acquired assets of Taj Textile Mills (38,000 spindles) is expected to come online by Feb-Mar’14 next year, with major renovation (detailed over-hauling of the spindles) taking place currently. A Capex of PKR 600-700mn in its over- hauling has to a great extent already been incurred by NCL

– Round about PKR 100-150mn (on a relatively higher side) is the only major capex mostly in the repairs and maintenance side to be incurred by NCL during FY14

– Finance and leverage levels remain in control of the management, as it has already been witnessed with debt to equity levels having been reduced from 1.6x to 1.3x, from FY12 to FY13, respectively

– 14MW grid station by NCL is nearing its completion and is expected to become operational by the end of this current financial quarter (issues with the ministry have mainly contributed to the continuous delays on the commencement of the project since many quarters)

– The management is considering setting up a 30-40MW coal-based captive power plant (capital outlay expected to be PKR 4-5bn) going forward in the next financial year (FY15), the project currently is in its initial stages and yet to be finalized by the board of directors

– Currently, and going forward, energy requirements of NCL stand at 45- 50MW

-This major potential project going forward will help reduce the fuel and power expenditure for NCL, in particular its costly furnace oil and gas reliance

– NCL management foresees higher profitability and dividend payouts from the subsidiary, Nishat Chunian Power Ltd (NCPL) going forward, while dividends and earnings growth of the company itself, for FY14, is expected to remain maintained on YoY basis, being slightly on the higher side from the prevailing fiscal

Outlook and recommendation
Arif Habib Limited currently have a ‘BUY’ recommendation on NCL with a Price Target of ’70.3/share’ for Jun’14 on Arif Habib Limited SoTP based financial model, offering an enticing upside of 28% from current levels.

To further add to its attraction, dividend income from subsidiary NCPL will further support the company bottomline in FY14 (PKR 5.5/share cash dividend expected to be realized in FY14 accounts).

The script is currently trading on a cheap PEx of 3.9x based on FY14 estimates. From Arif Habib Limited discussions with the management, capacity enhancement (Taj Textile Mills’ spindles) with major Capex already incurred by the company alongside GSP-Plus status to be awarded to increase yarn and value additions exports from 3QFY14 onwards make the prospects of NCL highly attractive, going forward.

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