AKD Quotidian about — NCL: Core Earnings Disappoint

Karachi, February 19, 2014 (PPI-OT): Nishat Chunian Limited (NCL) announced 20FY14 result yesterday where the company posted earnings of PkRI043mn (EPS: PkR521}, up 366%QoQ/70%YoV led primarily by dividend of PkRI, O3Bmr’ (EPS impact: PkR4.67) received from NCPL during 20FV14.

According to AKD Securities, that said. a slump in the yarn market coupled with a sharp increase in costs led by increase in the cost of cotton inventory as well as an increase in electricity tariffs led to a sharp decline ri gross margins to 93%, lower by 440bps QoQ. As a result, NCL posted a loss before tax on core operations of PkR38nin during 20FY14. There appears to be no respite in the near term as margins are likely to remain depressed while planned installation of a coal based power plant to reduce power costs will take time to materialize. Considering the disappointing core result for 2QFY14 AKD Securities is placing NCL under review while AKD Securities is paring AKD Securities’ FY14 EPS estimates to PkR826, Implying an FY14 PIE of 7.6x.

1HFY14 result review: Nishat Chunian Limited( NCL) announced Is ll-IFYI4 result yesterday where the company posted earnings of PkR1,267mn (EPS: PKR633). up by a sharp growth of 28°/o YoY which was in line with AKD Securities’ estimates Of PkR1 .307mn EPS: PkR653) The increase in earnings was led primarily by NCPL dividend of PkR1 ,038mn EPS impact: PkR4.67) resulting in 20FV14 earnings of PkRIO43rnn (EPS: PkRS.21), up by 366% QoQ70% YoY. That said, a slump in the yarn market coupled with a sharp increase in costs led by increase in the cost of cotton inventory as well as an increase in the electricity tariffs led to a sharp decline in gross margins to 93% a decline of 440bps QoQ. As a result NGL posted a loss before tax on core operations at PkR38mn during 20FY14. On a post tax basis the company posted core earnings of PkRIOB93 (EPS: PkRO.54) lower by 51%QoQ/61%YoY, due to tax benefits available ram ongoing capex activity.

Margins remain depressed: While cotton prices have been on the rise in the international market (Cot look A Index up 62%CYTD) AKD Securities could sees a delayed run up in international yarn prices which could potentially provide some support to margins in the spinning division However, the increase in yarn prices will likely be offset by appreciation of the PkR over the average exchange rate during 20FY14, where AKD Securities expects the PkR to appreciate by 2% over the last quarter’s average.

Tough times ahead: The weakness in gross margins appears to be here to stay as the company will not be able to significantly mitigate the increase in fuel and power costs in the near future. While the planned 40MW coal based captive power plant will result in a sharp reduction in electricity costs it will – also place a significant debt burden on the company considering the large capex of PkR4-Sbn required for the project- In this regard, AKD Securities has not yet built the coal bailer into AKD Securities’ financial model however AKD Securities will do so once management announces that It is going through with the project. While we pares AKD Securities’ FYI4F EPS estimate to PkRS.26 (FYI4F P/E: 7.6x), AKD Securities places the stock under review. AKD Securities advises caution in NCL considering the increase inlay high commodity pray and uncertainty over the Chinese cotton policy going forward.