Earnings Report /

Nishat Mills: 2QFY22 Review: Earnings miss on lower-than-expected gross margins

  • NML posted an unconsolidated EPS of PKR6.58, amid sharp rise in revenues, but missing our expected EPS of PKR10.70

  • We suspect that the c.7ppt qoq decline in GMs can be attributed to reversals in DLTL provisions on value-added products

  • We have a Buy stance on NML with a June 2022 TP of PKR120/sh amid robust order flows

Intermarket Securities
21 February 2022

Nishat Mills Ltd (NML) has reported an unconsolidated NPAT of PKR2.3bn (EPS: PKR6.58) in 2QFY22, nearly tripling yoy, while down c.30% qoq. Core textile earnings have come in at an estimated c.PKR1.0bn (EPS: PKR2.83) in 2Q, up from c.PKR0.5bn (EPS: PKR1.78) in SPLY. This takes 1HFY22 EPS to PK15.94, up c.3.0x yoy. The 2Q result significantly misses our EPS expectation of PKR10.70, where the deviation largely stems from lower-than-expected gross margins.

Key result highlights for 2QFY22:

Revenue has clocked in at PKR28.5bn (highest quarterly sales), up a staggering c.65% yoy, slightly higher than our expectations; where we suspect a broad-based increase in sales in both the Spinning segment (local and export sales of yarn both) and value-added segments (Home Textiles and Garments).

Gross margins have increased c.1ppt yoy at 12.7% (but are down a sharp 7ppt qoq), lower than our expectation of 19.8%. On a yoy basis, the rise in margins is attributed to the surge in yarn prices amid continuously increasing cotton prices both locally and globally, in our view. However on a qoq basis, we suspect the decline in margins is due to a reversal of DLTL provisions (similar to ILP’s 2Q result), in our view.   

Distribution and Admin expenses are up c.65% yoy (in tandem with the rise in sales; in line with expectations), which can be attributed to higher freight costs amid robust sales, in our view.

Other income has clocked in at PKR1.6bn (in line with expectations), up c.2.5x yoy, attributed to the realization of dividends from associated companies (both listed and unlisted) and exchange gains, in our view.

Finance costs have increased by c.60% yoy to PKR488mn, due to an increase in borrowings amid sequential rise in sales, in our view. Effective tax rate has clocked in at 16% compared with 22% SPLY, potentially due to an increase in exports in the sales mix.

NML has posted an unimpressive core-result, despite record quarterly sales, where we suspect reversals in DLTL provisions due to uncertainty around Textile Policy (first approved and then withdrawn; recently it has been re-approved), to have dragged down earnings. Nonetheless, we believe that the robust sales momentum will continue in the remainder of FY22, on the back of strong orders backlog, where overall exports have grown c.25% yoy in 1HFY22. Meanwhile, ongoing capacity expansions are likely to improve sales further, while approval of the Textile Policy is likely to further cement profitability, in our view. We have a Buy stance on NML (June 2022 TP of PKR120/sh).