Nishat Chunian Ltd (NCL) has reported an unconsolidated NPAT of PKR1.9bn for 3QFY21 (EPS: PKR7.74), the highest ever quarterly profits, up 2.1x qoq and a big jump over a net loss last year. This takes 9MFY21 NPAT to PKR3.2bn (EPS: PKR13.38). The 3Q result is significantly better than our expected EPS of PKR3.36, where the deviation stems from higher-than-expected gross margins.
Revenue has clocked in at PKR12.2bn, up 2% qoq, broadly in line with our expectation, where we suspect higher sales of the Spinning segment (both local and export sales of yarn) was offset by lower revenues from Home Textile exports (similar to other Textile results). Recall that Pakistan’s yarn exports grew a sharp c.40% qoq, amid higher global yarn prices. We highlight that the segment contributed c.58% of NCL’s revenue (vs 54% in 2Q).
Gross margins have witnessed the highest jump in our Textile Universe, up c.9ppt qoq to 22%. GMs are also higher than our expectation of 12.8%. As per the quarterly report, the strong GMs emanate from significant increase in Spinning segment margins (c.36%) amid higher local and export yarn prices, in our view. Other segments had flattish gross margins in 3Q. We highlight NCL had cotton inventory bought at lower rates, prior to the recent surge in cotton prices.
Distribution/Admin expenses are up 7%/14% qoq (in line with our expectation). The increase, despite flattish sales, comes from higher freight costs due to (i) higher international fuel prices, and (ii) the ongoing shortage of containers for sea shipments, in our view.
Other income has clocked at PKR274mn, against our expectation of PKR225mn; the deviation could be due to greater exchange gains on currency forwards (as in the previous quarter), in our view.
Finance costs rose 7% qoq to PKR456mn, despite a slight decline in borrowings by end-March (as per the quarterly report). Effective tax rate clocked in at 7% compared to 14% last quarter, potentially due to an increase in exports.
This is a strong result from NCL, where we expect the robust sales momentum to continue into 4Q, on the back of strong orders backlog. However, margins are likely to decline slightly due to the potential rise in competition from imported yarn (abolishment of duties and taxes on imports). We highlight that NCL has sufficient cotton inventory (procured at low rates) for at least the next two quarters (as per management). We, therefore, reiterate our Buy stance on NCL (June 2022 TP of PKR70/sh).