Earnings Report /
Pakistan

Nishat Chunian: 3QFY22 Review: Higher finance costs and other expenses lead to miss

  • NCL posted an EPS of PKR8.49 in 3Q, lower than our estimate of PKR10.41, amid higher finance costs and other expenses

  • GMs remained flat yoy as the robust Spinning segment margin had been more than offset by lower Value-added margins

  • We have a Buy rating on NCL with a June 2023 TP of PKR62/sh, amid strong order flows

Abdul Ghani Mianoor
Intermarket Securities
6 May 2022

Nishat Chunian Ltd (NCL) has reported an unconsolidated NPAT of PKR2.0bn in 3QFY22 (EPS: PKR8.49), up 10% yoy but down 18% qoq. This takes 9MFY22 EPS to PKR28.10, up a staggering c.2.0x yoy. The 3Q result is lower than our expected EPS of PKR10.41, where the deviation stems from higher-than-expected finance cost and other expenses.

Key highlights from 3QFY22 result:

  • Revenue has clocked in at PKR16.2bn, up 33% yoy, in line with our expectation, where higher sales of the Spinning segment (both local and export sales of yarn) were the key contributor. We highlight that Spinning segment revenues generated c.60% of revenues in 3Q.

  • Gross margins have remained flat yoy at 22%, slightly lower than our expectation of 23%. Spinning segment margins continue to remain healthy, improving to 25% in 3QFY22 (up from 21% in SLPY) amid procurement of cotton at low rates. However, margins of the Weaving and Home Textile segments faced the impact of high cotton prices, as margins declined yoy.

  • Distribution expenses are up 38% yoy to PKR412mn, whereas Admin expenses are also up by a similar magnitude to PKR90mn. The rise in the former can be attributed to higher freight charges, in our view. Other income has clocked in at PKR114mn, down 58% yoy, likely due to moderating exchange gains on currency forwards, in our view.

  • Finance costs have increased by 44% yoy, amid greater borrowings and higher borrowing rates. Effective tax rate has clocked in at 8% compared with 7% in SPLY.

Despite the earnings miss, NCL’s robust growth in revenues and healthy profitability are encouraging. The Revenue growth is likely to remain strong in the coming quarters amid strong orders backlog due to overall surge in country’s exports, resulting in healthy local yarn sales, in our view. However, margins are likely to gradually moderate due to shrinking of gains on cotton inventory. Lastly, the process to separate NCPL from the NCL, is likely to further unlock value for the company. We have a Buy rating on NCL with a TP of PKR62/sh.