Earnings Report /
Pakistan

Nishat Mills: 4QFY22 result review – Steep margin attrition results in earnings miss

  • NML posted an unconsolidated EPS of PKR3.58, missing our expected EPS of PKR4.94, owing to sharp decline in GM

  • GMs decreased by a sharp c.4.6ppt/5.5ppt YoY/QoQ to 11.5%, likely owing to absence of cotton inventory gains

  • We have a Buy stance on NML with a June 2023 TP of PKR108/sh

Abdul Ghani Mianoor
Abdul Ghani Mianoor

Investment Analyst

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Intermarket Securities
20 September 2022

Nishat Mills Ltd (NML) has reported an unconsolidated NPAT of PKR1.3bn (EPS: PKR3.58) in 4QFY22, down 45% YoY and 64% QoQ, owing to significant margin attrition. We estimate core-textile operations to have incurred a loss of PKR88mn (LPS: PKR0.25), for the first time since 4QFY20. This takes FY22 EPS to a record PKR29.33, up 74% YoY. The 4Q result missed our EPS expectation of PKR4.94, largely owing to lower-than-estimated gross margin. The result was accompanied by a final DPS of PKR4.00, lower than our estimate of PKR6.00.      

Key observations:

  • Revenue has clocked in at PKR31.5bn (highest quarterly sales), up by a strong 58% YoY, slightly lower than our expectation of PKR32.9bn; largely due to lower-than-expected Spinning segment sales (local and export sales of yarn), in our view.  

  • Gross margin has decreased by 4.6ppt/5.5ppt YoY/QoQ to 11.5%, much lower than our expectation of 16%. The decline in margins is likely to be attributed to a lack of inventory gains amid higher cotton inventory costs. 

  • Distribution and admin expenses are up 62% YoY (in tandem with the rise in sales), which can be attributed to higher transportation costs amid robust sales, in our view.

  • Other income has clocked in at PKR1.6bn, up 71% YoY, likely due to significant exchange gains and dividends received from unlisted associate companies.

  • Finance costs have more than doubled compared to the previous year to PKR685mn, due to an increase in Kibor-based short-term borrowings, attributed to greater working capital needs amid robust sales. The effective tax rate has clocked in at 4.3%, slightly higher than our estimated 4.1%, owing to the high one-off supertax.

NML has posted a weak core result, owing to a significant decline in gross margin, despite record quarterly sales and PKR slippage. We believe that the robust sales momentum is likely to be short-lived in FY23, owing to a potential slowdown in exports (international inflation and recession fears). However, ongoing capacity expansions are likely to improve revenues. We have a Buy stance on NML (June 2023 TP of PKR108/sh).