NMLs margins lopped rising production costs

Nishat Mills first quarter profits dropped by more than one-fourth as revenues remained flat while rising cost of doing business lopped its gross margins. The companys topline managed to grow by 3 percent year-on-year, as depreciating value of the rupee amid rising prices in international market helped offset the impact of global slowdown.
But cost pressures emanating from relatively higher raw material prices during 1QFY10 and soaring overhead expenses (especially the utilities) dragged its gross profits lower. The 10-percent increase in costs of production came on account of 31 percent hike in domestic cotton prices. Shielding the firm from soaring costs, however, NMLs financial expenses dropped sharply - 22 percent - limiting its decline in bottom-line profits.
With domestic cotton prices tracking the record making spree of international cotton, the margins of textile makers are likely to remain under pressure - and NML is no exception. Moreover, with the industry facing shortage of gas supplies, it will continue to face hurdles coupled with further electricity tariff hike due in December 2009 after six percent hike in October. Yet, while these factors will continue to hamper textile industrys margins on the whole, NML with its comparatively better market position will likely be better off than many of its peers.

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NML P&L

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RS (MN)            1QFY10    1QFY09    (+/-)%

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Sales               6397      6205         3%

COGS                5214      4753        10%

Gross profit        1183      1451       -19%

Gross Margin          18%       23%      -21%

Dist & Admin Exp     516       505         2%

Finance cost         259       330       -22%

Other Income         186       152        22%

PBT                  593       768       -23%

Taxation              80        62        29%

PAT                  513       707       -27%

EPS (Rs)            2.12     2.92*

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Source: Company results - *diluted
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