Nishat Mills is living up to its name, albeit not necessarily to analysts expectations who didn forecast the impact of squeezing gross margins on NMLs books.
Boosted by a three-fold increase in other operating income, and a 51 percent increase in topline revenues, the firm more-than-doubled its bottomline profits for the half year ending December 2010.
The firms other income likely improved on the back of steady dividend income from its associated concern the MCB Bank, as well as additional dividend from AES Lal Pir and Pak Gen and the capital gain likely booked on the sale of Nishat Powers shares in the secondary market.
While the exact breakup of other operating income hasn been disclosed yet, it is safe to assume that booking gains of more than Rs1.2 billion in that account aren going to be a recurring feature.
But even if one discounts the exceptional other income, the company would have still posted at least 30-40 percent growth in net profits. In other words, with a promising growth in NMLs core operations, shareholders shouldn be fretting over it.
Weighed by rising cost of raw material - that increased from 30 percent of the total cost of goods sold in 1HFY10 to 35 percent in 1HFY11 - the companys gross margins fell by some 300 basis points to around 15 percent. Yet, volumetric growth helped result in 32 percent increase in gross profits.
Sticking to its growth formula, which includes continuous search for markets and increasing presence in the existing ones (such as in Turkey), the firm expects to land at full-year revenues of Rs40 billion plus, according to Badar-ul-Hassan, the firms Chief Financial Officer.
In other developments, NML has already incorporated a wholly owned subsidiary in the UAE for the purpose, among others, of operating wholesale and retail outlets. The first of these, a retail outlet and a warehouse/showroom is planned to be opened by May or June, according to Badar.
"Our target is to open around five or six outlets in the UAE; but our expansion will depend on the performance of our first venture, following which we can open the branches quite easily, if need be," Badar told BR Research.
The UAE and the Middle East are fast growing and highly attractive apparel markets, according to several studies, which means that NMLs experiment is likely to bear juicy fruits. On top of that, setting up facilities in one of the top liberal visa regimes that offers a safe and secure law & order environment means that NML would have an attractive access to international travellers and apparel buyers.
Quite naturally, and despite the fact that second quarter earnings fell short of analysts expectations, the brokerage community still has a buy call on the stock.
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Nishat Mills P&L
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Rs (mn) 1HYFY11 YoY change
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Sales 21,344 51%
Cost of sales 18,062 55%
Gross profit 3,282 32%
Gross margin 15% down
300 bps
Total operating expenses 1,429 26%
Other operating income 1,207 260%
Profit from operations 3,060 81%
Finance cost 705 29%
Profit after tax 2,058 104%
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Source: Company notice to KSE
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Gas shortages make Packages unhappy
The results of Packages Limited turned out a tad disappointing for CY10, with a full-year loss of Rs332 million.
The fourth quarter of the year depicted a less-than-satisfactory performance, with sales plummeting down considerably over the previous quarter. The decline in sales sprung mainly from a drop in export sales, which decreased by around 50 percent relative to 4QCY09.
Company sources reveal that the main cause of the decline in export sales was a drop in volumes since gas shortages had rendered product prices uncompetitive in the international market.
The use of furnace oil as an alternate increases the cost of production significantly; hence gas loadshedding was a key grievance for the company as it affects the cost of production considerably.
The combined effect of lower sales and high cost of sales resulted in a gross loss of Rs45 million in the fourth quarter.
A year-on-year comparison reveals an improvement in gross margins by 2.1 percentage points. The gross margins improved even though the company incurred a depreciation expense of Rs1.5 billion during the year.
Yet, a gross margin of 4.3 percent was not high enough to avert an operating loss of Rs104 million for the year.
Finance costs for Packages were quite high, around 6.5 percent of sales, mainly on account of a loan taken up by the company for the Bulleh Shah Paper Mill. Company sources claim that finance costs will decrease once the loan repayments begin in 2012.
Investment income occurred as a saviour for Packages, with a particularly handsome amount of around Rs0.7 billion in the first quarter, and a full-year investment income of Rs1 billion. The company has investments in Nestle Pakistan, Tri-pack and IGI insurance, and the dividend income helped reduce the net loss for the company to some extent.
Clarity should be given with respect to a year-on-year comparison of some of the companys key indicators including the operating and net profits, as well as investment income. The disposal of Packages investment in Tetra Pak in the first quarter of 2009 is the real catch in the story.
The said sale upped the profits for CY09 considerably, thus resulting in a high-base effect for any comparison of the operating and net profit figures of the company with the previous year.
Overall, the company suffered considerably because of gas shortages during the year. Bearing in mind that the gas issue is likely to continue the next year, the company will have to tighten its belt in the cost control department.
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PKGS P&L
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(Rs mn) CY10 CY09 % chg
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Sales 18536 14044 32%
Cost of sales 17740 13736 29%
Gross profit 795 307 159%
Gross margin 4.3% 2.2% -
Administrative expenses 521 468 11%
Distribution & marketing 566 444 27%
Operating loss/ profit -104 -2132 -95%
Operating margin -0.6% -15.2% -
Finance costs 1210 1278 -5%
PAT -332 4064 N/A
EPS (Rs) -3.94 48.16 -
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Source: KSE notice
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