Revisiting investment case on sluggish volumetric sales.

1. BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact:
bmaresearch@bmacapital.com or call UAN: 111‐262‐111
This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy
or sell the securities mentioned.11
1
We revisit our investment case on Nishat Mills Limited (NML) post release of detailed
3QFY15 financial accounts. We downward revise our EPS estimates across our
investment horizons by 6% on average and our current EPS for FY15, FY16 and FY17
stand at PKR11.6, PKR15.6 and PKR18.9, respectively. The downward revision in
estimates can be attributed to i) slowing volumetric off‐take growth and ii) lower prices
of yarn, greig and processed cloth. Making the said adjustments to our estimates and
updating the portfolio value, our TP now stands at PKR148/sh (down 5% from previous
estimate), but still offers a total return of 33% against last closing – ‘BUY’. Our
investment case on the stock is premised on i) New facilities coming online in the high
value end ii) savings from new coal fired power plant commissioning and iii) reduced
finance cost on back of 150bps cut in DR since Jan’14. At current levels, the stock is
trading at a FY16E PER of 7.2x.
Disappointing 9MFY15 results amid sluggish sales: Nishat Mills Limited (NML), like
majority of the textile industry, has reported dismal 9MFY15 as the industry has been
battling i) stagnant demand from EU, ii) strong PKR against USD iii) eroding Chinese
demand and iv) dumping of cheap Indian yarn in the country. In this regards, the country’s
textile exports have declined ~2%YoY during 9MFY15 while at the same time, on average
basis USD has also appreciated by 2%YoY. The tapering demand from China coupled with
dumping of Indian yarn in the country ate into the margins of the company further.
Finance cost jumped 14%YoY despite 200bps cumulative cut in DR on account of higher
borrowing as the benefit from lower working capital requirement was net by loan given to
associated companies.
New production facilities coming online: NML has invested heavily in its production
facilities across the value chain which are expected to come online in FY16. In this regards,
the company’s new 28,800 spindles as well as new garment capacity which will double its
existing capacity in garments segment, capable of producing 35mn square meters, are also
expected to come online. Assuming status quo on the margins, new production facilities
are expected to augment the bottom‐line by PKR3.2/sh on an annualized basis.
Coal fired plant to saving fuel cost: Company has also invested in its generation capacity
which is also expected to come online in FY16. As per our calculations, current energy
requirement are ~65MW of which a big chunk is met by FO. The decrease in prices of FO
resulted in the gross margins improving in 3QFY15 and moving forward, with the new
9MW coal fired plant coming online, the company’s dependence on volatile FO will
decrease and therefore the cost of generation will remain contained, even in the event of
FO prices increasing.
Outlook on cotton prices: Our outlook on the cotton prices remain bearish given i) world
inventory being on an all time high level ii) demand from China remaining subdued and iii)
increasing global production, especially from India, US and Pakistan. Consequently, we
expect the prices of cotton to remain at the current levels (~PKR5200/maund ‐
PKR5500/maund) and therefore the retention rates of yarn to remain weak.
Lower finance cost: Company, despite a cumulative DR cut of 200bps during FY15, saw its
finance cost jump by 14%YoY due to higher borrowings. However, i) repayment from
subsidiary, ii) muted growth in working capital requirement and iii) yet another cut of
50bps in DR will reduce the burden of finance cost on the company and result in savings of
PKR0.3/sh on an annualized basis.
Nishat Mills Limited (NML)
Revisiting investment case on sluggish volumetric sales
Thursday May 07, 2015
BUY
Target Price: PKR 148
Current Price: PKR 113
NML Performance
1M 3M 12M
Absolute % 2% ‐13% 8%
Relative to KSE % ‐6% ‐11% ‐10%
Bloomberg NML.PA
Reuters NISM.KA
MCAP (USD mn) 390
12M ADT (USD mn) 1.8
Shares Outstanding (mn) 352
Source: BMA Research
Jehanzaib Zafar
Jehanzaib.zafar@bmacapital.com
+92 111 262 111 Ext: 2062
FY15E FY16E FY17E TP
New EPS 11.6 15.6 18.9 148
Old EPS 13.8 16.5 20.0 156
Change (%) ‐16% ‐5% ‐6% ‐5%
NML vs. KSE100 Relative Chart
‐10%
0%
10%
20%
30%
40%
May‐14
Jun‐14
Jul‐14
Aug‐14
Sep‐14
Oct‐14
Nov‐14
Dec‐14
Dec‐14
Jan‐15
Mar‐15
Mar‐15
Apr‐15
NML KSE100 Index

2. BMA Capital Management Ltd. 801 Unitower, I.I.Chundrigar Road, Karachi, 74000, Pakistan For further queries, please contact:
bmaresearch@bmacapital.com or call UAN: 111‐262‐111
This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained
herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions
expressed may be revised at any time. This memorandum is for information only and is not an offer to buy or sell, or solicitation of any offer to buy
or sell the securities mentioned.22
2
Investment Perspective: NML is our pick from the textile segment given its diversification
across the value chain. At our TP of PKR148/sh, the scrip offers a return of 33% on the last
closing. We however highlight the developments on gas rate hikes as the key sentiment
driver which may limit the price discovery in the scrip.
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