NCL - Nishat Chunian Limited

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Active Member
Apr 9, 2017
AHL Research
27 April 2017

Nishat Chunian Limited
Lack of Dividend Discount’s Value

Valuation Revision
Post appraisal of the latest financials and industry dynamics, we change our stance on Nishat Chunian limited (NCL) from ‘BUY’ to ‘HOLD’ by revising down our SoTP target price to PKR 61.9/share (downward revision of 4.2%). The adjustment in our investment thesis stems from i) absence of dividend income from subsidy (NCPL) in 3QFY17 which alters our earnings estimates for FY17, ii) adjusted cotton price assumption for FY18 and FY19 given significant jump in local and international cotton prices observed in FYTD by 16.5% and 13.4%, respectively, amid high consumption in China, India and Bangladesh, and iii) a decline in portfolio value largely due to the market price of NCPL. Pertinently, it is expected that NCPL may not announce dividend in the 3Q as well attributed to low liquidity which is expected to impact our investment case adversely going forward.

Rebate to Support Earnings in 2HFY17
The export incentive package is expected to have its impact on company’s profitability from 2HFY17. To recall, the incumbent government declared rebate on entire export value from Jan’17 to Jun’17 by 4%, 5%, 6% and 7% on spinning, weaving, home textile and ready-made garments, respectively. However, the rebate would only be available on incremental sales (a requirement of minimum 10% increase) till Jun’18. We have already incorporated the impact of the said package, which would add ~PKR 384mn to sales in 2HFY17.

Coal Power Plant – Impetus Detected
As per management, the 46MW coal-based captive power plant is under testing phase and is expected to commence operations in 4QFY17 which will also provide cushion to the gross margins. However, this should result in fuel savings of PKR 604mn translating into an EPS impact of PKR 2.51, given plant operates 100% on coal. Furthermore, this should also help the company generate electricity at a lower cost of PKR 6/KWh (FO based PKR 8/KWh, Grid cost of PKR 12/KWh). Apart from meeting the energy requirements of NCL, the surplus power (~12.3 MW) will be distributed to industrial units in adjacent domain which should corroborate the bottom-line.

Result Preview for 3QFY17
The Board of Directors of NCL is expected to meet on 28th Apr’17 to announce financial results for 3QFY17. We expect the company to announce a profit after tax of PKR 124mn (EPS: PKR 0.51), up by 84% YoY while down by 78% QoQ. During the period under review, we anticipate a significant jump in earnings vis-à-vis SPLY attributable to i) recently announced rebate for exporters expected to add PKR 204mn to net sales, ii) exemption of sales tax and regulatory duty on import of cotton resulting in savings, and iii) decline in finance cost by 14% YoY given the low reliance on short term borrowings. On an aggregate basis, we expect 9MFY17 earnings to clock-in at PKR 1,249mn (EPS: PKR 5.20), up by 63% YoY owed to higher gross margins, amid low cost inventory and 32% YoY higher other income.


Apr 9, 2017
BMA Capital Research
30 June 2017

Multiple initiatives set to pay off; re-initiate with ‘Overweight’

We re-initiate coverage on Nishat Chunian Limited (NCL), Pakistan’s 3rd largest textile listed player by sales, with an Overweight stance and a SOTP-based target price of PKR 83/sh. Our liking for NCL is underpinned by
  1. company’s continuing thrust on growing sales of value-added segment,
  2. materialization of big initiative on energy cost efficiency,
  3. improving earnings & payout outlook for listed power subsidiary and
  4. attractive valuations (FY18E P/E: 6.9x vs 11.0x for NML, D/Y: 6% vs 3% for NML)
Deepening focus on value addition...: In the past four years, NCL has expanded capacity in higher margin, downstream segments by 19-23%. This has helped in increasing contribution of value added in total sales to 50% in FY16 from 45% in FY14. We eye continued capital allocation toward value added segments as the company gears up optimize its revenue profile via expanding its geographical coverage and product portfolio and benefit from government’s incentives for value addition.

...along with operational optimization in non-value added segment: NCL’s efforts to revive spinning segment (50% contribution in top-line), via extensive BMR, and asset replacement are likely to pay off, in our view. Over FY17-FY23F net sales and gross profits of spinning segment are expected to grow by an annualized rate of 6% and 17%.

Two key drivers for margin improvement seen: Overall we expect NCL’s gross margin to recover from low of 6.1% in FY14 to 10.3% by FY18 on the back of two key drivers;
  1. Energy cost reduction set to materialize: NCL has recently commissioned a 46MW coal-fired CPP under the umbrella of its wholly-owned subsidiary NC Electric Company Limited. This would allow NCL to cut its power cost by 40% (relative to grid tariff) for its energy-intensive spinning and weaving segment, thereby supporting the margin. Meanwhile sale of surplus power (7MW) to external buyers should bring 3-5% upside to earnings from FY19. We have valued NCL’s investment in NC Electric using DCF-based valuation and it adds PKR11/share to our TP.
  2. Expected currency adjustment to support margin: NCL provides a natural hedge against expected rupee adjustment over the next 3 years given its ~70% export sales. Historically, the PKR has depreciated by ~5% p.a since 2007. However, in the past three years PKR depreciation has remained muted with cumulative 2% depreciation only. While we have assumed 4-5% depreciation, PKR weakness above our expectation cannot be ruled out. Our calculations suggest, every 1% PKR depreciation increases NCL’s profits by ~4%.
Dividends from NCPL likely to recover: Resumption of dividend from NCL’s 51% owned listed IPP, Nishat Chunian Power Ltd (NCPL) seems on the card as the government is likely to provide relief on energy debt. We expect to NCPL to pay out a cumulative PKR3.0/share in FY17 and PKR5.7/share in FY18. Resumption of dividend from NCPL will likely act as a significant trigger for NCL (contribution of NCL’s earnings of 48/44% in FY17E/FY18E). NCL has skipped dividend payouts in recent quarters (2QFY17 and 3QFY17) due to piling up of circular debt (9MFY17 overdue receivables stand at PKR6.1bn).

Stretching its arms into retail and entertainment business: NCL is also diversifying into cinema and retail businesses. It owns and operates nine cinema screens, whereas NCL also operates two retail stores.

Stretching its arms into retail and entertainment business: NCL is also diversifying into cinema and retail businesses. It owns and operates nine cinema screens, whereas NCL also operates two retail stores.

Key risks to our investment thesis:
  1. Exchange rate risk: PKR strength can reduce competitiveness in the international market,
  2. Energy cost inflation: Sharp increase in energy prices can erode gross margins of NCL, and
  3. change in duty structure for imports of cotton & cotton yarn.
Re-initiate with ‘Overweight’; multiple initiatives set to pay off
We re-initiate coverage of Nishat Chunian Limited (NCL) with an ‘Overweight’ stance. Our liking for NCL is underpinned by:
  1. robust earnings growth profile (6yr 13% CAGR),
  2. attractive valuations (1yr forward P/E multiple of 7.0x as compared to 8.6x for BMA Universe), and
  3. 14% underperformance against the benchmark KSE100 Index over the past 3-months which has opened up valuations.
NCL has carried out several initiatives which should drive its profitability growth over our forecast horizon of FY17-FY23; these include
  1. setting up of 46MW coal CPP under NC Electric Company which would enjoy income tax exemption,
  2. sizeable capacity expansions in downstream weaving and home textile segments, and
  3. BMR in spinning segment.
We have valued NCL using SOTP-based methodology; our Jun’18 TP of PKR83/share reflects a 68% upside from current market price. Along with capital gains, the scrip offers a dividend yield of 6%. At last closing, NCL trades at an undemanding 1yr forward P/E of 7.0x as compared to 8.6x for BMA textile universe.
Apr 11, 2017
Aba Ali Habib Research
22 September 2017

NCL: Lower margins dragged 4Q EPS to PKR 0.92, down by 61% YoY
  • NCL announced its financial results for FY17, where PAT of the company clocked in at PKR 1.62bn (3.1% lower than our estimation of PKR 1.67bn), compared to PKR 1.3bn in SPLY, up by 22% YoY due to rise in topline by 16% YoY and lower effective tax rate of 8.8% against 17.6% in FY16. During 4Q, company reported PAT of PKR 221mn, which is lower than our expectations on back of lower margins of 8.2% against 11.1% in SPLY.
  • During 4QFY17, company has availed tax benefits, which has a positive contribution of PKR 0.49 to the bottom-line of the company. Other income during the quarter fell by 85% YoY due to zero payout from its subsidiary company (NCPL).
  • Company announced Final year cash dividend of PKR 2.75, which is in line with finance act clause of dividend payout.
  • We maintain our BUY recommendation on NCL based on June-18 TP of PKR 76.1/share, implying a potential upside of 43.0% from last day closing price along with dividend yield of 5.2%.


Active Member
Apr 9, 2017
AHL Research
24 October 2017

NCL: 1QFY18E PAT to decline by 81% YoY

The board meeting of Nishat Chunian Limited (NCL) is scheduled on 26th Oct’17 to approve the financial results for 1QFY18. During 1QFY18, we expect NCL to record a PAT of PKR 107mn (EPS: PKR 0.45), significantly down by 81% YoY. Net sales of the company are expected to increase by 6% YoY due to higher production and uptick in final products prices. The decline the in bottom-line is on account of i) Absence of dividend income from subsidiary company (NCPL), and ii) Increase in finance cost by 31% YoY to PKR 295mn (borrowing increased by 37% in 1QFY18 against SPLY). On sequential basis, gross margins of the company are expected to improve by 185bps QoQ on account of lower cotton prices (down by 9% QoQ).


Active Member
Apr 9, 2017
AHL Research
26 October 2017

Result Review – 1QFY18
NCL 1QFY17 LPS of PKR 0.40

Nishat Chunian Limited (NCL) announced its 1QFY18 financial result whereby loss after tax clocked-in at PKR 95mn (LPS: PKR 0.40) compared to a profit after tax of PKR 565mn in SPLY.


Result Highlights
  • The company recorded net sales of PKR 8,368mn during 1QFY18, up 21% YoY and 8% QoQ. This is due to higher sales of spinning segment, ii) new customer base tapped in Northern / Latin America and Europe and higher production amid higher operational efficiencies (led by replacement of sick spinning units)
  • Gross margins of the company plunge by 519bps YoY to 6.35% during 1QFY18 compared to 11.53% mainly due to higher depreciation along with rise in input cost (fuel and power).
  • Other income of the company went down massively on yearly basis attributed to absence of dividend form its subsidiary (NCPL).
  • While, finance costs of the company grew by 36% YoY to PKR 307mn owed increase in borrowing to meet the capex demand.
Currently our recommendation on NCL is under review.