NCL squeezed margins

When the GSP+ award was pronounced at the beginning of this year, Nishat Chunian Limited’s (KSE: NCL) expansion into European markets was expected to see its sales mix combine a larger share of value-added home-bedding and textile apparel taking on the revenues in a huge way.
But, things appear to have gotten a little off-track for the firm as it has registered a considerable year-on-year slippage in earnings of about 67 percent in FY14.
The paltry growth of the top line which trickled to massive decline in the bottom line is because of the unfavourable conditions marring the textile sector for some time that are low demand of Pakistani yarn from China and influx of cheap Indian yarn in the local market.
The company’s margins that took a further beating were lent a bad hand by the upsurge in cost of sales attributable to rising power and gas tariff coupled with appreciation of Pakistani rupee against the dollar. Higher finance costs further dented the profitability of the firm, offering its investors an insignificant EPS of Rs3.8.
However, ‘other income’ rose by 82 percent year on year on the back of increase in dividend income from its subsidiaries.
Going forward, in order to counter the energy expenses, NCL’s executives have sanctioned approval of a 40MW coal-fired power plant. However, it is anticipated that the project will take around 24 months to get operative. For that reason, the profitability is almost certainly to witness a sliding trend if the demand from China and EU is expected to remain at the existing level.

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NISHAT CHUNIAN LIMITED

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Rs (mn)                       FY13     FY14     chg

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Net Sales                   21,213   22,799      7%

Cost of sales               17,618   21,419     22%

Gross profit                 3,595    1,380    -62%

Distribution costs             535      665     24%

Administrative expenses        149      155      4%

Profit for the period        2,276      761    -67%

EPS (Rs)                     11.37      3.8

Gross profit margin           16.9%     6.1%

Operating profit margin       13.7%     2.5%

Net profit margin             10.7%     3.3%

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Source: KSE notice

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