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The Bell about Personal Goods – Elixir Securities Limited

Karachi, October 02, 2012 (PPI-OT): NCL: Improving sector fundamentals to drive returns

According to Elixir Securities Limited,

NCL   Outstanding shares: 165.4 million
(PKR million) 4QFY11A 4QFY12E YoY FY11A FY12E YoY
Sales

5,780

5,557

-4%

20,322

18,807

-7%

COGS

5,172

4,743

-8%

16,913

16,715

-1%

GP

608

814

34%

3,409

2,092

-39%

Admin and Sell

191

212

11%

867

704

-19%

Other Income

226

50

-78%

604

744

23%

EBIT

643

651

1%

3,145

2,132

-32%

Finance cost

406

312

-23%

1,482

1,327

-10%

PAT

175

284

63%

1,459

583

-60%

EPS (PKR)

1.06

1.72

63%

8.82

3.52

-60%

Source: Company Accounts, Elixir Research

Lower energy costs to support 4Q earnings

Textile business of NCL posted a loss of PKR 5 million during 3QFY12, primarily on account of strong rise in energy cost. Higher energy charges were the result of one-off increase in power tariff by NEPRA. However, primary margins of the company improved during the quarter by 2.6pp. Elixir Securities Limited expects 4Q textile earnings to rebound on account of normalized energy costs amid persistence of higher primary margins. Due to improvement in energy costs, Elixir Securities Limited expects gross margins to increase by 3pp to 15% for last quarter.

Spinning 4QFY11A 4QFY12E YoY
Average Yarn Price (22 count)     PKR/kg

334

257 -22.9%

Average Cotton Price – NCL        PKR/maund

8,500

5,600

-34.1%

Average Cotton Price – NCL        PKR/kg

228

150

-34.1%

Cotton Required / unit of Yarn    22% wastage

1.22

1.22

Yarn Primary Margin – NCL         PKR/kg

55

74 33.9%

Source: Industry sources, Elixir Research

Improving primary margins for spinners would lift future profits

Based on current cotton and yarn prices of PKR 5,200/maund and PKR 258/kg, primary margin for spinners is hovering around PKR 88/kg, 31% higher than FY12 average of PKR 67/kg. This improvement in margins shall benefit spinners as procurement period (Oct- Dec) has just started. Policies of Government of China are encouraging yarn imports. Subsequently, regional yarn demand has increased due to higher yarn imports by Chinese value added textile sector. While this uptick in demand is yet to reflect in yarn prices in Pakistan, margins have already started expanding as yarn prices have remained stable against a declining cotton price. Yarn margins could rise further going forward as cotton procurement season kicks in and yarn exports gain pace. This would result in strong margins for local spinners. NCL remains highly leveraged to spinning segment and would thus benefit from uptick in spinning margins.

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