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The Bell about Personal Goods – Elixir Securities Limited

Karachi, October 04, 2012 (PPI-OT): NML: Improving fundamentals; reiterate BUY

According to Elixir Securities Limited,

NML   Outstanding shares: 352 million
(PKR million) 4QFY11A 4QFY12E YoY(%) FY11A FY12E YoY(%)
Sales

13,701

10,048

-27%

48,565

42,562

-12%

COGS

11,594

8,352

-28%

40,719

36,045

-11%

GP

2,107

1,696

-20%

7,846

6,516

-17%

Admin and Sell

1,007

697

-31%

2,847

3,104

9%

Other Income

760

310

-59%

2,445

2,238

-8%

EBIT

1,860

1,309

-30%

7,444

5,651

-24%

Finance cost

392

452

15%

1,601

1,810

13%

PAT

1,362

831

-39%

4,844

3,358

-31%

EPS

3.87

2.36

-39%

13.78

9.55

-31%

Source: Elixir Research, Company Accounts

Core earnings to clock in at PKR 3.82/share for FY12

Textile business’ earnings of NML for FY12 are expected at PKR 3.82/share, down 49% YoY. During 4Q, core earnings are projected to increase by 58% QoQ to PKR 1.6/share on account of reduction in energy charges. There was a one-off fuel surcharge adjustment in electricity tariffs during 2Q and 3Q which augmented fuel and power costs of NML. Elixir Securities Limited believes fuel and power costs would ease during last quarter and support gross margins. Based on cotton procurement cost of PKR 5,800/maund, primary margin of spinning segment of NML during 4QFY12 is estimated to have marginally risen by 2% QoQ to PKR 66/kg. However, Elixir Securities Limited has assumed primary margins to remain at 3Q levels.

Further decline in cotton prices likely

NML has a flexible inventory procurement policy and they procure cotton based on market conditions and needs of the operations, however bulk of the procurement is still done during Oct-Nov. Elixir Securities Limited’s discussion with the management suggests that the company has recently started replenishment of cotton inventory for consumption in the remaining FY13. The company is still not piling up large inventories and expects further decline in cotton prices due to likelihood of bumper crop in Pakistan this year. Elixir Securities Limited believes that current buoyant running margins for spinning would support textile earnings of NML for remainder of FY13.

Export market to remain the focus

The management further highlighted that recently rejuvenated marketing efforts of value added brands in the domestic market is part of market expansion. The company would continue to focus on export market as their main stream target market.

Strong fundamentals of core business coupled with portfolio value; BUY

Having competitive advantage of vertical integration, textile business of NML would continue to post strong profits going forward. In addition to this, the company has long term investments in banking and power sector, which shall continue paying high dividends and support earnings. Elixir Securities Limited expects FY13 EPS for NML to grow by 30% to PKR 12.4. At last closing price, the stock is trading at FY13 PER of 4.7x and offers an upside of 27% to Elixir Securities Limited’s Jun-13 PT of PKR 75/share. BUY!

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