September 14, 2010

Nishat Mills’s standalone annual earnings increased by 1.3times FIPI Update* (USD mn)
Gross Buy 13.73
Nishat Mills (NML) export sales is nearly 2% of Pakistan exports… Gross Sell 13.96
Net Buy/ (0.23)
NML reported superb FY10 standalone earnings of Rs 2,915.4 mn (diluted EPS: Rs 8.29) as *Source NCCPL website
against Rs 1,268 mn (diluted EPS: Rs 3.61) reported last year. NML also reported cash
Total Foreign portfolio update** 2,209
dividend of Rs 2.5/sh thus spelling annual dividend yield of 5.3%.
** Source SBP website
NML is undervalued in our universe (our TP Rs 73 – 75/sh based on various valuation
methods) and we remain positive based on FY12 outlook in the company. ‘BUY’ KSE 100 Index
Massive sales jump is behind 1.3times increase in profitability KSE 100 Index (Sep 9, 2010) 9,879.33
Change (11.80)
This indeed is a terrific show by NML in the wake of 32% y-o-y increase in sales that
Volume (mn) 50.45
reached all time high of Rs 31.5 bn mark equivalent to US$ 367mn (nearly 2% of Pakistan’s
total exports). However, gross margins are still lagging behind at 9% given host of factors. KSE Market Capitalization (bn) 2,754.85
KSE Market Capitalization (USD) 32.29
Even though, NML gets benefit of local currency weakness plus 25% - 30% increase in SCRA (8-September-10) (USD) (30.83)
product value in international market.
Benefit of higher sales quantum may wane in FY11 GDR Update (USD)
MCB (1GDR=2Shares) 2.60
The benefit of voluminous sales is likely to wane given exacerbating increase in cotton lint
(last year NML’s average cotton pickings were below Rs 4000/maund). This year this OGDC (1GDR=10Shares) 16.75
average of around Rs 6500/maund may mean that NML may not enjoy bout of increased UBL (1GDR=4Shares) 2.00
profitability. Moreover, we see sluggish growth in international home textiles may keep LUCK (1GDR=4Shares) 1.70
NML earnings depressed within the proximity of Rs 6 – 7/sh EPS. HUBC (1GDR=25Shares) 9.78

These earnings may be devoid of a possible dividend payout from new acquisitions of two
South Punjab based IPPs AES Lalpir & AES Gen. Key Financial Market Update
CPI Inflation % 12.79
As per our discussion with NML management, there is no likelihood that cash dividend FX Reserves (USD) 16.07
from these newly acquired IPPs to yield dividend in the coffers of NML at least in FY11. Trade Balance (USD) (2.69)
However, NML’s FY12 earnings may shoot up due to spat of dividends from these old IPP 6-Months KIBOR % 12.91
projects.
PKR-USD parity 85.95
Valuation

We cover NML on sum of parts based methodology wherein we have assigned previous Volume Leaders Vol (mn)
valuations of Rs 73 – Rs 75/sh cumulative fair value. However, with the change of new JSCL 5.56
fiscal we will come up with updated call once detailed accounts published. FCIBL 4.62
NML 4.15
However, we remain positive on NML given economy of scale, higher yarn prices and
prospects of developing huge niche in China and diversification into the power sector for FFBL 4.05
possible dividends. BUY NPL 3.58
AKSL 3.29

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