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NishatChunianLimited

ValuationsrevisitedfollowingtheawardofGSP+

BUY

We revisit our target price estimates for Nishat Chunian Limited (NCL) following
countrys entry into European GSP+ program. As a result, we have upgraded our
earnings estimates by PKR1.27/share and PKR2.26/share for FY14 and FY15
respectivelytoPKR13.21/shandPKR15.02/sh.

With all the expansions that company has made to its spinning segment, the
segmentscontributioninrevenueofthecompanyislikelytoincreaseevenfurther
(60% of sales in FY13) making the company extremely susceptible to changes in
Chinascottonpolicy

DividendincomefromNishatChunianPowerLimited(NCPL)ofPKR750mn(PKR4/sh)
will be recognized by the company in 2QFY14 which will help support the bottom
line.

Factoringinthesefavorablechangesinearningsforecast,werevisetheTPofNCLto
PKR74/share. We also expect the stock to pay full year dividend of PKR3/share
thereforethestockoffersatotalreturnof~22%.BUY

TargetPriceDec14:PKR76
CurrentPrice:PKR63
Bloomberg

NCL.PA

Reuters

NCHU.KA

MCAP(USDmn)

100

12MADT(USDmn.)

1.2

SharesOutstanding

200

Valuations

2013A

2014F

2015F

EPS

11.4

13.2

15.0

DPS

2.0

3.0

4.0

5%

2014FDividendYield(%)
CapitalGain(%)

17%

TotalGain(%)

22%

NCLvs.KSE100RelativeChart
KSE100Index

NCL

200
180
160
140
120

Thursday,January9,2014

GSP+;ImpactonNCLsprofitability
WerevisitourtargetpriceestimatesforNishatChunianLimited(NCL)followingcountrys
entryintoEuropeanGSP+program.NCL,with~12%ofitssalescomingfromEU,isinline
tobenefitfromthisconcession.However,giventhecompanysconcentrationinspinning
segment(contributing~58%ofitstotalsalesinFY13),theimpactwouldnotbesignificant
since countrys exports of yarn to EU remains negligible. As a result, we have upgraded
our earnings estimates by PKR1.27/share and PKR2.26/share for FY14 and FY15
respectively to PKR13.21/sh (upward revised by 10%) and PKR15.02/sh (upward revised
by 17%). Weve also taken this opportunity to roll forward our model to reflect Dec14
targetprice.Factoringinthesedevelopments,werevisetheTargetPriceofNCLby12%to
PKR74/share.CompanyisexpectedtoannouncefullyeardividendofPKR3/share(DY5%).
Therefore,NCLoffersanupsideof17%,settlingthetotalreturnat~22%.

Continuedfocusonspinning:Puttingalleggsinonebasket

100
80
Jan14

Nov13

Dec13

Oct13

Sep13

Aug13

Jul13

Jun13

Apr13

May13

Mar13
Feb13

Jan13

NCL Profile: Nishat Chunian Limited is primarily


engaged in spinning, weaving, printing/dyeing and
stitchingoperations.Thecompanyoperatesunderthe
umbrella of Nishat Chunian group which has strong
presence in Textiles and Power Generation. The
revenue mix of the company is composed of 70%
exportsalesand30%localsales.

JehanzaibZafar
jehanzaib.zafar@bmacapital.com
+92111262111Ext:2062

NCLsspinningcapacityhasbeenreinforcedsignificantlyasitsnewspinningunitof22,000
spindles came online in Dec13. The company is expected to add ~ 7.05mn KGs to its
spinningcapacity(assumingnewspindlesproduce320KGsofyarn/spindle).Furthermore,
theacquisitionofTajtextilesassetswillfurtheraddtothecapacityofthecompanywhich
is likely to come online in 4QFY14. With all these expansions in spinning segment, the
segments contribution in revenue of the company is likely to increase even further
(previously it was 60% of sales in FY13) making the company extremely susceptible to
changes in Chinas cotton policy. However, with China likely to continue its cotton
procurementpolicyinCY14,weexpectthecompanytoridethecrustofthewaveforyet
anotheryear.

BittersweetnewsonFuelandPowerFront
The much anticipated 14MW, from WAPDA grid, has finally come online in Jan14. This
developmentwouldkeepthefuelandpowercostinchecksincethe3Qcomeswithgas
outages.Therefore,theneedtouseFOtosupplementthegasoutageswouldbelimited
keeping the fuel and power cost low. This news complements the decision to divert

85mmcfdtoindustriesratherthanIPPs.However,GIDCleviedonCPPswillincreasethe
fuelcostsgoingforwardandourbackoftheenvelopecalculationsuggestthatitwillhave
animpactofPKR0.58/share(4%ofEPS)onNCLsearningsonannualizedbasis.

Rupeedevaluation
The currency depreciation, causing major headaches for the incumbent government, is
goodnewsforexportorientedcompanies.NCLssales(~73%USDdenominated)arealso
likelytobenefitfromPKRdepreciation.Rupeedepreciatedby7%inFYTD,webelieve,the
PKR/USDparitywillcloseataroundPKR110/USDinCY14.

Bigpaydayfromsubsidiary
DividendincomefromNishatChunianPowerLimited(NCPL)ofPKR750mn(PKR4/sh)will
berecognizedbythecompanyin2QFY14havinganaftertaximpactofPKR3.37/sh.We,
expectthisdividendtocontinue,goingforward,onthebackofimprovedfundamentalsof
NCPL.
FinancialSnapshot(PKR/share)

Sales

GrossProfit
OtherIncome
FinanceCost
EPS

FY13A
106.07
17.98
5.00
6.22
11.37

FY14E
114.30
18.25
7.38
6.54
13.21

FY15E
118.44
20.45
7.45
6.83
15.02

Source:BMAResearch

Valuations
We maintainour BUY rating on the stock with a Dec14 targetpriceof PKR74/sh.We
expect the company to announce full year dividend of PKR3/share. The scrip currently
tradingataforwardP/Eof4.7x,offersanupsideof~17%anddividendyieldof5%taking
tototalreturnthestockoffersto22%.