KARACHI, Nov 19: On Thursday, Nishat Mills Limited announced financial figures for the year ended September 31, 2004, posting an after-tax profit of Rs751 million.
The earnings, which recorded a jump of 83 per cent over the previous year's taxed profit at Rs411 million, were better than market expectations. The Board also proposed cash dividend at Rs 2 per share.
The market forecast was an after-tax profit in the sum of around Rs550 to Rs600 million and Rs1.50 to Rs1.75 per share in dividend. Last year, the board had declared cash dividend at Rs1.50 per share. The market price of share in Nishat Mills is Rs53. On the FY'04 earning per share (eps) at Rs6.13, the share is trading on price-to-earnings (p/e) multiple of 8.8x.
Most analysts were on target as far as prediction about recurring income was concerned, but the bottom line was made glossier by a phenomenal, unexpected rise in "other income", to Rs371 million, up 144 per cent over the year ago 'other income' at Rs 152 million.
Investors found their own explanations about the composition of 'other income'. The simplest explanation was that Nishat had received substantial sums in dividend from DG Khan Cement and Muslim Commercial Bank, in which the company had considerable stake.
Nishat Mills had made Rs174 million 'other income' in the 4Q, while expectations were of around Rs51 million. DG Khan had distributed dividend at Re1 per share on both its common and preference shares, which added Rs65 million to net earnings of Nishat Mills. Other analysts thought that the huge increase in 'other income' mainly represented 'gain on revaluation of investments'.
The major portion of 'other income' amounting to Rs147 million, according to Khalid Iqbal Siddiqui, analyst at InvestCap, accrued as capital gains from sale of 5.4 million shares of Umer Fabrics held by Nishat Mills.
Working backwards, the price of the share in Umer Fabrics that Nishat recovered was Rs37.50 per share. That is at least Rs12 lower than the Umer Fabric's current market price of the stock at Rs49.50.
Since capital gains on sale of shares are not taxed in Pakistan, the impact of Rs 147 million flowed directly through to the bottom line. Umer Fabrics Limited - a Nishat group listed company - is currently in the process of being merged with Nishat Mills and a shareholders meeting has been called for December 1. Every investor has his own prediction over the possible swap ratio: Number of shares that a shareholder would get in Nishat Mills against his holdings in Umer Fabrics.
But the reason that the price of share in Umer Fabrics now about equals that of Nishat Mills could be the investors' expectations of a swap ratio at 1:1. Other than that, there was scarcely anything exciting about the company's core earnings.
Sales grew by 13 per cent to Rs14,876 million for FY'04, from a year ago sales at Rs13,209 million. But due to a 14 per cent increase in cost of sales, gross profit improved by just 2 per cent to Rs1,934 million, from Rs1,888 million and the gross margin slipped from 14 to 13 per cent.
Administrative, selling and general expenses increased by 11 per cent to Rs925 million for the year under review, from Rs832 million the previous year. The recurring profit of the company (excluding the one time capital gains) increased 47 per cent, in spite of higher cost of cotton.
Operating profit was down 4PC to Rs1,009M, from Rs1,056M and the recurring earnings picture was made prettier only by the financial charges, which dropped sharply by 33 per cent to Rs427M for the year under review, from Rs635 million in FY'03.
This was understood to be due to lower interest rates and debt repayments during the year. Pre-tax profit at Nishat Mills rose 66 per cent to Rs906 million, from Rs 544 million in FY'03, and provision for taxation was up 16 per cent to Rs154 million, from Rs134 million. The profit after-tax margin for the company jumped to 5.05 per cent, from 3.11 per cent previous year.
Going forward, Nishat Mills appears to be one of the composite textile mills, quite prepared to take advantage of the post-WTO environment. With a glut of cotton and slump in its price, the company's core earnings could see some kind of improvement in the current year (FY'05).
