Topline Revises NML Earnings Due to Lower Margins

Staff Report
Islamabad: Topline has revised down our earnings estimates for Nishat Mills (NML) by average 33% for FY25 and FY26 to Rs18.49 and Rs19.11 on the back of lower-than-expected gross margins posted by company in 9MFY25.

Topline has now assumed gross margins of average 11.1% for FY25-FY27 in our forecast compared to 9MFY25 gross margins of 11.3%. While gross margins in last 10 years i.e. FY15-FY24 have averaged at 12.4%.

Despite decline in earnings, we maintain our BUY stance on the company with Jun 2026 target price of Rs225, suggesting total return of 60% including dividend yield of 2%.

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The Sum of The Part (SOTP) value of the company arrives at Rs302/share, 53% discount to the market price. In SOTP value, the portfolio value of MCB Bank (MCB) and DG Khan Cement (DGKC) is at Rs156, higher than current market price of Rs142.7/share.
While the other major holdings of the company are (1) Pak Gen Power (PKGP), (2) Nishat Power (NPL), (3) Hyundai Nishat Motors and (4) Lalpir Power (LPL).

Revising down Gross Margins: With a 14.3% gross margins in FY21-23 the gross margins for NML fell to 10.8% in FY24 and expected to clock in at 11.1% in FY25 (9MFY25 11.3%) vs. initial projections of 12.5%. The downward revision is attributed to higher-than-expected fuel cost and salaries expenses.

We expect gross margins to clock in at 11.1%, 11% and 11% in FY25 FY26 and FY27, respectively.

SOTP valuation and target price: SOTP valuation includes Rs257/share of portfolio valuation, (with 39% belonging to MCB and DGKC), and Rs 46/share of core operations taking total SOTP value to Rs302/share. NML is currently trading at 53% discount to market price.

On PE side, NML is trading at a FY25, FY26 and FY27 PE of 7.72x, 7.47x, and 6.51x respectively. We expect company to pay dividend of Rs3/3/3.50 per share for FY25E/26/27F.

We mentioned NML as our top pick in our annual strategy released on Nov 16, 2024. Since then, stock has returned 88% compared to market return of 41% during this period.

Key risks to NML’s earnings include: (1) lower-than-expected volumetric recovery amid economic uncertainty, (2) Higher US Tariffs of Pakistan (3) renewed PKR depreciation impacting input costs, and (4) supply chain disruptions.