March 03, 2022 (MLN): Nishat Chunian Ltd (NCL) recently announced intentions to separate its subsidiary Nishat Chunian Power Ltd. (NCPL) as an independent entity. That is, it will transfer its 51% holding in NCPL to the existing shareholders of NCL, in turn becoming a pure textile company itself.
According to the research note by Intermarket Securities, this is a wise move by NCL management, which will unlock greater value for its shareholders than by keeping NCPL as a subsidiary.
In terms of benefits, the disinvestment of NCPL will save NCL from injecting cash into NCPL through future loans. Instead, NCL can invest money into its core textile business, which is thriving amid healthy export demand for Pakistani textiles. Other large textile firms, such as Gul Ahmed (GATM) and Interloop Ltd (ILP) are investing much more than $100mn each into capacity expansions.
For the past few years, NCPL has faced many predicaments such as mounting circular debt, a NAB investigation, and other litigations. NCPL is among RFO based power plants, which are being phased out in Pakistan; therefore, its probable under-utilization in the future casts doubt over its profitability and cash-flows. In addition, these woes have overshadowed the stock price performance of NCL, despite the stupendous earnings growth of the core textile business, the report said.
The previous two disinvestments of Akzo Nobel (non-paint businesses of ICI Pakistan) and GSK Pakistan (GLAXO) (Consumer’s business of GSK Consumer Healthcare (GSKCH)) further strengthened the case as post demerger, their original shareholders benefitted from significant returns, even though the stocks of the holding companies declined post demerger.
However, the difference between those two transactions and NCL’s case is the fact that NCL is a more attractive asset than that it is demerging which indicates that post demerger, NCL shareholders will benefit from monetizing the NCPL shares and potentially realize greater capital upside on NCL, analyst at Intermarket Securities said.
On the profitability front, the report underscored that NCL’s core profitability will remain robust, as strong yarn margins and inventory gains on cotton are likely to recur in the coming quarters as the company has procured inventory until September-October 2022.
However, rising gross margins will be checked by multi-year high coal prices. Nonetheless, the Spinning segment of NCL will continue to ride the growth in demand for Textile exports. The recently approved Textile Policy 2020-25 will ensure that the industry remains competitive in the global markets, the report concluded.
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