Nishat Chunian Limited (NCL) has acquired Taj Textile Mills Limited (TTML) at a reserve price of Rs350.1 million, according to a notice issued to the Karachi Stock Exchange on Thursday.
The acquisition is likely to add 40,000 spindles to NCL’s existing capacity of 150,000 spindles for the production of yarn. According to investment group JS Global, the new additions will formally come online by early 2014. NCL is expected to spend up to Rs1 billion to refurbish the spindles.
The move comes at a time when demand for yarn has been on the rise. Pakistan’s yarn exports increased by 30% during 2013. Most of the increase was fuelled by China, the world’s largest cotton importer. According to research group Elixir Securities, in 2011 the Chinese government began to support high cotton prices in China to help rural incomes increase, which made it very difficult for the Chinese spinning industry to continue manufacturing yarn. An increase in Chinese yarn imports resulted in a boom in the spinning sector in Pakistan, with profits in the yarn industry increasing by 20% in 2013. “Pakistan imported 300,000 spindles last year in view of China’s yarn demand,” says Ujala Adnan, analyst at Elixir Securities. “We expect Pakistan’s yarn exports to remain strong during 2014.”
This is why according to JS Global, NCL’s profits are expected to increase, provided the extra spindles run at NCL’s current efficiency and Chinese demand continues. The acquisition is predicted to have a positive earnings impact of Rs2.2-2.4 per share for NCL.
Still, there is a slight worry that the spinning euphoria many not last. China may be making slight changes to its policy, considering that its own spinning sector was hit badly. “There are talks of the change coming in form of giving away direct subsidies to farmers rather than high support prices,” says Bilal Qamar, analyst at JS Global. If that leads to reduced cotton prices in China, then according to Bilal: “Chinese cotton yarn import from Pakistan may decline resulting in a down side risk for NCL”.
However, this is just speculation. China has yet to make any changes, and has so far continued its cotton support policy for 2013-14. As for NCL, even if China does discontinue its cotton policy, its management remains confident that it will not be exposed to a higher sales risk. In fact, JS Global predicts that NCL will earn almost RS 2.3 billion by the end of 2013, an increase of almost 234% from the corresponding previous year.
Published in The Express Tribune, July 26th, 2013.
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