KARACHI, Feb 2: Nishat Mills Limited the country’s largest composite textile mill released its half year accounts to Dec 31, 2008, on Monday, posting a fabulous growth of 128 per cent in profit after tax (PAT) to Rs1,197 million, from Rs525 million in the corresponding period of the previous year.

Those numbers translated into earning per share (eps) at Rs7.49 and Rs3.28.

But the market sentiments dampened as the accounts were seen to be accompanied by an auditor’s qualification. Investors scrambled to dump the company stock, which from its peak of Rs27.67 closed on a loss of Rs1.05 at Rs25.05 with trading in 4.4 million shares.

The auditor’s qualification was in regard to the “fair value of available for sale investments in quoted companies,” which they said had been recognised directly in equity instead of impairment loss through profit and loss account as required by the International Accounting Standards (IAS) 39 “Financial Instruments: Recognition and Measurement”.

The auditors concluded: “Had the impairment loss been recognised through profit and loss account, profit for the year amounting to Rs1.197 billion would have been converted into loss of Rs1.856 billion”. There would be no financial impact of the qualification on the shareholders’ equity on Dec 31, 2008, auditors added.

The qualification, naturally turned the bottom line topsy-turvy. Management, however, had this to say in defence: “The management has recognised the decline in fair value of available for sale investments in quoted companies in shareholders’ equity instead of impairment loss through profit and loss account, as it is not a significant and prolonged impairment”.

It observed that prices quoted on stock exchanges at the balance sheet date were felt to show movement of only 15 days after opening of stock exchanges as on Dec 15. Therefore, the decline could not be considered as prolonged.

The company contended that those prices did not reflect fair value due to change in conditions after freezing of stock exchanges on Aug 27, 2008. Major decline was observed in the share prices of MCB Bank and D.G. Cement (group companies).

The share prices of D.G. Khan and MCB Bank were Rs21.27 and Rs125.31, respectively on Dec 31. “The management has calculated the fair values of these companies by discounting the future cash flows and earnings, which are much higher than the prevailing quoted market prices on stock exchanges on Dec 31, 2008”, the company said, highlighting the six months average of quoted market prices of D.G. Khan and MCB Bank, which it said stood at Rs39.28 and Rs238.75 on the date when the stock market was frozen.

The management thus summed up those details: “All these factors clearly conclude that the share prices of D.G. Khan and MCB Bank quoted on the stock exchanges as on Dec 31 should not be used as the basis to determine the impairment of these securities”.

Other than that, Nishat Mills posted 37 per cent growth in sales to Rs11,841 million for the six months ended Dec 31, 2008, from Rs8,721 million in the same period a year ago.

Analyst Syed Atif Zafar at JS Global stated that the sales growth was mainly on account of the rupee depreciation, “which boosted rupee-based export revenue during the period.”

Cost of sales showed a slower rise due to decline in cotton prices in 2QFY09, which provided impetus to gross margin expansion. Gross margin improved to 23.21 per cent, from 22.1 per cent. The Nishat stock traded on Monday at a price-to-earnings (p/e) ratio of 1.8 times the basic and diluted eps at Rs7.49 (annualised at: Rs14.98). That could be cheap, but investors were cautioned by the auditors’ qualification which appeared as a fly in the ointment.