Dewan Farooque Spinning Mills Limited

Dewan Farooque Spinning Mills Limited (PSX: DFSM) was incorporated in Pakistan as a public limited company in 2003. The company is engaged in the manufacturing and sale of fine quality yarn. The company also manufactures yarn on contract basis.

Pattern of shareholding

As of June 30, 2022, the company has a total outstanding share volume of 97.750 million shares which are held by 2080 shareholders. Local general public have the majority stake of 55.36 percent in the company. This is followed by Deewan Motors (Pvt.) Limited, an associated company of DFSM, holding 38.62 percent shares. Directors, CEO, their spouse and minor children account for 5.24 percent shares of DFSM. The remaining shares are held by other categories of shareholders.

Performance Trail (2018-22)

The topline of DFSM witnessed a dip in 2019 and 2020 and then began rising thereafter. The company isn’t able to post even gross profit, let alone a positive bottomline in any of the year under consideration. However, the magnitude of net loss had been lowering until 2021 which bounced back in 2022. 2015 was the last year when the company posted a positive bottomline.

In 2019, the topline posted a drop of 37 percent year-on-year on account of a dip in yarn manufacturing on contract basis while revenue from spinning and raw material sale posted an increase during the year. The cost of goods manufactured also posted a decline owing to lesser raw materials consumed during the year. Consequently, the gross loss shrank by 55 percent year-on-year in 2019 with a significant drop in gross loss margin which clocked in at 23 percent in 2019 from 32 percent in 2018. Selling and distribution expense also posted a dive particularly on the back of no commission on sales coupled with lesser salaries during the year. Admin expenses, on the other hand, showed some respite as lesser provisions for doubtful debt and advances were booked in 2019. The operating loss tapered off by 52 percent year-on-year with operating loss margin clocking in at 33 percent in 2019 versus 43 percent in the previous year. Finance cost increased by 10 percent year-on-year on the back of high discount rate during the year. The bottomline posted a net loss of Rs.210.21 million which is 44 percent lesser than the net loss posted by DFSM in 2018. Loss per share stood at Rs.2.15 in 2019 versus Rs.3.86 in the previous year. Net loss margin of the company also thinned down to 44 percent in 2019 from 49 percent in 2018.

In 2020, the company suffered a further 11 percent year-on-year drop in sales as industries and markets had to undergo a lockdown period owing to the outspread of COVID-19. The gross loss shrank by 10 percent year-on-year in 2020, however the gross loss margin hovered at the same level as it was in 2019. Operating expenses narrowed down particularly as DFSM booked no provision for doubtful debt and advances during the year. Operating loss further contracted by 18 percent year-on-year with operating loss margin clocking in at 30 percent in 2020. Finance cost expanded by 20 percent year-on-year due to high discount rate in the starting quarters of FY20. The net loss of the company tapered off to Rs.197.87 million in 2020 which is 6 percent lesser than the net loss recorded by DFSM in the previous year. The loss per share clocked in at Rs.2.02 in 2020 while the net loss margin increased to 46 percent.

In 2021, the company posted a 39 percent year-on-year rebound in sales after a constant drop in sales since 2018. DFSM posted the last topline growth in 2017. The growth in revenue came from spinning charges while there were no local or raw material sales during the year. The cost of sales grew by 18 percent year-on-year in 2021 mainly on account of higher fuel and power charges as well as market induced rise in salaries and wages. The gross loss considerably reduced during the year with gross loss margin hovering around 4 percent in 2021. While distribution expense dipped by 13 percent year-on-year in 2021, admin expense posted a massive jump of 117 percent owing to Rs.20.67 million worth provision for doubtful debt booked by the company. Operating loss thinned down by 37 percent during the year while operating loss margin stood at 14 percent in 2021. Finance cost gave a respite as it declined by 54 percent year-on-year as discount rate saw multiple cuts during the year. Due to making persistent losses, the company suffered from liquidity crunch and was in a process of continuously restructuring its loan portfolio. The bottomline posted a net loss of Rs.125.45 million which is 37 percent lesser than the net loss posted in the previous year. Net loss margin slimmed down to 21 percent with a loss per share of Rs.1.15 in 2021.

2022 was another year in a row where DFSM’s topline showed an uptick. The 11 percent year-on-year rise in topline came mainly on account of spinning charges coupled with a small amount of raw materials sale made during the year. The topline growth couldn’t bear any fruit as the enormous cost f sales on the back of mushrooming fuel and power cost, salaries and wages as well as depreciation charges culminated into a gross loss of Rs.117.10 million which was 372 percent higher than the gross loss recorded in the previous year. Gross loss margin which was on the downward journey also rose back to 17 percent in 2022. Although operating expense ticked down during the year on the back of lesser provision for doubtful debt, operating loss magnified by 170 percent during 2022. The operating loss margin also moved up to 25 percent during 2022. Finance cost dealt a mighty blow to the bottomline as it grew by 27 percent during the year as discount rate saw several upward revisions during the year. The net loss for the year grew by 54 percent to clock in at Rs.192.99 million with a loss per share of Rs.1.97. The net loss margin stood at 28 percent in 2022.

Recent Performance (1HFY23)

The topline which had shown a growth momentum in 2021 and 2022 came to a standstill yet again in 1HFY23 as it nosedived by 1 percent. As the company is getting its loan restructured time and again, it faced severe working capital constraints which made the company to produce yarn on contractual basis to stay operational. Rising inflation magnified the cost of sales particularly fuel and power and salaries and wages. This resulted in an 88 percent year-on-year rise in the gross loss made by the company in 1HFY23. Gross loss margin stood at 31 percent in 1HFY23 versus 16 percent in 1HFY22. Operating expense also grew which drove the operating loss up by 70 percent in 1HFY23. This translated into an operating loss margin of 39 percent in 1HFY23 versus 23 percent during the same period last year. Finance cost posted an 82 percent year-on-year growth due to discount rate hikes during the period. The net loss magnified by 83 percent during 1HFY23 to stand at Rs.153.56 million with a loss per share of Rs.1.57 compared to Rs.0.86 during the same period last year. Net loss margin enlarged to 46 percent in 1HFY23 versus 25 percent during the same period last year.

Future Outlook

The company has repeatedly got its loan restructured with the financial institutions yet was unable to repay the installments of restructured loan portfolio. The company hasn’t even made provision for markup payable which is also a serious issue. Had the company booked provisions for markup, its loss after tax would’ve been even higher. As of December 30, 2022, the company’s current liabilities exceed its current assets by over Rs1.198 billion without even booking provision for markup against the outstanding liabilities. The company is in litigation with its lenders who have no longer renewed its expired short-term financing facilities. This casts serious doubts over the ability of the company to continue as a going concern.