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 a contract basis.

Pattern of shareholding

As of June 30, 2023, the company has a total outstanding share volume of 97.750 million shares which are held by 2216 shareholders. The local general public has a majority stake of 60.91 percent in the company followed by Deewan Motors (Pvt.) Limited, an associated company of DFSM, holding 38.62 percent shares. The remaining shares are held by other categories of shareholders.

Performance Trail (2019-23)

DFSM’s topline has posted year-on-year growth only in 2021 and 2022 with its net sales shrinking in other years. The company isn’t able to post even gross profit, let alone a positive bottom line in any of the years under consideration. The magnitude of net loss which had been lowering until 2021 bounced back thereafter. 2015 was the last year when the company posted a positive bottom line. The detailed performance review of the period under consideration is given below.

In 2019, DFSM’s topline posted a year-on-year drop of 37.22 percent on account of a dip in yarn manufacturing on a contract basis while revenue from spinning and raw material sales increased during the year. The company was facing working capital constraints as unabated losses since 2016 had not only resulted in hefty accumulated losses for the company but also created liquidity constraints where it was unable to repay its liabilities (see the graph of liquidity position). Cost of sales 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 to clock in at Rs.110.12 million. Selling and distribution expenses posted a 17.8 percent dive, particularly on the back of no commission incurred on sales coupled with lesser salaries paid during the year. Admin expenses declined by 47.73 percent in 2019 on the back of lesser provisions for doubtful debt and advances booked in 2019. Operating loss tapered off by 52.35 percent year-on-year to clock in at Rs.159.2 million. Finance costs increased by 9.64 percent year-on-year on the back of a high discount rate during the year. The bottom line posted a net loss of Rs.210.21 million, down 44.26 percent year-on-year. Loss per share stood at Rs.2.15 in 2019 versus Rs.3.86 in the previous year.

In 2020, the company suffered a 10.55 percent year-on-year drop in sales as industries and markets had to undergo lockdown owing to the outspread of COVID-19. Owing to working capital constraints, the company continued yarn production on a contract basis in order to stay operational. Gross loss shrank by 10 percent year-on-year in 202 to clock in at Rs.99.21 million. Operating expenses narrowed down particularly as DFSM booked no provision for doubtful debt and advances during the year. Consequently, operating loss further contracted by 17.97 percent year-on-year to clock in at Rs.130.58 million. Finance costs expanded by 20.41 percent year-on-year due to a high discount rate in the initial quarters of FY20. Net loss of the company tapered off to Rs.197.87 million in 2020, 5.87 percent less than last year. Loss per share clocked in at Rs.2.02 in 2020.

After a constant drop in sales since 2018, DFSM posted a 39.46 percent year-on-year rebound in sales in 2021. The growth in revenue came from spinning charges while there were no raw material sales during the year. 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. DFSM’s gross loss considerably shrank during the year to clock in at Rs.24.79 million. While distribution expense dipped by 12.8 percent year-on-year in 2021, administrative expense posted a massive jump of 117.41 percent owing to a provision worth Rs.20.767 million for doubtful debts booked by the company. Operating loss thinned down by 36.94 percent in 2021 to clock in at Rs.82.34 million. Finance cost gave respite as it declined by 53.96 percent year-on-year on account of multiple discount rate cuts during the year. Due to persistent losses, the company suffered from a liquidity crunch and was in the process of continuously restructuring its loan portfolio. DFSM posted a net loss of Rs.125.45 million, down 36.6 percent year-on-year 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. 15.24 percent year-on-year rise in topline was mainly due to higher spinning charges coupled with a small amount of raw materials sales made during the year. The topline growth couldn’t bear any fruit as the enormous cost of sales on the back of mushrooming fuel and power costs, salaries, and wages as well as depreciation charges culminated in a gross loss of Rs.117.10 million which was 372.48 percent higher than the gross loss recorded in the previous year. Operating expense ticked down during the year on the back of lesser provision for doubtful debt booked, yet, operating loss magnified by 106.84 percent during 2022 to clock in at Rs.170.32 million. Finance cost dealt a mighty blow to the bottom line as it grew by 27 percent during the year and the discount rate saw several upward revisions during the year. Net loss for the year grew by 53.83 percent to clock in at Rs.192.99 million with a loss per share of Rs.1.97.

In 2023, DFSM’s net sales dwindled by 29.66 percent on account of low demand as well as shut down of the plant during the latter half of the year due to working capital constraints and also because of repair & maintenance. Elevated fuel & power charges, depreciation as well and payroll expenses didn’t allow the cost of sales to shrink proportionately, resulting in a 94.68 percent escalation in gross loss which clocked in at Rs.227.98 million in 2023. Administrative expenses slid by 25.32 percent in 2023 mainly due to no provision booked on doubtful debts during the year. Distribution expense multiplied by 34.71 percent in 2023 due to higher payroll expenses as well as vehicle running expenses incurred during the year. Operating loss surged by 39.42 percent year-on-year in 2023 to clock in at Rs.237.45 million. Finance cost escalated by 39.42 percent in 2023 owing to the high discount rate. Net loss climbed up by 48.51 percent to clock in at Rs.286.6 million in 2023 with a loss per share of Rs.2.93.

Recent Performance (1HFY24)

The onset of the new fiscal year didn’t bring any positive hope for the company. In line with the previous year, DFSM’s topline shrank by 51.53 percent year-on-year in 1HFY24. As the company was getting its loan restructured time and again, it faced severe working capital constraints which made the company produce yarn on a contractual basis to stay operational. Rising inflation, elevated fuel and power charges, as well as high salaries and wages, resulted in a 65.92 percent bigger gross loss of Rs.168.81 million recorded by DFSM in 1HFY24. Operating expense shrank by 18.67 percent in 1HFY24 supposedly due to no booking of provision for doubtful debts. During the period under consideration, the company also booked a reversal of Rs. 40.43 million on provision booked against doubtful debt. Operating loss multiplied by 16.88 percent to clock in at Rs.150.05 million in 1HFY24. Finance cost dropped by 99.74 percent in 1HFY24 as the company didn’t make any provision of mark-up for the period which amounted to Rs.50.087 million and approached its lenders for the restructuring of its loans. Net loss of the company stood at Rs.139.54 million in 1HFY24, down 9.13 percent year-on-year. The net loss would’ve been higher by Rs.50.087 million had the company booked the provision of markup in respect of bank borrowings. Loss per share stood at Rs.1.43 in 1HFY24 versus a loss per share of Rs.1.57 recorded by DFSM in 1HFY23.

Future Outlook

As of December 31, 2023, the company’s current liabilities exceed its current assets by over Rs.1351.021 million. The company hadn’t booked a provision for markup against the outstanding liabilities and is in the process of further loan restructuring along with a waiver for non-provided markup. Its accumulated losses stood at Rs.1787.726 million as of December 31, 2023. 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.