The increasing cost of sales has eroded profit margins

Nov 09 - 15, 1996

The full year results released by Rupali Polyester for the year ended June 30, 1996, indicate a massive decline in gross profit which has come down from Rs. 742.815 million in 1995 to Rs. 337.801 for 1996 - a fall of nearly 65 per cent. In spite of increase in sales of the company by 5% from Rs. 2.669 billion in last year to Rs. 2.803 billion in the year under review, the cost of sales has increased from Rs. 1.926 billion to Rs. 2.466 billion - an increase of 28% during the period.

While the operating profit has gone down by 65% from Rs. 630 million in 1995 to Rs. 221 million in 1996. The pre-tax profit has declined by 57% from Rs. 552 million posted last year to Rs. 235 million in the year under review.

While the administration, selling and general expenses along with financial charges registered marginal increase from Rs. 112.803 million in the previous year to Rs. 116.039 million, other income was to the tune of Rs. 31.194 million as compared to a loss of Rs. 36.333 million from other activities. The company had incurred a loss of Rs. 61.719 million in 1995 due to loss on exchange fluctuations which eroded the other income of Rs. 25.386 million.

Rupali has also declared 30% cash dividend for the year 1996 after making Rs. 148 million after tax profit resulting in a dividend yield of 1.5%. In 1995 it had also declared 30% cash dividend inspite of posting Rs. 354 million after tax profit. The after tax profit would have been much higher had the company not kept a provision of Rs. 195 million.

The company has been declaring regular cash dividend since 1992 with the exception of1994 when it declared 15% bonus shares. It had declared 140% cash dividend in 1992.

According to the last annual report, the company enjoys 0:100 debt equity ratio indicating that the financial charges would be minimum. However, increase in share holders' equity may affect the earnings per share in the future.

Sales of the company were more than the sales in previous year in spite of a number of limiting factors particularly the increase in raw material prices due to their shortage, increase in installed capacity of the PSF industry in Pakistan and falling prices of polyester fibre globally. Rupali has been able to increase its production of fibre by improvement in operational efficiency but the increase in input cost and decrease in sale price of PSF have affected the profitability of the company. However, while the inputs costs went up and prices of man-made fibre came down, imposition of regulatory duty on import of PSF provided protection to the industry against suspected dumping by foreign suppliers.

Since the prices of two basic raw materials, MEG and PTA, and prices of PSF have remained volatile over the last two years the PSF industry in Pakistan in general and small units like Rupali in particular will continue to face problems. Dewan Salman, ICI Pakistan and Pakistan Synthetics have expanded their installed capacities and will be able to take advantage of economies of scale.

Rupali Polyester owns and operates composite facilities for manufacture of polyester fibre and filament yarn. The company has capacity to produce 12,000 tonnes of polyester staple fibre and 6,300 tonnes of filament yarn per annum which is very small as compared to other manufacturers. Installed tonnes per annum production capacities of other manufacturers are, Dewan Salman 108,500, ICI Pakistan 63,000 and Pakistan Synthetics 23,000. The other unit which has not carried out expansion is National Fibres, 12,000 tonnes per annum.

The overall negative sentiments in PSF industry - excessive production capacity in the country, increase in input costs and declining prices of PSF- have discouraged the company to undertake any expansion but the company is establishing a 450 MW power plant to avail of the advantage of the energy policy announced by the government.

Since 1989 Rupali has not carried out any expansion. Jaffarali M. Feerasta, chairman of the company in his last annual review has attributed this to the government policies which did not offer incentives to the existing manufacturers to expand their capacities. However, the value of gross assets employed has increased over the years indicating efforts to remove bottlenecks to achieve greater operational efficiencies. However, according to Abbas Anjarwalla an analyst in AKD Securities, the size of the PSF unit does not play a major role in the profitability of the company. Besides, Rupali is a very illiquid scrip and good or poor results do not influence buying or selling of its shares.

The future outlook of PSF industry is bright. Lately, due to increase in global offtake of PSF the prices of fibre have gone up. The prices have also improved in Pakistan and will have a positive impact on the earning of the manufacturers but companies like Ruplai having small production capacity will continue to face the crunch.

Although the estimation of current cotton crop around 9.5 million bales is depressing news, it provides a silver lining for the PSF industry. It offers two opportunities to the PSF industry: larger domestic sales to spinners and improvement in fibre prices. Larger sales can ensure better capacity utilization and reduction in cost of production through economies of scale. Rupali may not be able to improve its capacity utilization further as it already works around full capacity but any improvement in PSF prices may improve the profitability - all other factors remaining constant.