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1999    1998    1997

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Pak Development

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Quality Steel on right track

  1. The need for expansion in PSF sector
  2. Budget based on optimistic estimates
  3. The power generation dilemma
  4. Quality Steel on right track
  5. Agricultural constraints and prospects
  6. The LPG terminal of Engro Paktank

Stringent control on expenses, aggressive marketing and successful executions of orders helped in the turnaround

August 16 - 22, 1999

For the first time, after denationalization, Quality Steel Works Limited (QSWL) has posted pre-tax profit of Rs 6.5 million for the year ending June 30, 1998. It had posted a pre-tax loss of about Rs 20 million for the previous year. The success was achieved by substantial increase in sales. The profit would have been much higher had the Quality Steel not been required to pay Rs 21 million financial charges over the inherited dues that were passed on to the present management. As a result of achieving profit, the board of directors declared 8 per cent cash dividend. However, the dividend was not payable to majority shareholders who own 51 per cent shares of the total paid-up capital.

The unit was denationalized in an extremely poor condition. Even in 1997 domestic sales were only Rs 32 million out of total sales of Rs 192 million. However, the situation improved considerably in 1998. Total sales increased to Rs 310 million, out of which, Rs 170 million was through exports. However, gross profit of QSWL came down to Rs 9.6 million in 1998 as against Rs 29.4 million for the previous year. This was despite of a massive reduction in cost of raw material consumed which came down from Rs 308 million in 1997 to Rs 168 million in 1998. The Company was also able to curtail salaries, travelling and insurance expenses. However, it was surprising that there were no expenses towards electricity, gas and water. The amount spent under this head was Rs 21,000 for the previous year. The Company was able to post pre-tax profit of Rs 7.9 million only because of 'other income' of Rs 29 million for the year. Out of this Rs 22 million was generated through sale of scrap.

The unit still suffers due to capacity under utilization. The management has attributed this to irregular supply of billets from Pakistan Steel, intense competition and depressed demand, surplus production capacity in the country and old plant and machinery. However, management is following three prone strategy of increasing production, achieving total quality control and upgrading the present facilities. However, according to the auditors' note there were indications of poor internal controls. This includes no insurance cover in respect of its fixed assets which could result in the loss to the Company.

It is necessary to read auditors' report and the comments on the notes by the directors to get a better picture of the affairs of QSWL. According to the auditors, mark up on term-loans and unserviceable loans aggregating to Rs 108 million and on short-term loans amounting to Rs 32 million, including Rs 37 million in respect of the referred year, has not been accrued by the Company. Had the Company accrued mark-up for the year and in respect of prior years, net profit for the year would have been turned into a net loss of Rs 31 million for the year.

Provisions against trade debt, compensatory rebates, earnest money and various adjustments amounting to Rs 34 million have not been recorded by the Company. Had these provisions and adjustments been made in the accounts the net profit for the year would have turned into a net loss of Rs 27.5 million.

The Company is not amortizing its freehold land. Had the Company taken amortization for the year and amortization todate, would have amounted to Rs 1.5 million and Rs 8.8 million respectively, resulting in the reduction in net profit for the year by Rs 1.6 million. Accumulated losses would have increased by Rs 8.8 million.

The accumulated losses of the Company amounted to Rs 214 million as on June 30, 1998 and current liabilities exceeded its current assets. Accordingly the ability of the Company as a going concern depends upon its success in improving liquidity and achieving other plans of the management.

No further extension was allowed to the Company in its period given by a financial institution upto November 14, 1998 with regard to the finalization of rescheduling/restructuring of its financing, originally approved in 1994. If the same is not revived and/or finalized, the current liabilities of the Company will increase by Rs 150 million, including Rs 19 million on account of liquidated damages.

Pending finalization of the rescheduling/restructuring arrangements, current maturities of long-term loans are stated at Rs 32 million as against Rs 164 million, resulting in an increase of long-term loans by Rs 131 million and under-statement of current liabilities by the same amount.

Directors' Report has provided some explanations regarding notes of the auditors which do not seem to be very satisfactory. It is important to note that the new management is making efforts to turnaround the Company. However, it may take some time to turnaround the unit. The financial institutions should have a sympathetic view towards the new management by restructuring debt immediately to reduce financial cost. The Export Promotion Bureau should also help the Company in promoting exports of its products.