Stringent control on expenses, aggressive marketing and successful
executions of orders helped in the turnaround
By SHABBIR H. KAZMI
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
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.