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Profit margin expected to erode in the year 2000 due to increase in MEG and PTA prices

By SHABBIR H. KAZMI
Dec 27, 1999 - Jan 02, 2000

The three leading manufacturers of polyester staple fibre (PSF) have released their annual accounts for the period ending June 30, 1999. All the three companies, namely Dhan Fibres, Dewan Salman and Ibrahim Fibres, have registered increase in profit after tax for the year. This was mainly due to increase in sales volume and improvement in PSF prices. However, their profit margins are expected to erode in the year 2000 due to increase in the prices of two basic raw materials — MEG and PTA. While Dhan skipped dividend Dewan and Ibrahim declared 7.5 per cent and 10 per cent cash dividend respectively. Dewan also proposed issue of 12.5 per cent bonus shares. In 1998 the Company had issued 15 per cent bonus shares.

Dhan Fibres

The gross sales of the Company was Rs 4,219 million in 1999 as compared to Rs 3,700 million during last year — an increase of 10 per cent. Operating profit increased from Rs 76 million in 1998 to Rs 246 million in 1999 which was due to increase in sales and optimization of cost of production. However, financial charges increased from Rs 93 million to Rs 102 million during the period under review. Dhan did not declare cash dividend for the year. It has not paid any dividend for 1998 also.

Dewan Salman

Operating profit of the Company came down from Rs 510 million in 1998 to Rs 496 million in 1999. However, profit after tax improved from Rs 215 million to Rs 295 million during the period under review due to write-back of tax liability of Rs 88.726 million in the year 1999. The Company declared 7.5 per cent cash dividend for the year 1999. It has not paid dividend for the year 1998. While the Company had issued 15 per cent bonus shares for the previous year, it also decided to issue 12.5 per cent bonus shares for the year 1999. In the initial announcement the Company has not shown financial charges separately. However, other charges were reduced marginally from Rs 295 million for the previous year to Rs 289 million for the year 1999.

Ibrahim Fibres

The Company has posted Rs 556 million profit after tax for the year 1999 as compared to a profit of Rs 107 million for the previous year. This improvement was mainly due to increase in sales and reduction in the cost of goods sold. Financial charges for the year 1999 also reduced, though marginally. The Company has declared 10 per cent cash dividend for the year 1999 amounting to Rs 200 million and transferred Rs 415.8 million to general reserve. It had also declared 10 per cent interim cash dividend for the year 1998.

Outlook

During last couple of years PSF industry has suffered due to dumping. While spinners have been demanding zero rated duty on PSF imports, it may result in serious problems for the local PSF manufacturers. The issue needs proper investigation and the favour should not be dished out to spinners as cotton prices are lower as compared to last year.

The post nuclear economic slump is still not over and the country is yet to be back on the track of recovery. During 1999 the PSF manufacturers were able to post higher profit margins mainly due to enhanced in-house consumption.

Profit margin of PSF manufacturers for the year 1999 improved due to relatively lower prices of MEG and PTA during this period. Prices of these two important raw materials are linked to crude oil prices. Therefore, this advantage is expected to erode considerably during the year 2000 as prices of crude oil have increased substantially lately.

Cotton production is expected to be higher and its prices are lower as compared to last year. Some of the analysts believe, lower cotton price will make it a more attractive substitute for PSF and consumption of man-made fibre is expected to go down. It is estimated that the consumption of PSF may go down by around 10 per cent in the year 2000 as compared to the previous year. Whereas others believe that the overall improvement of capacity utilization of spinning units will increase the consumption of PSF next year.

Profit margin of Dewan is expected to improve in the following years due to commencement of its acrylic fibre unit. The Company will enjoy the monopoly. Similarly, profit margin of Dhan and Ibrahim are expected to improve further due to improved capacity utilization. Both the companies enjoy considerable in-house consumption of the total quantity of PSF produced by them.

Financial Highlights

(Rs in million)

Dhan Fibre Dewan Salman Ibrahim Fibre

Sales (Net) 3,674 4,907 3,460

Cost of goods sold 3,356 4,270 2,675

Profit before tax 183 206 573

Profit after tax 165 295 555

Dividend (%) Nil 7.5 10.0