August 7, 2002	Wednesday	Jamadi-ul-Awwal 27,1423

KARACHI, Aug 6: Dawood Cotton Mills Limited of Karachi, makes a case of considerable corporate interest. Its profitability as a giant composite textile unit has been vulnerable. The company, nonetheless, has proved its acumen in making sound financial investment decisions, which is why in spite of operating losses, the company has managed to post bottomline strongly in the black — all due to ‘non-operating income’ earned from investments. Few companies on the textile sector have disbursed as hefty dividends as Dawood: 65 per cent cash for 2000 and 35 per cent for 2001.

The company was listed at the KSE as far back as 1953. The composite textile company (with huge spindlage strength and a weaving unit) has seen some of the best of times. But just for now — and may be some years preceding — Dawood Cotton Mills has been living and feeding the shareholders entirely off the income earned from investment.

The recently released report and accounts for the three-quarters ended June 30, 2002 showed ‘long-term investments’ (at cost) at staggering Rs236 million — the same as at that time last year. These investments constituted nearly 35 per cent of the company’s total assets of Rs668 million and were worth Rs55 million more than the book value of company’s fixed assets of Rs181 million.

For the nine months, Oct-June 2001-02, the company made sales of the value of Rs354.9 million including sales of Rs137.8 million for the 3rd quarter ended June 30, 2002. Cost of sales amounted to Rs349.3 million, which was 98 per cent of sales, leaving gross profit at just about Rs5.6 million. Operating expenses, which aggregated to Rs22.9 million, easily wiped out the gross profit, pushing the company in operating loss of Rs17.2 million. For the cumulative nine months last year, the company had incurred gross loss of Rs0.4 million and operating loss amounting to Rs11.5 million.

Until this stage, Dawood Cotton Mills would have been another of the lame ducks on the textile sector, accumulating losses over the years. But its non-core, non-operating income earned from investments has continued to rescue the results.

Including the third quarter income of Rs20.3 million, the cumulative non-operating income for the nine months stood at a handsome Rs63.6 million (same time last year: Rs46.1 million). Profit on sale of fixed assets provided another Rs1.2 million. All of that helped to cover the operating loss and produce pretax profit of Rs47.6 million and after tax profit of Rs44.0 million for the three-quarters under review. For the same time last year, the company had managed pretax profit of Rs34.8 million and after tax profit of Rs29.4 million.

The directors’ report for the period under review is too brief. It goes to reproduce certain sales and profit figures, but stops short of explaining the industry and market conditions obtaining in the textile sector. Rise in cost of raw materials, poor quality of cotton, frequent power breakdown, increase in power and gas charges and other input cost of production have historically been blamed for high cost of sales. Slump in export orders after September 11, have known to impact most of the textile units in the country. “The management is making continuous efforts to reduce the operating costs and improve profitability”, directors wrote in the quarterly report. That could be bearing fruit as is reflected by a gross profit situation in the period under review, compared with gross loss in the comparable nine months of the previous year. But the after tax profit improvement is due mainly to higher investment income, which may have been due to the strong bull rally at the local stock markets during the first quarter of the current calendar year — in case much of the company’s investment is in stocks.

The 10-rupee share in Dawood Cotton Mills had recorded all-time high price of Rs99 in 1994. The ruling market value is Rs35, which works out to only a half of the break-up value of Rs63 — the company having built up strong shareholders’ equity of Rs468.0 million, from capital base of Rs74.2 million.