February 2, 2003	Sunday	Ziqa’ad 29, 1423

KARACHI, Feb 1: Dawood Cotton Mills Limited makes a case of considerable corporate interest. Although a giant composite textile company, its earnings, if at all, from core business of sale of yarn and cloth, have remained thin. Yet the company is able to post an impressive bottomline and pay as hefty dividend as 65 per cent cash for 2000 and 35 per cent for 2001. How? Through the enormous sums that it earns in dividend income from investments in three blue chip stocks: 4.1 million shares in Engro Chemicals; 3.1 million shares in associated company, Dawood Hercules Chemicals Limited and 0.8 million shares in Sui Southern Gas Company Limited.

The company had made huge operating losses in financial year 2001 amounting to Rs21.6 million, which could be reduced to Rs6.9 million for the year ended September 30, 2002. The results were rescued by the dividend income of Rs88 million that the company earned from stock investment, so that the after tax profit for the year stood at Rs79.8 million. The earlier year, dividend income had contributed Rs51 million and the net profit that year was Rs42.9 million.

Set up back in the fifties, Dawood Cotton Mills has seen some of the best of times. But just for now — and may be some years preceding — the company has been living and feeding the shareholders entirely off the income earned from investment.

The recently released report and accounts for the year ended September 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 Rs673.8 million.

Due to the bull run at the stock exchange during 2002, the market value of the four equity investments at September 30, 2002 stood considerably higher at Rs554 million. Auditors have mentioned that International Accounting Standard (IAS)-39 should have been complied in regard to (presentation of) investments. The company explained that IAS-39 had not been adopted because “management is of the opinion that recognizing unrealized gain/loss on investments is not prudent considering the volatile movement in share prices”.

Out of the sum of Rs254.9 million available for appropriation in the year under review, including the after tax profit of Rs79.8 million, directors distributed Rs74.2 million in bonus shares (one-for-one) 100 per cent. For the first time in seven years, the company has decided to skip a cash dividend and it is after a long period of 11 years that the company intends to raise the paid-up capital; the last time it was increased in 1991, from Rs49.7 million to the current Rs74.2 million, through a bonus and a right issue, each at 25 per cent (one-for-four). The accounts and appropriations were approved by the shareholders at the annual general meeting (AGM) held in Lahore on January 23. Associated companies/undertakings hold 65.2 per cent shares in the company equity; followed by 18.6 per cent by directors, CEO and their spouse and minor children.

The 10-rupee share in Dawood Cotton Mills Limited had recorded all-time high price of Rs99 in 1994. The ruling market value is Rs44.50, which works out at discount of 53 per cent to the stock’s break-up value of Rs67.87.

Net sales for the year under review amounted to Rs485.9 million, which represented 58 per cent growth over sales at Rs308.3 million the earlier year. Cost of sales could be contained so that the company made gross profit of Rs22.7 million, in place of a gross loss of Rs5.2 million last year.

Dawood Cotton Mills has 53,724 spindles of which 28,428 were worked during the year under review. Actual production of cloth increased to 2.1 million sq.mtrs in 2002, up from 0.8 million sq.mtrs the earlier year. Production of yarn also increased to 6.4 million kgs, from 4.4 million kgs the previous year.

The dividend income from investment in prime stocks has proved a good hedge against the losses in textiles. But since the company is not in the investment business, such an arrangement could only be short-term and still fraught with risks. The company needs to step up earnings from the core activity of spinning yarn and making cloth.