KARACHI, Jan 25: There had been market talk — some time ago — of Dewan group giving a hard look at the possibility of merging all of its three textile companies: Dewan Textile; Dewan Mushtaq Textile and Dewan Khalid Textile, into the flagship fibre unit — Dewan Salman Fibre Limited (DSFL). That however, was not to be. But if the group would have given in to the urge to merge, it would have followed in the footsteps of DSFL’s principal competitor — Ibrahim Fibres Limited, which had amalgamated with Ibrahim group’s textile mills and the captive power plant.

Huge debts are the principal problem that plagues the business of Dewan Salman Fibre Limited, the largest polyester staple fibre (PSF) producer in the country. In the first quarter (Q1) of 2003, the company posted operating profit of Rs332.4 million, which worked out at 7.7 per cent of the company’s net sales valued at Rs5,143 million for the period. Financial charges, which amounted to Rs311.1 million, wiped out 94 per cent of the operating income, leaving a minuscule pretax profit of Rs20.3 million. Profit after tax for the quarter was a wafer thin Rs3.4 million.

If the group had merged its textile units with DSFL, it would have enabled the fibre unit to improve its debt-to-equity ratio, which would have gone well with the investors. The company’s debt/equity ratio was 0.88 at the close of the last financial year on June 30, 2002 while the current ratio was 0.99:1. The company is known to be actively pursuing debt rescheduling debts in the wake of excess supply in the PSF market and the shrinking margins which are further reducing the company’s ability to repay debts. The company’s financial results for the half year ended December 31, 2002 would be out in due course. Shareholders would then be able to know how negotiations with the lenders have progressed. In the Q1 report, directors had mentioned that the mark-up rates on short-term financing had been reduced after negotiations with the banks and they expected it to be lowered further after reprofiling of the long term debt.

In the Q1 report, directors had complained of difficult industry conditions. The reduction of import duty on PSF from 25 to 20 per cent had dealt a blow to the polyester industry, directors said, adding that though the price of PTA eased a little from its peak in June 2002, but it was still very high. MEG prices continued to remain strong during Q1. “As a result the industry has not been able to obtain value for its products”, directors said.

DSFL has not distributed cash dividend for the last three years, but issued bonus shares for 2000 and 2001, respectively at 50 and 15.5 per cent. No cash or stock was disbursed for 2002. The 10- rupee share in DSFL is currently trading at the stock market at Rs13.95, which about equals the stock’s break-up value at September 30, 2002. The DSFL is one of the six most liquid stocks on the KSE, its volume of business noted at a phenomenal 895 million shares in all of the calendar year 2002. At the end of last financial year, as many as 101 foreign investors were seen to have 22.7 per cent stake in DSFL and 159 joint stock companies holding nearly half of all the issued and paid-up capital. A total of 20,696 individuals together held 66.3 million shares, equal to 19.4 per cent of the company equity.

The company had planned to raise cash through the issue of preferred stock. The funds were needed to improve cash flow and to get along with the BMR that envisaged manufacture of coloured and hollow fibre as well as expansion of capacity.

Ibrahim Fibres already has set up coloured and hollow fibre plant. So is there a demand for the product? Market believes that to be ‘insignificant’.

With the increased supply of PSF following expansions by ICI and Ibrahim Fibres and decreased demand following 9/11, DSFL is believed to be exploring the export market and mainly China. But the problem is that China is the biggest importer of PSF in the world and the company could be hard pressed to compete with the low cost Far East producers.

At the close of Q1, total assets of DSFL stood at the book value of Rs17.8 billion with Rs10.5 billion in operating assets and Rs195 million in capital work-in-progress.