The financial report of Dankotuwa Porcelain PLC released on November 10 reveals a net profit of Rs 11 million for the quarter ended September 30 against a loss of Rs 18.9 million for the corresponding period. The growth of 158 percent far exceeded the expectations considering the fact the company has been under Environmental Resources Investment PLC only for 29 days during the relevant quarter.
The quantum of profits earned had surprised many investors and analysts many expecting the turnround only in the current quarter. The performance is very significant having recorded a growth after five and a half years since 2005, if a very small profit of half a million for the year 2007 is ignored.
What is interesting is the company which recorded growth for five years upto 2004 without GSP ironically has incurred for the next five years losses while enjoying GSP benefits. As mentioned in the paper article dated November 1 the company has been operational below 60 percent of the capacity in 2009 and likely this trend continued in the first half of 2010 due to several financial constraints.
As reported in the financial report ERI has promptly repaid overdue local and foreign creditors and overdue bank facilities totalling Rs 39.8 enabling the company to meet increased working capital requirements which would ultimately lead to near capacity utilization.
This would result in reduction of unit cost and increase in the quantum of profits on increasing turnover. Apart from full capacity utilization the following remedial action have been indicated by the company in the restructuring and rehabilitation exercise in various documents.
* Retirement of some debts
* Expansion
* Improvements to existing machinery
* Purchase balance new energy saving refractories.
It is likely the company would take steps to attend to the above during the current year since a sum of Rs 363.5 million remained unutilized as at balance sheet day of September 30. The company in the recent past has been engaged in an aggressive marketing drive and according to the Chairman successfully reduced dependency on EU from 60 percent to 40 percent and reducing the GSP impact by 1/3. Any further reduction would be beneficial to the company.
Due to availability of funds the company would be in a position to purchase raw material etc, at the correct time and lowest price due to prompt payments to the suppliers.
Profitability
It is possible for the company to go for a right issue with a warrant for a substantial expansion within a few months. If an analysis is made of the financial reports of the first half the company had incurred a loss of Rs 32.4 million with a monthly average of Rs 5.4 million. Consequently due to cash constraints this same trend would have continued for the month of July and August totaling Rs 10.8 million loss. Even if an improvement to the losses by 25 percent is considered due to increased sale for the quarter the loss for the first two months would be around Rs 8.1 million. Since the company has not given a breakdown of performance monthly on the basis of above assumption company may have earned a net profit of around Rs 19 million for the month of September 10.It should be noted substantial impact of the infusion of capital would be felt in the current quarter performance and even if this positive factor is disregarded theoretically the company should record a net profit of Rs 57 million for the current quarter and Rs 68 million for the second half.
This would result in a net profit of Rs 36 million for 12 months ending December 10 erasing a loss of Rs 32 million of the half. These projections are based on certain assumptions and invariably has a wider margin of error.
The company had indicated in the said report the current financial year would be extended to March 31, 2011 including 15 months in line with the financial period of ERI. In that event for the current financial year ending March 31, 2011 the company may show a net profit of around Rs 100 million which would far exceed the highest net profit made by the company during the past 10 years when company made net profit of Rs 52.9 million made in 2000. The writer made this forecast earlier only for the next financial year.
Although a forecast for the next financial year 2011/12 is fairly difficult the competence of the ERI, its business model, past experience with CLPL, innovation and substantial infusion of capital, further improvement to the world economy and the performance of the last quarter should result in net profit in a range of Rs 175 million to 250 million.
source - www.dailynews.lk
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