Dewan's crisis can spell a disaster for the banking system, which has lent heavily to its companies. Now the same banks are pumping cash into the loss-making companies, which they cannot afford to see going bankrupt, analysts say.
The group companies are in a lot of debt, says Khurram Shahzad, analyst at Invest Cap Securities. And if the companies fail, a lot of banks will be in trouble.
He said it is not easy to estimate the exact size of the loans Dewan companies carry on their books. But the debt-to-equity ratio is close to 70 per cent.
All the companies which disclosed results on Wednesday have seen a sharp drop in sales, in one case they plunged 70 per cent.
Falling demand for the groups premium products like textile and cars, amid a dismal economy, battered its overall profitability and future outlook.
Dewan Farooque Motors, manufacturers and distributors of Hyundai and KIA in Pakistan, showed a staggering loss of Rs1.3 billion for the fiscal year that ended on June 30, indicating that bad days for the automotive industry are far from over.
This loss, which is substantially higher than the Rs399 million loss the company incurred in the same period of the previous year, is 68 per cent of its sales.
All the textile concerns of Dewan have been hit by falling sales and shrinking margins. Dewan Mushtaq Textile Mills recorded a loss of Rs69 million in 2008-09, up from Rs8.1 million borne by it a year earlier.
Despite an increase in sales, Dewan Cement cannot come out of the quagmire of financial turmoil. Its loss is Rs163 million, down from last years Rs499 million. A finance cost of Rs463 million wiped out its operating profit of Rs55 million.
Dewan Farooque Spinning Mills loss is Rs209 million, substantially higher than the previous years Rs36 million. This company showed a finance cost of Rs127 million.
Year-on-year sales of Dewan Khalid Textile Mills plunged by 50 per cent but that did not stop its financial hemorrhage. This company, which has a finance cost of Rs45 million, posted a loss of Rs93 million.
The groups highest revenue generating company, Dewan Textile Mills, also bled because of high finance cost and impairment loss on other investments. The loss for the year is Rs674 million, up from last years Rs213 million.
Ishtiaq Textile Mills has the same story. Sales plunged by 57 per cent to Rs226 million and loss increased by 297 per cent.
Shahzad of Invest Cap says if these companies liquidate the banks, which are already finding it hard to lend, they will be in trouble. These companies are so highly leveraged that their capital would not be enough for financers to make up for the bad debt.
In the worst case scenario, he said, shareholders wont get anything. A lot of banks have not made any provisioning against Dewans companies. That is why I believe banks will help the group survive.
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