Why Malek Spinning backed out on Tk213cr investment plan

Malek Spinning had undertaken a bold plan to invest over Tk200 crore in 2021, when the global economy was in distress due to the pandemic, creating high hopes among its investors. But the spinner has backed out just two months before the project implementation deadline.

The spinner has shown a lack of good business prospects due to a slump in prices and demand for yarn as well as the appreciation of foreign exchange, a factor that pushes up the cost of importing machinery for setting up a new factory, as reasons for its withdrawal from the plan.

Now, the company plans to overhaul its factory in Gazipur by replacing its worn-out machines, according to a disclosure by the company on the Dhaka Stock Exchange (DSE) website on Tuesday.

Twenty months ago, Malek Spinning declared that it would set up a new factory in Bhaluka, Mymensingh, at a cost of Tk213 crore. It saw a good prospect for its business as the price of yarn was high. It received orders from local garment industries.

The company had taken the investment decision at a time when it had incurred a loss due to the pandemic. It raised hopes among its investors, leading to a significant jump in its share prices.

Its shares have been stuck on the floor price of Tk27.10 each since November at the DSE.

A Matin Chowdhury, managing director of Malek Spinning, told The Business Standard, "The price of yarn has declined in the international market. Demand in local and global markets has also fallen. Besides, we have studied that the capacity of yarn production in the country is greater than demand."

"In this situation, we have come back from implementing the new project. At that place, we have decided to increase production efficiency by replacing the old machines of the existing factory," he added.

For this, the company will invest Tk106 crore in its Kaliakoir factory in Gazipur to replace the old machines with new ones.

What had prompted it to take on a new project?

On 23 June 2021, the company announced plans to set up a new plant at a cost of Tk213 crore in Bhaluka, Mymensingh. It planned to install 79,464 spindles and 2,000 rotor machines.

At the time, the company had said that the new machines would be set up for producing high-value yarn to meet buyers' requirements. This new project will create value addition due to the improvement of product quality, which will enable the company to sell its products at higher prices and retain better margins. The proposed investment will be implemented with funds from internal sources as well as loans from banks and other sources. The new project will boost production capacity by 60%.

The company also decided to purchase 55 bighas of land in Mymensingh at a cost of Tk55 crore to build the new factory.

At that time, the managing director of the company had said, "Our yarn has a lot of demand from buyers because we import cotton from America and make yarn using modern technology. We do not charge a premium for this."

"Along with the advancement of technology worldwide, the quality of yarn has also changed. So we are investing heavily in producing better yarn."

The company wanted to issue a Tk290 crore zero coupon bond to finance this project.

At that time, the company had said that it would issue bonds to get funds in the long term. But the Bangladesh Securities and Exchange Commission (BSEC) has not approved the bond yet.

Share price appreciation

Malek Spinning Mills' shares soared 9.72% on 23 June 2021 riding on a new investment plan that was announced by the company on that day. And until 12 August of that year, its share price had jumped by 22%.

But its share price had already jumped 145% in the last two months before the investment news was published on the websites of local stock exchanges.

On 22 June 2021, the DSE sent a letter to know the reason for the unusual price hike of the company.

In reply to the query, Malek Spinning informed the country's premier bourse that the company's board, at a meeting on 22 June decided to invest in the new project.

"We decided on a new investment on the same day the letter from the DSE arrived. In response to the letter, the price-sensitive information has been reported, which has been published on the DSE website at a time, A Matin Chowdhury said earlier to TBS.

Financial performance

The company had failed to pay a dividend in FY2020 due to incurring losses. But in the next fiscal year, it turned around from its losing streak. In that year, its net profit was Tk65 crore, and it paid a 10% cash dividend to its shareholders. It also kept up its gaining spree in FY2022, where its net profit was Tk72 crore and it paid the same dividend.

But in the October-December quarter of FY2023, it incurred a loss due to an increase in raw material prices compared to an increase in sales prices.