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Dhanalaxmi Roto Spinners


Dhanalaxmi Roto Spinners is in the business of trading textiles, paper, and wood pulp.

It is established in the paper and wood pulp markets and management intends to set up a manufacturing facility for forestry and logging products.  Management also intends to enter commodity trading and exports.

The company has reported growing operating profits on a growing revenue base in the last five years – reporting about 1.3cr in operating profits on a revenue base of about 30cr in the last financial year.  It operated with a net cash position of 3cr.

The company is currently exclusively engaged in the trading business and hence, does not own valuable long-term assets that can generate consistent earnings. 

The wood pulp market is dependent on the international demand/supply situation and hence, slowing demand and oversupply has a detrimental impact on the company’s profitability. 

The company is dependent on suppliers for product and has virtually no pricing power with customers.

Moreover, there is intense competition in this business and a weakening INR does not help matters by making imports more expensive.

Management does not have demonstrable experience in commodity exports – and hence, their venture into this area entails above average risk.  This business would also be subject to adverse government policies on exports based on domestic production/consumption patterns.

Management are also likely to incur substantial capital expenditure in the near future by pursuing the manufacturing route and this is likely to reduce cash flows available to shareholders.

Even the existing cash resources available to shareholders have not been given to them in the past despite the low returns earned from the business.  This should call management’s expansion plan into question and shareholders ought to demand a more rational dividend policy concerning the cash resources that belong to them.

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