SERT FY2026: deeper losses and an auditor warning outweigh better cash
Verdict: Service Industries Textiles Limited’s year ended June 30, 2026 was weaker than the headline sales decline alone suggests. Revenue fell 6.9%, production dropped 12.9%, a slim gross profit became a gross loss, and the after-tax loss widened by 52.8%. Positive operating cash flow and lower short-term borrowing offer some relief, but most of the cash generation came from a large increase in trade and other payables. More importantly, the statutory auditor issued an adverse opinion because it considered the going-concern basis inappropriate. That makes liquidity and continuity—not a near-term earnings rebound—the central issue.
Results at a glance
- Reporting basis: audited, unconsolidated financial statements for the year ended June 30, 2026; figures below are in Pakistani rupees unless stated otherwise.
- Net sales: Rs 1,276.2 million, down 6.9% from Rs 1,370.5 million.
- Gross result: a loss of Rs 35.2 million versus a profit of Rs 5.6 million; gross margin moved to negative 2.76% from positive 0.41%.
- Operating loss: Rs 93.9 million versus Rs 49.3 million; operating margin deteriorated to negative 7.36% from negative 3.60%.
- Net loss: Rs 111.4 million versus Rs 72.9 million; loss per share increased to Rs 8.08 from Rs 5.29. No dividend was declared.
- Production: 3.915 million kilograms versus 4.496 million kilograms. Against stated capacity of 7.037 million kilograms, utilization fell to about 55.6% from 63.9%.
- Audit: adverse opinion linked to the going-concern basis, after a Rs 111.4 million loss, Rs 472.2 million accumulated losses and a Rs 461.4 million current-liability deficit.
AlphaGen model scores
These are AlphaGen model outputs, not figures reported by the company:
- Alpha QoQ Score: 16.49
- TTM Performance Score: 13.26
- 3Y Business Perf Score: 41.10
- Sector Leadership Score: 9.4871
What weakened
The operating squeeze was broad. Sales declined by Rs 94.3 million, while cost of sales fell by only Rs 53.5 million. Raw-material consumption eased 2.0% and fuel and power cost fell 14.9%, but those savings were insufficient because output and revenue fell faster. Factory wages rose 3.1% and production depreciation increased 34.6%. The result was a Rs 40.8 million reversal at gross level—from a small profit to a material loss.
The annual report attributes the pressure to high energy and other input costs, subdued yarn margins, limited and expensive domestic cotton, and cheaper imported yarn and fabric available under the Export Facilitation Scheme. It also says demand and pricing for locally produced yarn were hurt. Those are management’s explanations. The filing does not quantify the separate contribution from selling prices, yarn counts, customer mix or raw-cotton cost, so a precise volume-versus-price bridge is not possible.
Production supplies the clearest physical signal. Output fell by 580,668 kilograms, or 12.9%, and implied utilization dropped by roughly 8.3 percentage points. Sales fell less than production, which could indicate some combination of price, mix or inventory timing, but the company does not disclose enough to allocate the difference. Inventory nevertheless rose 50.9% to Rs 102.4 million, which deserves attention while the mill is running well below stated capacity.
The fourth quarter was the weakest of the year. Derived by subtracting the reported nine-month figures from the audited annual totals, June-quarter sales were about Rs 272.6 million, down 21.0% year on year. The quarter produced a Rs 27.1 million gross loss versus a Rs 14.2 million gross profit a year earlier, while the net loss expanded to Rs 39.5 million from Rs 10.1 million. The arithmetic shows that pressure intensified late in the year, consistent with the directors’ report.
Below gross profit, administrative expenses rose 9.7% to Rs 49.8 million, more than offsetting a 6.4% reduction in distribution cost. Finance cost increased 31.5% to Rs 13.9 million. A Rs 13.3 million waiver of accrued markup from related-party lenders was recorded as other income; without this non-recurring support, the pre-levy loss would have been worse. The company also incurred a Rs 16.0 million minimum-tax levy, calculated at 1.25% of revenue, despite reporting an accounting loss.
Why the auditor’s opinion matters
This is not a routine emphasis-of-matter paragraph. Crowe Hussain Chaudhury & Co. issued an adverse opinion, stating that because of the significance of the going-concern matter, the statements do not give a true and fair view under the applicable reporting framework. The auditor pointed to the recurring loss, accumulated losses and the gap between current liabilities and current assets, and concluded that the company may be unable to realize assets and discharge liabilities in the normal course.
Management and the board disagree with that conclusion. They cite improved operating results after year-end, better domestic cotton availability, encouraging cotton-yarn export trends, sponsor support and potential use of idle infrastructure. But the report provides no post-year financial numbers, binding support amount or detailed turnaround timetable. Those assertions therefore cannot yet be treated as evidence of a sustained recovery.
The published figures remain useful for understanding what management reported, but every balance-sheet and cash-flow conclusion must be read through the adverse opinion. Asset values are especially important: equity of Rs 906.5 million includes a Rs 1,222.2 million property, plant and equipment revaluation surplus, while accumulated losses were Rs 472.2 million. Book equity is therefore not a substitute for liquidity or proven earnings power.
What improved
Cash and bank balances increased 53.4% to Rs 30.2 million. Net cash from operating activities rose to Rs 56.4 million from Rs 44.6 million, and the company spent Rs 35.6 million on property, plant and equipment. On a simple operating-cash-flow-minus-capex basis, the year produced about Rs 20.7 million of cash after investment.
That improvement needs context. Before working-capital movements, operations consumed Rs 24.6 million of cash. A Rs 161.5 million increase in trade and other payables was the main source of operating cash, while inventory absorbed Rs 34.5 million. Finance cost paid was Rs 35.8 million—far above the Rs 13.9 million expense in profit or loss—because prior accrued obligations were also settled. Positive cash flow was real, but it did not arise from profitable trading.
Funding composition became somewhat cleaner. Short-term borrowings of Rs 21.5 million and the current portion of long-term financing were cleared or restructured. The remaining Rs 37.1 million related-party loan is unsecured, carries three-month KIBOR and has a two-year grace period within a five-year arrangement. Directors also waived previously accrued markup. Sponsor flexibility reduces immediate scheduled debt pressure, although it also underscores dependence on related-party support.
Liquidity remains the decisive weakness
Current assets rose to Rs 198.6 million, but current liabilities climbed to Rs 660.0 million. The current ratio was only about 0.30 times, virtually unchanged, and the working-capital deficit widened to Rs 461.4 million from Rs 392.5 million. Trade and other payables reached Rs 643.2 million, including Rs 322.7 million of contract liabilities and Rs 236.3 million of trade creditors. Those two balances together are more than three times current assets.
Contract liabilities may represent customer funding against future delivery, which is less threatening than an equivalent bank loan if orders can be fulfilled profitably. But fulfilment itself requires cotton, energy and working capital. The interaction between low utilization, higher inventory and larger customer or supplier balances is therefore central. The next report should show whether inventories convert to sales without further margin sacrifice and whether payables normalize rather than roll forward.
Longer-run picture
FY2026 was not an isolated loss. The company earned Rs 59.5 million in FY2021, then reported losses of Rs 11.4 million in FY2022, Rs 157.9 million in FY2023, Rs 100.6 million in FY2024, Rs 72.9 million in FY2025 and Rs 111.4 million in FY2026. Gross profitability has also oscillated: positive in FY2021 and FY2022, sharply negative in FY2023 and FY2024, barely positive in FY2025, and negative again in FY2026. This history argues against treating one year’s cost reduction or sponsor concession as a structural fix.
The sector backdrop supports management’s description but does not excuse company-specific execution. The State Bank of Pakistan’s FY2025 annual report described high energy cost as a structural textile-sector disadvantage and noted that cotton seed availability covered only about one-third of requirement. It also recorded a recovery in textile exports, showing that better national export conditions do not automatically restore margins for every spinner. SERT’s low utilization and repeated losses remain its own operating problem.
What to monitor next
- Auditor status: whether the next filing removes the adverse opinion or provides quantified evidence that supports the going-concern basis.
- Gross margin and utilization: a genuine recovery requires positive unit economics, not only higher production.
- Working capital: inventory conversion, trade-creditor settlement and the movement in contract liabilities.
- Sponsor support: the amount, term and legal firmness of any additional financing, rather than a general commitment.
- Post-year trading: management says operations improved after June 30, but no figures were disclosed in the annual report.
- Regulatory position: PSX currently displays a Risk Warning Alert for SERT under clauses 5.11.1 or 5.11.2. The company page does not identify the precise unresolved clause in the alert text, so that status should be checked directly rather than inferred from the auditor’s opinion.
- Industry policy: actual enforcement against misuse of the Export Facilitation Scheme and whether better domestic cotton availability translates into lower input cost.
Bottom line
FY2026 shows a business with weaker sales, falling production, negative gross margin and a widening loss. Cash and debt scheduling improved, but those positives were driven substantially by working-capital funding and sponsor concessions. The adverse audit opinion elevates the risk from ordinary cyclical weakness to a financial-reporting and continuity issue. Until SERT demonstrates profitable production, sustainable liquidity and a reporting basis accepted by its auditor, the most useful signal will be evidence of operating repair—not management’s stated intention to diversify or use idle assets.
Primary sources
Service Industries Textiles Limited — audited Annual Report 2026 (PSX PDF)
Service Industries Textiles Limited — FY2026 financial results announcement (PSX PDF)
Pakistan Stock Exchange — SERT company page, announcements and Risk Warning Alert
State Bank of Pakistan — Annual Report 2024–25, sector and cotton context
Federal Board of Revenue — Customs Rules containing the Export Facilitation Scheme