PACRA Maintains Entity Ratings of H.A.R Fibres (Pvt.) Limited

Pakistan's spinning industry is highly fragmented and consists of ~368 dedicated spinning units with an estimated size of ~PKR 775bln and ~13.4mln number of spindles installed as of FY23 according to an economic survey of Pakistan. The projected cotton production estimate is revised and projected to be ~11.5mln bales and currently, the production has reached upto ~8.26mln bales, surpassing FY23 total production of ~4.91mln bales. During FY24, better local raw cotton yield is expected to supplement the industry for import substitution. Pakistan's requirement for imported cotton has increased from ~3.5mln bales to ~4mln bales for the ongoing year. The recent hike in energy tariffs further elevated the challenges for the industry. Overall, the industry's cashflow, thus liquidity remains stretched. Consequently, the industry's overall outlook is on the Watch.
The ratings of H.A.R Fibres (Pvt) Limited ('H.A.R Fibres' or 'the Company') demonstrate an adequate position within the spinning segment of the textile industry. Engaged in the production of carded yarn in three blends - Cotton, Polyester cotton, and Viscose (Coarse: 1s – 20s), the Company sources ~70% of its cotton from the United States, Brazil, and Africa, with the remaining
~30% is sourced locally, from Punjab and Sindh. H.A.R Fibres primarily generated revenue from a single segment, that experienced a significant YoY decrease of ~51.8%, attributed to reduced demand both domestically and internationally. On a comparative basis, business margins remain on the lower side. However, the materialization of enhancement in efficiency parameters, i.e. installation of 1000 rotors and increase in spindles to ~30,232, are expected to improve the overall business profile by reducing the cost per spindle leading to enhanced margins.
On the financial risk front, the liquidity profile is stretched in FY23, reflecting relatively low coverage for the Company's financial obligations. Additionally, the Company's capital structure is highly leveraged, with capital needs arising from financing inventories and trade receivables. However, the borrowing cushion remains positive. Moreover, Sponsor's acumen to manage through challenging times bodes well for the ratings.
The ratings are dependent upon the management’s ability to improve margins, profitability, and financial profile of the Company. This includes keeping the debt levels manageable and improving the business profile of the Company, going forward. Improvement in the governance framework remains important for the ratings.

About the Entity
H.A.R Fibres (Pvt) Limited ('H.A.R Fibres' or 'the Company') was established in 2018. The Company is engaged in the manufacture and sale of yarn and operates a single spinning unit with ~20,232 spindles. Mr. Shahid Mehmood Sheikh owns a ~40% shares of the Company. While the remaining stake is equally divided among his sons: Mr. Haroon Shahid, Mr. Faizan Shahid & Mr. Adan Shahid. The overall control of the Company vests with the Board chaired by Mr. Shahid Mehmood Sheikh. Mr. Shahid is also the CEO of the company. He is assisted by an experienced team.