PACRA Maintains Entity Ratings of Shahzad Textile Mills Limited | Maintains Rating Watch

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 up to ~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 cash flow, thus liquidity remains stretched. Consequently, the industry's overall outlook is on the Watch.
Shazad Textile Mills Limited's ('Shahzad Textile' and “the Company”) ratings reflect its affiliation with Sargodha Jute Mills. The Company is in the manufacturing of yarn and socks, offering a range of products including ring-spun yarn, synthetic blended yarns, and various types of socks. Over the past years, the Company has significantly enhanced its business profile by successfully diversifying into the value-added segment of socks. During FY23, the Company experienced a decline in its topline, primarily attributed to challenges pertaining to the timely import of raw materials impacting the export volumes. Additionally, adjustments in cotton prices amidst inflationary pressure and substantial rupee depreciation further impacted the financial performance. This along with the surge in energy costs and increased wages has significantly impacted the manufacturing costs, leading to a downward trend in margins. The Company effectively managed challenges posed by import restrictions through its diversified procurement channels, which are not solely reliant on the local market. Despite these challenges, the Company managed to break even in terms of operating losses during 6MFY24. Nevertheless, it reported a net loss primarily attributed to high finance costs. On the financial risk front, the Company reaps the benefit of low leveraged capital structure. The coverages remain stretched with adequate working capital management. The ratings have been assigned a 'Watch' due to the decline in performance, and resultant losses incurred. This, if not curbed, may lead to equity erosion.
The ratings are dependent upon the management's ability to improve the margins, profitability, and financial profile of the Company. This includes avoiding any asset-liability mismatch that may arise and effectively managing its position in a competitive segment. Any deterioration in debt coverages leading to higher financial risk or subdued profitability will have a negative impact on ratings.

About the Entity
Shazad Textile Mills Limited’s ('Shahzad Textile' and “the Company”) commenced its operations in 1981 as a public limited company. The Company is in the business of manufacturing ring-spun cotton and synthetic blended yarns, with a total installed capacity of 63,648 spindles and 194 knitting machines. Mr. Imran Aslam, the CEO, along with other family members, collectively owns the majority stake in the Company (~73.8%). The remaining shareholding of the Company is held by Corporates & Related Parties (~5.7%), with a free float of ~20.5%. The Board is chaired by Mr. Mian Parvez Aslam. While, Mr. Imran Aslam heads the Company as the CEO. He is supported by an experienced management team.