PACRA Maintains Entity Ratings of Ellcot Spinning Mills Limited

The Ellcot Spinning Mills Limited (“the Company” or “ESML”) ratings emanate from the strapping profile of the sponsoring group- Nagina group. Three Companies primarily operate under the umbrella of the Nagina group which includes Nagina Cotton Mills Limited, Prosperity Weaving Mills Limited & ESML. The group has a presence in the local & export-oriented spinning and weaving sector through Nagina Cotton Mills Limited, ESML, and Prosperity Weaving Mills Limited. The rating takes comfort from the financial strength of the sponsoring group. The core operating activity of the Company is the production of cotton and blended yarn with a production capacity of 62,400 spindles. The Companies dedicated to spinning only have an inherent risk of 100% single product concentration and dependency on a sole raw material, primarily raw cotton. This situation can lead to potential vulnerabilities in the supply chain if the supply side disrupts. During FY24, the raw cotton production target is estimated to be at 12.80mln bales and the cotton yield is expected to ameliorate this year to supplement local production demand in comparison to last year when a substantial portion of Pakistan had a detrimental impact on cotton crops, potentially posing a barrier to local raw material availability and experience a 55% shortfall in its targeted production of domestic cotton. Availability of electricity at subsidized rates, the surge in tax burden, and massive PKR devaluation are other challenges specific to the industry. Currently, due to the consistent surge in the policy rate, the Company is not expected to execute any CAPEX during FY24. According to the Pakistan Textile Mills Association (APTMA) Pakistan’s textile sector exports witnessed a significant decline of 15% in July, clocking in at USD1.3bln compared to USD1.54bln last year. Despite the economic crisis in Pakistan during 9MFY23, the top line of the Company has a growth of 9.0% QoQ basis mainly dominated by local sales and driven by inflationary impact in yarn prices coupled with minute hike in volumetric levels.. The Company primarily caters to the needs of the local market and it has developed a reputable clientele over the years. During the period under review, the elevated cost of production, the surge in energy cost, and the magnifying interest burden have caused a dip in the margins and profitability matrix of the Company. The financial risk profile is considered moderate as the management of inventory at an optimal level to cater for the stable demand of Yarn has augmented the working capital management of the Company. The cash flows of the Company are considered moderate accompanied by adequate coverages. Capital structure is leveraged where borrowings are dominated by long-term borrowings (LTFF) for BMR previously executed and working capital requirements primarily met through internally generated cashflows which supplement the financial risk score.
The ratings are dependent on the Company’s ability to increase business margins through operational efficiencies and product quality. The sustainability of cashflows and coverages at a comfortable level remains critical for the ratings along with prudent management of the investment portfolio. Going forward, consistent growth in accumulated profits should supplement the equity levels.

About the Entity
ESML was incorporated in 1988 as a public limited company. ESML is majorly (~71%) owned by Nagina Group, through group companies and sponsoring individuals. The board comprises 10 directors which includes 05 non-Executive (N.E.D), 02 E.D & 03 Independent directors. Mr. Shahzada Ellahi Shaikh is the Chairman of the board, and Mr. Haroon Shahzada Ellahi Shaikh is the CEO of the Company.