PACRA Updates Entity Ratings of KTM Leather Pvt. Limited

KTM leather (Pvt.) Ltd (‘KTM’ or ‘the Company’) formerly known as Khawaja Tanneries (Pvt.) Limited is principally engaged in the manufacturing of a wide range of leathers from the rawhide to the crust and finished stages, both in Cow & Buffalo. The ratings reflect Company’s long-lived presence in tannery industry underpinned by the foundation stone for Mahmood Group – a known industrial & commercial group. Pakistan’s leather industry comprised five different segments i.e. Leather Gloves (31.8%), followed by Leather Apparel & Clothing (31.7%), Tanned Leather (18.9%), Leather footwear (16%), and other leather goods & accessories (1.7%). The tanned leather industry in Pakistan has experienced a downward trend for the past couple of years, with export volumes plummeting from 26 million sqm in FY18 to just 11 million sqm in FY23. This worrisome trend poses a significant business risk for the industry players. However, value-added leather export segments such as apparel & clothing, and footwear registered volumetric growth only. Total leather exports of the country also posted a decline of ~7% and recorded at $887mln as compared to $954mln SPLY due to shrinking in global demand caused by high inflation and geographical tensions i.e. Russia-Ukraine war, etc. The major potential export markets of industry are Italy, Vietnam, China, Hong Kong, Bangladesh, and Indonesia. Lack of technological advancements, skilled labor force, and introduction of low-priced alternatives can potentially hamper the overall growth of this industry. Nevertheless, a rising populace, increasing fashion trends, and depreciating exchange rates (for export-oriented sectors) are likely to favor market participants. The key opportunities are generically available to the Company if investments are made in terms of offering value-added products. The Company’s export sales performance is driven by seasonal effects, volatility in global fashion trends, and local industrial developments. Margins of the Company are significantly dependent on improved topline. Further, the Company must build a strong capital base. The ownership structure is majorly represented by sponsoring family members. During the review period, the Company managed to sustain its topline mainly due to PKR depreciation, but volumes remained under pressure in line with the industry. Gross margins improved to 24.8% from 21.4% SPLY, but net profit margin reduced to 0.5% (FY22: 3.4%) due to an increase in borrowing cost. The financial risk profile of the Company is considered modest with dwindling coverages, cashflows, and working capital cycle. KTM’s capital structure is leverage; encompassing STBs & humble equity.
The ratings are dependent on KTM’s ability to sustain its position amidst a conservative leather business environment and management’s ability for successful strategy execution pertaining to the manufacturing of high-fashion finished leather products. With the growth in KTM’s revenue; prudent financial performance and an effective liquidity profile shall remain imperative.

About the Entity
KTM was established in 1935. Mr. Khawaja Muzaffar Mahmood laid the foundation of Mahmood Group by entering into tannery business, twelve years before the establishment of Pakistan. Ever since, the group has evolved as a diversified business empire by serving various industries. KTM has been involved in the manufacturing and sale of tanned leather, both Cow & Buffalo. Recently, the Company has started manufacturing leather shoes; sales constituted exports and local. KTM’s ownership (84%) directly lies with the sponsoring family, while the remaining (16%) is by an associated Company Masood Model Ginning Factories (Pvt.) Ltd. Mr. Ilyas now holds the position of Chairman, and his son Mr. Mehr Ali is the CEO both have decades of experience in the industry.