The Pakistan Credit Rating Agency Limited
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Muhammad Hassan

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PACRA Maintains Entity Ratings of Ellcot Spinning Mills Limited

Rating Type Entity
Action Maintain Initial
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

The ratings reflects Ellcot Spinning Mills Limited's improving business profile in harmonization with textile industry dynamics in recent times. The company’s revenues have taken a hit in past few years mainly due to price decline in exports and local segments. Recently, revenues have started to pick up, benefiting from local volumes. Textile industry in general and spinning industry in particular continues to suffer from low international commodity prices and high cost of doing business in Pakistan. This has been mitigated to certain extant by recent rupee devaluation. Recent re-imposition of custom duty & sales tax on cotton imports in FY19 Budget, coupled with exclusion of tax rebate on yarn and greig fabric may put pressure on industry margin. If not modified, will further stretch the industry margins. Leveraging has increased owing to debt-driven expansion. Ellcot intends to gradually build a sizable investment portfolio. This exposes the company to market risk as exhibited by recent volatility in stock exchange. Any significant decline in investments leading to losses, and eventually equity erosion, will impact the financial profile of the company. The management’s ability to manage this risk is critical. The assigned ratings derive comfort from Ellcot’s association with Nagina Group.

The rating is dependent on the company’s ability to sustain its business profile, a flagship company of NG and improve its margins to gain competitive edge. The company’s ability to generate cash flows to fulfill its financial obligations is critical for the ratings. At the same time, prudent management of investment portfolio is important.

About the Entity
Ellcot Spinning Mills Limited incorporated in 1991 as a public limited company in Pakistan under the Nagina Group (NG).NG, through Directors (46.6%) and its Group companies - AHR (Pvt) Ltd (5.7%), Haroon Omer (Pvt) Ltd (6.1%), Monell (Pvt) Ltd (6.1%) and ICARP (Pvt) Ltd (6.1%) retains the majority stake (70.9%). The remaining shareholding (23.9%) rests with the Executives, General public, Joint Stock Companies and Foreign investors. Nagina Group – one of the oldest small-sized textile houses in Pakistan – comprises three listed public limited companies – and six private limited companies.

The seven member board is dominated by Sponsoring family. Five Nagina Group (NG) affiliates, including CEO, and two independent directors. Six non-executive on board. Lack of segregation of governance and management as control of the latter vests with sponsoring family. However, the board is compliant with Code of Corporate governance. HR and audit committees exists at board level.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.