PACRA Maintains Entity Ratings of Fazal Cloth Mills Limited

Fazal Cloth Mills Limited (Fazal Cloth) enjoys a strong business profile in otherwise volatile textile industry. This primarily emanates from its large size – yielding economies of scale – established relationships with a diverse customer base- -export and local - and diversity of operations – spinning and weaving. This has helped the entity to sustain its position despite suppressed textile dynamics exerting pressure on prices. Recent re-imposition of custom duty and sale tax on cotton imports in FY19 budget, coupled with exclusion of tax rebate on yarn and greige fabric may put pressure on margins. With focused marketing efforts, the company has been able to capitalize on additional capacities thereby generating incremental volumes, mainly in spinning segment. The management expects improved margins on account of (i) saving in power cost given regular supply of RLNG to industry players, and (ii) export – led relief provided by GoP. The management is contemplating a gradual entry into value-added segment - dyeing and finishing; once implemented, it is likely to further strengthen business risk profile of the entity. Fazal Cloth's financial risk assessment encompasses irrevocable and unconditional inter-corporate debt guarantee provided to wholly owned subsidiary - Fazal Weaving Mills Limited - with fall back on Fazal Cloth's cash flows. Nevertheless, overall financial profile is considered adequate. Although coverages are low, the company's designed financial strategy keeps sizeable cushion in short-term borrowing lines to meet shortfalls in operational cash flows in servicing debt obligations. Furthermore dividend stream from investment provides comfort to cash flows; this provides flexibility in management of financial affairs.

The ratings are dependent on the company’s ability to yield improvement in margins. Meanwhile, management of financial obligations amid rising interest rates, thereby impacting coverages, is considered important. Improvement in business and financial profile along with effective changes in governance framework would be rating positive.

About the Entity
Fazal Cloth, a listed concern incorporated in 1966, is engaged in the manufacturing and marketing of yarn and fabric. The company operates with 197,556 spindles, 224 air jet looms and 2,700 open-end rotors with 384 MVS spindles; doubling machines to 106. The company is majority owned by Fazal Group and Fatima Group (~45% each). In addition to textile, Fazal group has interest in Fertilizer, Energy and Real Estate sectors.

The BoD comprises seven members with equal representation from both the shareholding groups, along with an independent director. The management control vests with Fazal Group. Involvement of Sheikh Naseem - the CEO, is limited as Mr. Rehman Naseem - the Chairman - primarily manages the company's affairs, supported by a experienced management team.