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The Pakistan Credit Rating Agency Limited
Press Release

Date
26-Jul-19

Analyst
Muhammad Hassan
muhammad.hassan@pacra.com
+92-42-35869504
www.pacra.com

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This press release is being transmitted for the sole purpose of dissemination through print/electronic media. The press release may be used in full or in part without changing the meaning or context thereof with due credit to PACRA

PACRA Maintains Entity Ratings of Fazal Cloth Mills Limited

Rating Type Entity
Current
(26-Jul-19 )
Previous
(24-Jan-19 )
Action Maintain Maintain
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

Fazal Cloth Mills Limited (Fazal Cloth) enjoys a strong business profile in the volatile environment of textile industry. The Company’s large size yielding economies of scale, diverse customer base and broad product portfolio in spinning & weaving segments provides competitive advantage. This has helped the Company to sustain its position despite volatile textile dynamics in previous years. The withdrawal of custom duty and sale tax on cotton imports and subsidized gas rates for textile sector have helped the industry margins, largely offsetting higher interest cost. With better industry dynamics and focused marketing efforts, the Company has been able to capitalize on additional capacities thereby generating incremental volumes, mainly in spinning segment, eventually translating into improved margins and profitability. The management is contemplating a gradual entry into value-added segment – dyeing and finishing - once implemented, it is likely to further strengthen business profile of the Company. The overall financial profile of the Company is considered adequate. It has a intermediately leveraged structure and adequate coverages, although coverages have improved on the back of strong cashflows in 9MFY19. The Company keeps sizeable cushion in short-term borrowing lines as part of its financial strategy to mitigate any liquidity crunch. The recent withdrawal of zero rated facilities on exports is expected to impact the liquidity position of the Company, though it will remain manageable. The Company is in process of merging its wholly owned subsidiary – Fazal Weaving – with and into Fazal Cloth. The process is near completion and is expected to conclude by end-July 2019. Post-merger, all assets and liabilities of Fazal Weaving will be transferred to Fazal Cloth. This will have a limited impact on the overall leveraging of the Company as Fazal Cloth's financial profile is characterized by strong equity base.
The ratings are dependent on the Company’s ability to maintain strong margins. Meanwhile, management of financial obligations, particularly working capital, amid rising interest rates, is considered important. Improvement in business and financial profile, mainly coverages, will be considered positive for the ratings. any material deterioration in margins and/or coverages will impact the ratings negatively.

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 seven spinning units (199,044 spindles, 3,660 rotors, 936 MVS spindles and 119 doubling machines) and a weaving unit (224 air jet looms). The Company’s majority stakes are owned by Fazal Group and Fatima Group (~45% each). The remaining shareholding rests with financial institutions (~6%) and general public (~4.7%). Herein “Group means members of family without reference to any law of Pakistan”.

The Company’s board comprises seven members, including the Chief Executive Officer (CEO). The board has equal representation (three each) of Fazal Group and Fatima Group, while one director is independent director. The management control vests with Fazal Group. In Nov-18, Mr. Rehman Naseem was appointed as CEO, replacing his father Mr. Sheikh Naseem. He is supported by an experienced management team supplementing his expertise.

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.