The Pakistan Credit Rating Agency Limited
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Ateeb Riaz

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PACRA Maintains Entity Ratings of Al Rahim Textile Industries Limited, Assigns Rating Watch, Outlook "Negative"

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

Al Rahim Textile Industries Limited (Al Rahim) is a family owned textile company that enjoys strong position in towel manufacturing. Overall export volumes of towel industry declined by ~10% in FY20 on YoY basis owing to COVID-19 outbreak in early 2020 and subsequent lockdowns in major export destinations (Europe & USA). Domestic players had to shut down production or remained partially operational during lockdown in 4QFY20 as per Government directives. Resultantly, the industry is facing challenges including low demand, build-up of inventory and receivables and lower capacity utilization. Al Rahim is no exception to this scenario. Moreover, the Company is in corporate transition phase where all assets, liabilities and business of sole proprietorship are transferred to the new corporate entity. The transition is expected to complete as all approvals are in place. During 9MFY20, the top-line of the Company declined by ~12% mainly due to retention of few export contracts on proprietorship accounts. Towel industry enjoys relatively better margins that are reflected in Al Rahim’s profitability. The revenues are expected to remain low due to COVID outbreak and its impact on demand in 4QFY20. The situation has improved to an extent as orders are now being delivered and gradual improvement is seen in international markets. The recent reduction in interest rates and the Company's plan to shift its borrowings to SBP's refinance schemes will lower financial charges, going forward. The Company's financial risk profile is characterized by moderate leveraging and strong coverages. However, the working capital cycle is significantly higher than industry average, creating pressure on liquidity profile and cashflows. High levels of inventory and receivables remain a challenge. The Company has availed the option to defer its long-term principal repayments and is in negotiation with banks to convert short-term borrowings to refinance schemes. This is expected to improve the Company's overall capital structure and provide cushion in cashflows. The assigned ratings incorporate recent corporatization of the entity, experienced management team, and expected sponsor support as demonstrated historically.
The 'Rating Watch' signifies the COVID-19 outbreak and a challenging economic environment. The entire textile chain has been impacted due to the lockdowns across globe. The demand has contracted while the eventual resumption of operations and recovery of the sector remains uncertain. The Government and SBP has announced several initiatives to provide support. PACRA will monitor the situation and accordingly take action.
The ratings are dependent on sustaining business margins while maintaining strong financial risk profile. The timely shift of short-term borrowings to SBP's refinance schemes remain important. Prudent management of working capital requirements, especially inventory dilution and timely realization of receivables will remain critical. Strengthening of corporate structure, governance framework along with timely and smooth transition are important.

About the Entity
Al Rahim Textile Industries Limited (Al Rahim) traces its roots to Al Rahim Textile industries, which operated in the textile industry as a sole proprietorship since 1991. In order to strengthen the corporate structure, a public unlisted company was formed by the name of Al Rahim Textile Industries Limited in July 2019. Currently, the transition is in process. The board comprises three members of Saya Family. Mr. Faisal Rahim Saya (Son of Mr. Abdul Rahim) manages overall business affairs of Al Rahim as CEO.

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.