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The Pakistan Credit Rating Agency Limited
Press Release

Date
10-Jul-20

Analyst
Bakhtawar Abid
bakhtawar.abid@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 Liberty Mills Limited

Rating Type Entity
Current
(10-Jul-20)
Previous
(12-Jul-19)
Action Maintain Maintain
Long Term A+ A+
Short Term A1 A1
Outlook Stable Stable
Rating Watch - -

Liberty Mills’ ratings reflect strong business profile of the Company emanating from value added textile business and topped up with non-core recurring income from investments. This diversity in revenue stream insulates the Company's profitability to an extent. by providing a significant cushion. Liberty Mills, a family-owned textile company, operates in the value-added textile segment - processing of fabric and manufacturing of madeups - which insulates it against volatility in cotton prices. The Company focuses on its established niche of quality-conscious institutional buyers. Although this has led to customer concentrations, longevity of relationship with big-name clients in addition to sustained quality helps manage the risk. The holding company structure of the entity strengthens its profile with investment book constituting ~75% of the equity base. Strategic holding in IPP – Liberty Power Tech – has reaped strong dividends, though showing decline recently due to ongoing liquidity issues in the power sector because of circular debt. Over the years, the Company has built a sizable trading portfolio, which exposes it to market risk exhibited by recent volatility in the stock market. Amidst COVID-19 outbreak and subsequent lockdown, the Company had to shutdown its operations in line with the provincial Government’s directive. Thus, the overall production was impacted due to the circumstances and margins were low. However, the Company continued to produce bedsheets for its hospital clients. Operations have been completely restored as majority of sales are export oriented. The recent currency devaluation is expected to be beneficial for the Company’s performance. The Company’s financial risk profile remains strong, characterized by moderate leveraging and in turn, strong debt-servicing ability. The Company has borrowed ~91% of loans, mainly short-term in nature, at concessionary rates from SBP. This keeps financing costs low and insulates the Company from interest rate risk. There is uncertainty due to the outbreak of COVID-19 pandemic. This has impacted the entire textile chain as demand contracts due to shutdown in domestic and global markets and tough economic conditions. However, recent easing in lockdown in local and export markets and improvement in exports provide comfort to the rating. Rating also incorporate strong sponsor support augmented by supplementary investment portfolio.
Going forward, Liberty Group - the sponsor - intends to expand its industrial footing with a diversification philosophy. A number of medium and long term projects are underway at group-level including (i) Pakistan Aluminum Beverage Cans Limited (PABC) (ii) Liberty Wind Power (iii) Pharmaceutical projects and (iv) Hydro Power projects
The ratings are dependent on sustaining business performance amidst prevailing tough conditions. Meanwhile, continued utilization of beefed-up capacities is considered critical. Meanwhile, improvement in governance framework will be favorable for the ratings. Going forward, increase in business size, continuation of dividend/other income stream will be important.

About the Entity
Liberty Mills Limited, established in 1964, is in the business of manufacturing and processing of textile fabrics (capacity: 100mln meters) and made ups (stitching machines: 1,026 machines). The Company is owned by the Mukaty family mainly through individuals. Liberty Group holds ~90% stake in Liberty Power Tech Limited (a 200MW thermal IPP) including ~29% through Liberty Mills. Liberty Mills has an eight-member board. The CEO, Mr. Muhammad Salim Mukaty, also holds the office of Chairman. The Board comprises four directors from the sponsoring family and four executive directors. Director Mr. Muhammad Ashraf S. Mukaty - son of Mr. Salim Mukaty - oversees daily operations. Mr. Ashraf is supported by an experienced management team.

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.