The Pakistan Credit Rating Agency Limited
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Muhammad Adil Kaleem

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PACRA Maintains Entity Ratings of Kohat Textile Mills Limited, Assigns 'Rating Watch'

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

The ratings reflect a moderate business profile of Kohat Textile Mills Limited (Kohat Textile). The Company caters to the needs of local industry and deals in specialized products i.e. polyester yarn, acrylic yarn and viscose yarn. Kohat Textile is a net importer of raw material. This exposes the Company to exchange rate volatility and eventually dilutes its profit margins. However, the impact remains limited as the Company has adequately invested in technological upgradations and expansion projects to remain cost-competitive as reflected in improved margins in recent years. The Company has managed to improve its operating profit in 9MFY20 despite the withdrawal of zero-rating and an increase in energy prices by 31% while the overall profitability was negatively impacted by the exorbitant increase in KIBOR. The outbreak of Covid-19 has impacted the revenues of the Company as demand contracted. The Company's financial profile is considered adequate on the back of manageable working capital cycle, moderate coverages and leveraging. Recent SBP measures and interest rate cut will provide relief to the Company. The assigned ratings derive comfort from an experienced management team, strong financial muscle of the Sponsors and their timely support to the Entity in the form of subordinated loans.

The Rating Watch signifies the prevailing uncertainty due to the outbreak of COVID-19 pandemic and tough economic conditions. This has impacted the entire textile chain as demand contracts due to shutdown in domestic and global markets. Recent SBP measures will provide some respite in this regard. The Company’s production facilities were shut down for 3 days as per the provincial government orders due to outbreak of Covid-19, subsequently, operations were resumed with partial capacity due to lockdown in the country. Currently, the mill is running at full capacity. Demand has improved recently but will take time to reach pre corona level. PACRA is closely monitoring the situation and will take rating action accordingly.
The ratings are dependent on the Company’s ability to sustain its operations in prevailing conditions. Significant deterioration in revenues and/or debt coverages due to the prolonged downturn leading to higher financial risk or subdued profitability will have a negative impact on the ratings. Saif Group's support to the Company will remain critical.

About the Entity
Kohat Textile commenced operations in 1967 and was listed on PSX in 1970. Kohat Textile’s is a subsidiary of Saif Holdings, with majority stake (~77.98%). The remaining shareholding rests with financial institutions (10%), general public (10.12%) and directors (0.87%). Saif Group is one of the renowned corporate groups in Pakistan. The Company operates with a single spinning unit having a capacity of 35,280 spindles - manufacturing specialized yarn.

The board comprises seven members, all from the sponsoring group, with Osman Saifullah Khan as the Chairman of the BoD. Board members have diversified experience, and relatively long association with the Company. Management control vests with Saif Group. Assad Saifullah – the CEO – primarily manages the Company’s affairs, supported by a team of seasoned professionals.

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.