Muhammad Adil Kaleem
PACRA Maintains Entity Ratings of Fazal Cloth Mills Limited
Fazal Cloth Mills Limited (Fazal Cloth) enjoys a strong business profile as a leading producer of yarn and cloth. The Company's large size yielding economies of scale, diverse customer base, and broad product portfolio in spinning & weaving segments provides a competitive advantage. In recent years 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. Lately, the Company maintained its trend of revenue growth but profitability came under pressure due to high finance cost. The operations of the Company suffered on account of the COVID-19 outbreak as the entire textile chain came to a halt due to lockdowns in Pakistan and internationally. Production resumed since the Government allowed export-oriented sector to start operations and the Company restarted operations at full capacity. However, the last quarter (April-June) of FY20 remained challenging as demand was low and prices of yarn reduced. The demand for textile chain is recovering as economies open up in Pakistan and export destinations. Meanwhile prices have also improved on both local and international fronts recently. The Company is expected to benefit from these improved dynamics as it has exhausted its piled up inventory and order flow remains strong. Fazal Cloth has a leveraged capital structure and adequate coverages. In order to relieve pressure on cashflows caused by the pandemic and economic slowdown, the Company availed SBP's moratorium relief and deferred principal repayments for one year. Reduction of 625bps in interest rates by SBP shall provide respite in this regard. The Company's merger with its wholly-owned subsidiary – Fazal Weaving – is near completion and awaits Court's order. Post-merger, all assets, and liabilities of Fazal Weaving will be transferred to Fazal Cloth. The Company continues to lend support to its associate company "Fatima Energy" through loans and capital injection as it still requires time to mature.
The ratings are dependent on the Company’s ability to maintain strong business profile amidst current circumstances. Meanwhile, management of financial obligations, particularly working capital, during and after the pandemic, is imperative. Improvement in margins and coverages will be considered positive for the ratings. Materialization of investments into positive cashflows and managing related obligations prudently is important.
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 (212,916 spindles, 3,660 rotors, 888 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 the general public (~4.7%). Herein “Group means members of the family without reference to any law of Pakistan”.
The Company’s board comprises of total nine members which includes equal representation (three each) of Fazal Group and Fatima Group, while the remaining three are independent directors. The management control vests with Fazal Group. Mr. Rehman Naseem, CEO, heads the management team; and he is supported by experienced team members.