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The Pakistan Credit Rating Agency Limited
Press Release

Date
28-Aug-20

Analyst
Muhammad Fahad Iqbal
fahad.iqbal@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 Khas Textile Mills (Pvt.) Limited

Rating Type Entity
Current
(28-Aug-20)
Previous
(29-Aug-19)
Action Maintain Initial
Long Term BB+ BB+
Short Term A3 A3
Outlook Stable Stable
Rating Watch - -

The ratings reflect the small yet adequate business profile of Khas Textile Mills (Pvt.) Limited emanating from a relatively small revenue base, thin margins, and profitability. The Company is associated with Khas Group of Industries. The Company manufactures various types of the cotton ring and open-end yarn. Despite challenging textile industry dynamics, Khas Textile managed to maintain its volumes. Subsidized gas rates for the textile industry have made the local textile industry cost-competitive, though the withdrawal of zero-rating status will affect the liquidity of the industry. On a standalone basis, the Company’s sales volume increased due to capacity enhancement from last year's completed BMR and better yarn prices. Increased cotton prices have put pressure on margins and, in turn, profitability. The Company has a highly leveraged capital structure and weak coverages. The Company has stretched its working capital cycle, though in line with the industry average. Limited cash flows from operations and higher finance cost led to stretched coverages. These are expected to improve due to the repayment of long term loans in the near future. The debt structure is skewed towards short-term borrowings, which led to an asset-liability mismatch. The overall governance framework needs strengthening.
COVID-19 has impacted the entire textile chain as demand contracts due to shutdown in domestic and global markets and tough economic conditions. Recent SBP measures will provide some respite in this regard. The Company’s production facilities were shut down in line with the provincial Government’s directive of lockdown and now the situation is becoming normal day by day.
The ratings are dependent upon the management's ability to improve margins, profitability, and financial profile of the Company. Improving asset-liability will be critical. Meanwhile, strengthening of governance practices will have a positive impact on the ratings. Any deterioration in debt coverages leading to higher financial risk or substantial losses will have a negative impact on ratings. Khas Group of industries has a presence in diverse sectors; including textile, aluminum, poultry, socks, and knitwear and import of building hardware.

About the Entity
Khas Textile Mills (Pvt.) Limited was incorporated in 2001 as a private limited company. The Company is engaged in manufacturing of different types of the cotton ring and open-end yarn. The Company currently operates 19,680 spindles and 840 rotors and has a purpose-built manufacturing facility located in the industrial hub -Nooriabad. The Company is entirely owned by the Ashfaq family, which includes Mr. Haji Ashfaq Ahmed and his wife (20%) and two sons (i) Mr. Khurram Ashfaq (40%) and (ii) Mr. Noman Asahfaq (40%) individually and through their respective families.

The board comprises five directors. All of them belong to the sponsor family. Mr. Ashfaq Ahmed – chairman of the Company – has over 45 years of experience in diverse industries, including textiles. Mr. Khurram Ashfaq – Managing Director – has over 23 years of experience in the textile industry and 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.