The Pakistan Credit Rating Agency Limited
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Muhammad Adil Kaleem

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PACRA Maintains Entity Ratings of Ellcot Spinning Mills Limited

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

Ellcot Spinning Mills Limited, incorporated in 1991 as public limited company, is a part of one of the oldest medium-sized textile group in Pakistan - Nagina Group. The ratings reflect Ellcot Spinning's improving business profile; as evidenced by slight increase in revenue and better margins. The Company largely caters to the needs of local market and it has developed a reputable clientele over the years. The Company has also planned significant BMR over the next couple of years to increase operational efficiencies. Ellcot Spinning's operations came to a halt for an entire week during the last quarter of FY20, as a result of the COVID-19 outbreak and nationwide lockdown imposed. The entire textile chain suffered due to lockdowns in Pakistan and internationally. Production resumed on 7th April, 2020; since the Government allowed export-oriented sector to recommence operations. The Company's financial risk profile is relatively strong, as displayed by healthy coverages and shortening of working capital cycle. Although reduced in 9MFY20; the significantly high leverage remains the only disconcerting factor in otherwise favorable financial risk profile. Furthermore, 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 also provided respite in this regard. Ellcot Spinning's investment portfolio exposes the Company to market risk as exhibited by the portfolio's lackluster performance during 9MFY20; due to pandemic induced volatility in stock market. A decline in investments leading to losses, and eventually equity erosion, will have an impact on the financial profile of the Company. Going forward, the Company plans on carrying out a major BMR in the next financial year; replacing ~25,000 spindles with new ones. Moreover, the demand is beginning to improve prompting price correction by market forces, which is allowing the yarn prices to gradually recuperate; both locally and internationally. Nonetheless, the likelihood of a second wave of pandemic is also lurking around; which is a cause of concern for a few countries around the world, while some other economies have reopened. The assigned ratings derive comfort from Ellcot Spinning’s association with Nagina Group.
The ratings are dependent on the Company’s ability to increase business margins through operational efficiencies and product quality. Meanwhile, any significant deterioration of cashflows culminating in notable impact on the coverages may affect the ratings. Prudent management of investment portfolio is also critical.

About the Entity
Ellcot Spinning is majorly (~58%) owned by Nagina Group, through group companies and sponsoring individuals. The remaining stake rests with financial institutions and general public. Nagina Group is one of the oldest medium-sized textile houses in Pakistan, operating under Ellahi’s for over five decades.

The Company's board comprises of ten members, with Mr. Shahzada Ellahi Shaikh as Chairman of the board. The board includes five non-executive and two executive members – including the CEO, while three directors are independent. In January, 2020, Mr. Haroon Shahzada Ellahi Shaikh replaced his uncle; Mr. Shafqat Ellahi Shaikh as the CEO of Ellcot Spinning Mills Limited. Mr. Haroon Ellahi has eleven years of experience in textile sector, working in non-executive roles on the boards of other group companies.

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.