H.A.R Fibres (Pvt.) Limited

CREDIT RATING REPORT | Mar-25

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
28-Mar-25 BBB- A2 Stable Maintain -
29-Mar-24 BBB- A2 Stable Maintain -
29-Mar-23 BBB- A2 Stable Initial -
About the Entity

H.A.R Fibres (Pvt) Limited ('H.A.R Fibres' or 'the Company') was established in 2018. The Company is engaged in the manufacture and sale of yarn and operates a single spinning unit with ~20,000 spindles. Mr. Shahid Mehmood Sheikh owns a ~40% shares of the Company. While the remaining stake is equally divided among his sons: Mr. Haroon Shahid, Mr. Faizan Shahid & Mr. Adan Shahid. The Board is chaired by Mr. Shahid Mehmood Sheikh. Mr. Shahid is also the Chief Executive Officer (CEO) of the Company and is assisted by an experienced team.

Rating Rationale

Pakistan’s spinning sector comprises ~368 spinning units consisting of ~13.4mln spindles. Cotton production increased by ~70.9% YoY in FY24, recorded at ~8.4mln bales (FY23: ~4.9mln bales) owing to an increase in the area under cultivation, a better quality of pest-resilient seeds, favorable weather conditions, and attractive fixation of the intervention price of cotton. As a result, cotton imports drop significantly to ~1.2mln bales (FY23: ~4mln bales). The spinning sector in Pakistan is likely to face challenges in FY25 due to rising costs, high energy tariffs, and limited competitiveness. Despite economic recovery, profitability margins are under pressure, and reliance on imports is expected to grow.
The ratings of H.A.R Fibres (Pvt) Limited ('H.A.R Fibres' or 'the Company') incorporate the Company's adequate position within the spinning segment of the textile industry. With a spindle count of ~20,000, the Company produces carded yarn in three blends - Cotton, Polyester cotton, and Viscose (Coarse: 4s – 30s). The Company sources ~80% of its raw material, including polyester, viscose, and lyocell, from China, Thailand, and Indonesia, while the remaining is procured locally from Sindh and Punjab. During FY24, the Company posted a value-driven uptick of ~34% in revenue. However, the Company faces risks due to its reliance on a single segment and higher customer concentration. On a comparative basis, business margins remain on the lower side. However, regular BMR to improve efficiency would improve margins going forward. On the financial risk front, the liquidity profile benefits from moderate coverage. Additionally, the Company's capital structure is moderately leveraged, with Sponsors injecting ~PKR 90mln as equity during the period, increasing shareholders equity to ~PKR 585mln. However, the borrowing cushion has been reduced. Moreover, the Sponsor's acumen to manage through challenging times bodes well for the ratings. Going forward, the Company's ability to diversify its customer base, enhance margins through efficiency improvements, and maintain a stable financial risk profile will be critical for sustained growth. This, along with streamlining the Company's governance framework, would benefit the decision-making process and, in turn, the overall performance of H.A.R Fibres.

Key Rating Drivers

The ratings depend upon the management’s ability to improve margins, profitability, and the Company's financial profile. This includes keeping the debt levels manageable and improving the Company's business profile. Improvement in the governance framework remains important for the ratings.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

H.A.R Fibres (Pvt.) Limited

rating analysis

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Profile
Legal Structure

H.A.R Fibres (Private) Limited (‘H.A.R Fibres’ or ‘the Company’) was incorporated in Jun-18 under the Companies Act, 2017. 


Background

The Company is a venture of the Shahid Family that holds interests in yarn trading in Faisalabad. The Company is a part of H.A.R Group, with H.A.R Textile Mills (Pvt.) Limited is the other group company, which has been operational since 1958.


Operations

H.A.R Fibres specializes in yarn manufacturing and distribution, headquartered near Faisalabad's Clock Tower. Its manufacturing plant is located in Mohalla Mughalpura, Naya Lahore, and houses approximately 20,000 spindles, ensuring operational efficiency and accessibility to key resources and markets.


Ownership
Ownership Structure

Mr. Shahid Mehmood Sheikh possesses ~40% stake in the Company. The remaining ownership is distributed among his sons: Mr. Haroon Shahid (~20%), Mr. Faizan Shahid (~20%), and Mr. Adan Shahid (~20%).


Stability

The Company inherits the technical and business expertise from the first generation to the second generation of the Shahid family, combining the guidance and knowledge of the founders with the new generation. However, a formal succession plan requires to be documented.


Business Acumen

The sponsoring family is interested in textiles and investing in the real estate sector. The sponsors have vast experience and knowledge of various aspects of the textile value chain and have witnessed many businesses over a span of more than four decades.


Financial Strength

Sponsors hold considerable financial footing to support the Company, if needs be, going forward.


Governance
Board Structure

The four-member Board of Directors (BoD) is dominated by the Sponsoring family and comprises an Executive Director and three Non-Executive Directors. The BoD's decision-making process can be strengthened by the inclusion of an Independent director. 


Members’ Profile

Mr. Shahid Mehmood Sheikh, the BoDs Chairman and Chief Executive Officer (CEO), has been in the yarn trading business for the last 46 years and enjoys a good reputation in the business community. Mr. Haroon Shahid, Non-Executive Director, has an overall experience of more than two decades in yarn manufacturing and trading and has been associated with the Company for 5 years. All other Board members are qualified in different disciplines and have ample experience in textile and other industries.


Board Effectiveness

The absence of a structured system for recording BoD minutes highlights a need for improvement in the overall governance framework. Moreover, there is a lack of BoD committees to facilitate the decision-making process. 


Financial Transparency

Zahid Jamil & Co., the Company's external auditors, is a QCR-rated firm with a listing under category "B" by the State Bank of Pakistan. They have provided an unqualified opinion on the Company's financial statements for FY24.


Management
Organizational Structure

The Company's organizational framework comprises three primary departments: i) Finance, Admin & Marketing, ii) Purchase, and iii) Production. Each department is headed by a respective head, who reports to the Executive Directors, who reports to the CEO. The CEO makes the pertinent decisions and is considered the man at the last mile.


Management Team

Mr. Shahid Mehmood Sheikh holds the position of CEO. He has been in the yarn trading business for the last 46 years and enjoys a good reputation in the business community. Mr. Ejaz Ali, the CFO, has more than three decades of experience and has been associated with the Company for five years. They are assisted by a team of professionals. 


Effectiveness

The Company has no management committees. The Sponsor's close involvement in day-to-day business affairs bodes well for the effectiveness of the Company.


MIS

The Company has built an in-house oracle to cater to the business needs. The senior management monitors the business performance through certain Key MIS reports.


Control Environment

Production is completely order driven, and the QC department conducts a rigorous quality check on the end product. The Company has obtained ISO 9001 certification.


Business Risk
Industry Dynamics

Pakistan’s spinning sector comprises ~368 spinning units consisting of ~13.4mln spindles. Cotton production increased by ~70.9% YoY in FY24, recorded at ~8.4mln bales (FY23: ~4.9mln bales) owing to an increase in the area under cultivation, a better quality of pest-resilient seeds, favorable weather conditions, and attractive fixation of the intervention price of cotton. As a result, cotton imports drop significantly to ~1.2mln bales (FY23: ~4mln bales). The spinning sector in Pakistan is likely to face challenges in FY25 due to rising costs, high energy tariffs, and limited competitiveness. Despite economic recovery, profitability margins are under pressure, and reliance on imports is expected to grow.


Relative Position

With its operational spindle count of 20,000, H.A.R Fibers is categorized as a relatively small player in Pakistan's spinning sector.


Revenues

During FY24, the Company witnessed a value-driven uptick of 34% in its revenue, reported at ~PKR 930mln (FY23: ~PKR 693mln). The Company lacks a brand-specific customer base and distributes its entire output in Faisalabad through sales brokers. H.A.R Fibres faces a notable customer concentration risk, relying solely on local yarn sales. Going forward, revenue is expected to increase due to the country's improved economic conditions.


Margins

During FY24, the cost of goods sold increased in line with an increase in revenue and was reported at ~PKR 830mln (FY23: ~PKR 632mln), resulting in a gross profit of ~PKR 101mln (FY23: ~PKR 61mln) with gross margin reported at ~10.8% (FY23: ~8.7%). Net profit was reported at ~PKR 3mln (FY23: ~PKR 24mln) due to tax expense of ~PKR 37mln (FY23: ~PKR 2mln), resulting in a net profit margin of ~0.3% (FY23: ~3.4%). Going forward, margins are expected to improve due to a decrease in policy rate and the Company's gradual shift towards solar energy.


Sustainability

Going forward, in line with the improving business environment, the Company plans to start a BMR, which will add 1,000 rotors to existing capacity. The total cost of CAPEX is estimated to be ~PKR 100mln, which will entirely be funded from equity. BMR is expected to bring in efficiency gains, lower costs per spindle, and consequently improve margins. However, timley and successful materialization of the same remain imperative.


Financial Risk
Working capital

As of FY24, increased demand reduced inventory turnover days to ~467 days (FY23: ~488 days). Trade receivable days reduced to ~31 days (FY23: ~65 days), demonstrating the Company’s ability to collect customer payments. Trade payables days reduced slightly to ~199 days (FY23: ~207 days), demonstrating a moderate position of the Company to negotiate credit from suppliers. The combined impact of decreased inventory days, trade receivable days, and trade payable days resulted in a net working capital cycle of ~300 days (FY23: ~346 days). The borrowing cushion of the Company remains moderate. 


Coverages

As of FY24, the Company’s Free Cash Flow from Operations (FCFO) was reported at ~PKR 90mln (FY23: ~PKR 38mln), a substantial uptick of ~137% due to an increase in profit before tax reported at ~PKR 40mln (FY23: ~26mln). Finance cost remained stable at ~PKR 4mln (FY23: ~PKR 4mln). The increased FCFO with stable finance cost resulted in an FCFO/Finance Cost coverage of ~23.1x (FY23: ~8.4x). Going forward, coverages are expected to improve with declining finance costs. 


Capitalization

As of FY24, the Company reported a decline in total borrowings by ~3.5%, reported at ~PKR 221mln (FY23: ~PKR 229mln), primarily due to a decrease in long-term borrowings reported at ~PKR 40mln (FY23: ~PKR 60mln). Shareholders’ equity increased by ~19%, reported at ~PKR 585mln (FY23: ~PKR 492mln), resulting in an improvement in the Company’s leverage reported at ~27.4% (FY23: ~31.8%).
 
 

Mar-25

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H.A.R Fibres (Pvt.) Limited

financial summary

(PKR mln)

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Jun-24
12M		 Jun-23
12M		 Jun-22
12M
A. BALANCE SHEET
1. Non-Current Assets 399 383 211
2. Investments 0 0 0
3. Related Party Exposure 0 0 0
4. Current Assets 1,792 1,461 825
a. Inventories 1,326 1,056 469
b. Trade Receivables 84 76 170
5. Total Assets 2,192 1,844 1,036
6. Current Liabilities 1,354 1,117 410
a. Trade Payables 507 507 280
7. Borrowings 166 170 134
8. Related Party Exposure 55 59 96
9. Non-Current Liabilities 31 6 12
10. Net Assets 585 492 383
11. Shareholders' Equity 585 492 383
B. INCOME STATEMENT
1. Sales 930 693 1,438
a. Cost of Good Sold (830) (632) (1,318)
2. Gross Profit 101 61 120
a. Operating Expenses (34) (30) (44)
3. Operating Profit 66 30 77
a. Non Operating Income or (Expense) (14) 18 (14)
4. Profit or (Loss) before Interest and Tax 53 48 63
a. Total Finance Cost (13) (22) (2)
b. Taxation (37) (2) (17)
6. Net Income Or (Loss) 3 24 43
C. CASH FLOW STATEMENT
a. Free Cash Flows from Operations (FCFO) 90 38 79
b. Net Cash from Operating Activities before Working Capital Changes 78 16 77
c. Changes in Working Capital (152) 76 (136)
1. Net Cash provided by Operating Activities (74) 92 (59)
2. Net Cash (Used in) or Available From Investing Activities (45) (197) (7)
3. Net Cash (Used in) or Available From Financing Activities 70 103 102
4. Net Cash generated or (Used) during the period (50) (2) 36
D. RATIO ANALYSIS
1. Performance
a. Sales Growth (for the period) 34.3% -51.8% 44.6%
b. Gross Profit Margin 10.8% 8.7% 8.4%
c. Net Profit Margin 0.3% 3.4% 3.0%
d. Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) -6.7% 16.4% -4.0%
e. Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Shareholders' Equity )] 0.5% 5.4% 12.0%
2. Working Capital Management
a. Gross Working Capital (Average Days) 499 553 131
b. Net Working Capital (Average Days) 300 346 72
c. Current Ratio (Current Assets / Current Liabilities) 1.3 1.3 2.0
3. Coverages
a. EBITDA / Finance Cost 24.6 12.6 1012.4
b. FCFO / Finance Cost+CMLTB+Excess STB 1.0 0.5 2.4
c. Debt Payback (Total Borrowings+Excess STB) / (FCFO-Finance Cost) 2.1 5.7 2.6
4. Capital Structure
a. Total Borrowings / (Total Borrowings+Shareholders' Equity) 27.4% 31.8% 37.6%
b. Interest or Markup Payable (Days) 0.0 0.0 0.0
c. Entity Average Borrowing Rate 1.4% 1.2% 0.1%

Mar-25

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H.A.R Fibres (Pvt.) Limited

rating scale

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Mar-25

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H.A.R Fibres (Pvt.) Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
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    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
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    2. PACRA uses due care in the preparation of this Rating Report. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA does not, in every instance, independently verify or validate information received in the rating process or in preparing this Rating Report. (Clause 11-(A)(p))
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    3. PACRA discloses that no shareholder directly or indirectly holding 10% or more of the share capital of PACRA also holds directly or indirectly 10% or more of the share capital of the entity which is subject to rating or the entity which issued the instrument subject to rating by PACRA. (Chapter III; 12-2-(f))
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  6. Probability of Default
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Mar-25

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