Reliance Cotton Spinning Mills 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 A- A2 Stable Maintain -
08-Apr-24 A- A2 Stable Maintain -
14-Apr-23 A- A2 Stable Maintain -
14-Apr-22 A- A2 Stable Initial -
About the Entity

Reliance Cotton Spinning Mills Limited ('Reliance Cotton" or 'the Company') was incorporated as a listed company in 1991 under the umbrella of Sapphire Fibers Limited & Mills. The Company started its operations in Jul-92 and is exclusively engaged in the spinning business. The core operations include manufacturing and export of a wide range of premium quality yarn products. A major stake of ~66% is held by the Sponsors - the Sapphire Group through associated companies. Directors hold (~8%) stake, and Financial Institutes and Joint Stock Companies hold (~5%) stake of the Company. While the remaining stake of (~21%) is held by General Public. The Board is chaired by Mr. Shahid Abdullah, while, Mr. Shayan Abdullah serves as the CEO. He is assisted by a team of professionals.

Rating Rationale

Reliance Cotton Spinning Mills Limited ('Reliance Cotton" or 'the Company') holds an adequate position in the spinning segment, on a standalone basis. The Company is known for its superior quality and wide range of yarn products, nationally and internationally. Reliance Cotton's product mix includes 6 Ne to 80 Ne (single & double yarn), plied, slubs, mélanges, and blends. The Company has an installed capacity of ~57,600 spindles and mainly generates revenue from the export (~81%) and local market (~19%). Reliance Cotton enjoys an established customer base with several export destinations in Italy, Portugal, Argentina, and Bangladesh along with renowned local customers. Despite the susceptibility to economic trends, the Company's topline, margins, and in turn profits post stability; however, remain lean. Going forward, the spinning sector in Pakistan seems to remain challenged during CY25 due to rising costs, high energy tariffs, and limited competitiveness. The economic patterns have pose some recovery since Jan-25, yet the profitability margins may remain under pressure. The reliance on imports is expected to grow. The Company holds a supportive business risk profile with a stable cushion from the investment income. Reliance Cotton holds an adequate investment portfolio, ~PKR 1bln as of Dec-24. In Nov-24, Amer Cotton Mills (Pvt.) Ltd., a Group company, has been merged with and into Reliance Cotton. Also, the Company has entered into an agreement with Samsung Electronics Co. Ltd., Korea, and Samsung Gulf Electronics Co., FZE, UAE, through Sapphire Electronics (Pvt.) Ltd. - a wholly owned subsidiary. The agreement is to manufacture and/or assemble Samsung-branded electronic products & home appliances to sell in Pakistan. The envisioned initiatives require time to generate substantial income for the Company and remain imperative. On the financial risk front, the Company holds an adequate working capital cycle. While coverages and capital structure remain strong. Reliance Cotton gathers synergy from its association with Sapphire Group ('the Group'), which holds a strong footing across the textile value chain, retail, dairy, and energy segments. This along with a streamlined governance framework and internal control mechanisms bodes well for the Company.

Key Rating Drivers

Ratings incorporate the association with the Sapphire Group and the management's ability to capitalize on growth opportunities in a competitive landscape. Moreover, operating at an optimal level and sustaining the margins remain important. Sustained capacity utilization while strengthening the business risk profile is crucial for ratings.

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

Reliance Cotton Spinning Mills Limited

rating analysis

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Profile
Legal Structure

Reliance Cotton Spinning Mills Limited (‘Reliance Cotton’ or ‘the Company’) was incorporated in Jul-91 as a public limited company, listed on PSX. The Company's stocks are traded with a symbol of RCML.


Background

In 1970, Sapphire Group ('the Group') entered in the business arena by setting up small textile ventures. Over time, the Group has become a renowned name and an intergrated textile player that has expanded its local and international reach. The Group holds interests in dairy, power generation, and textile and retail segmenrs. The Company was established in 1991 and started production in Jul-92.


Operations

The Company is engaged in the production and selling of high-quality yarn; 6 Ne to 80 Ne (single & double), plied, Slubs, melanges, blends and variety of yarns. The Company has ~57,600 spindles and a production capacity of 36.5mln pounds per annum. The production facilities are located in Sheikhupura, while the head office is located in Lahore.


Ownership
Ownership Structure

Major stake (~66%) in the Company is held by the Group through associated companies and related parties. Directors hold (~8.6%) stake, Financial Institutes and Joint stock Companies hold (~4.5%) stake in the Company. While, the remaining (~20.6%) stake in the Company is held by the General Public.


Stability

The Company's ownership structure is expected to remain stable as the Sponsors are among the well-established investors in Pakistan.


Business Acumen

The Group is one of the largest vertically integrated textiles setups in Pakistan. The Group holds interests in dairy, power generation, and textile and retail segmenrs.


Financial Strength

The Company gathers financial strength from the Group, if needs be. PACRA rates other Group entities aswell, namely: Diamond Fabrics Ltd.(A-/A2), Sapphire Electric Company Ltd.(AA-/A1+), Sapphire Fibres Ltd.(A+/A1), Sapphire Finishing Mills Ltd.(A/A1), and Sapphire Retail Ltd.(A-/A2). 


Governance
Board Structure

Overall control of the Company lies with the seven member Board, comprising one Executive, four Non-Executive, two Independent Directors. The BoD has a dominating presence of sponsoring family with one female Director.


Members’ Profile

The Chairman, Mr. Shahid Abdullah has been associated with the Group since 1980 and has expertise in spinning, weaving, knitting, dyeing, finishing, and power generation. He is the CEO od Sapphire Fibres and Sapphire Electric Company Ltd. Mr. Ameer Abdullah, a Non-Executive Director, is associated with the Group since 1990 and is currently the CEO of Diamond Fabrics and Sapphire Dairies. During the year, 3 BoD members completed Directors Training Program. Other BoD members hold strong and diversified experiences that adds value to policy framework.


Board Effectiveness

The BoD met four times during the year. The BoD meetings have full attendance and minutes are properly recorded. Three subcommittees - Audit Committee, Risk Committee and Human Resource Committee - assists the BoD in relevant decision and policy formation matters. Audit and Human Resource Committees are chaired by an Independent Director. While, the Risk Committee is chaired by the CEO.


Financial Transparency

External Auditors M/S. Shinewing Hameed Chaudhri & Co. Chartered Accountants issued an unqualified audit report on financial statements for FY24. The firm is QCR rated and on SBP's panel in category "A".


Management
Organizational Structure

The Company’s overall operations are managed by eleven key management personnel including the CEO. Three of them are designated as employed Directors. All departemental heads reports reports to the COO, who then reports to the CEO. The CEO reports to the BoD. However, head of internal audit and human resource reports adminstratively to the CEO and functionally to the respective BoD committee.


Management Team

The Company’s CEO, Mr. Shayan Abdullah, is the CEO of the Company for the last ~12 years. Mr. Farrukh Raza Bashir, an Executive Director, possesses 38 years of industry experience. Mr. Jawwad Faisal, Director Finance, is an FCA and possesses ~23 years of experience. They are assisted by an experience management team. 


Effectiveness

The Company lacks prescence of management committees. However, MIS reports relating to daily operations are generated and submitted to senior management for discussion on regular basis. Furthermore, there are regular need-based meetings to proactively manage the affairs.


MIS

The Company has deployed an Oracle-based ERP solution – Oracle E-business suite – for quality information to control and maintain efficient operations. The Company’s monthly MIS comprises comprehensive performance reports which are reviewed frequently by the senior management.


Control Environment

The Company has an outsourced internal audit function to M/S. KPMG Taseer Hadi & Co., who coordinates and reports to the Board Audit Committee (BAC). The Company has set up effective mechanisms for identifying, assessing, and reporting all types of risks arising from the business operations. These risks include strategic, operational, financial, or compliance risks, which may compromise achieving the Group's overall business objectives.


Business Risk
Industry Dynamics

Pakistan’s yarn production declined by ~8.1% to ~2.5mln MT, while, export volumes showcased growth of ~25.6%, valuing ~USD 956mln (PKR 272bln), due to PKR depreciation during FY24. Economic recession and floods affected the cotton crop, depleting raw material availability and leading to higher yarn prices. However, during FY25, it's estimated that better quality and increased quantum of local cotton may supplement import substitution. However, the uplift of subsidized rates on energy tariffs, surge in tax burden, and PKR fluctuation remain a serious concern for the industry. Thus, placing the industry's outlook on a watch


Relative Position

The Group holds strong presence in the country’s textile sector, while Reliance Cotton with 57,600 spindles acquires a position in the middle tier players of the spinning segment.


Revenues

The Company manufactures and sells a wide range of yarn. During FY24, the Company’s topline increased by ~32% (FY24: ~PKR 14.6bln, FY23: ~PKR 11bln), primarily driven by increased export sales. While, local sales also posted a favorable trend. Moreover, better pricing and imporved volumes benefitted the overall performance. During 6MFY25, the Company generated a topline of ~PKR 8.3bln, posting a growth of ~24%. Going forward, the revenue stream is expected to grow and enhance operational efficiencies.


Margins

During FY24, the gross profit margin increased to ~16.2% (FY23: 15.4%) owing to increase in prices. Operating profit margin of the Company posted a better trend and stood at ~13.6% (FY23: ~12.2%). Net profit margin stood at ~8.1% (FY23: ~7.6%). During 6MFY25, the Company generated a GP margin of ~16.5%. Going forward, the recent reduction in the policy rate is expected to positively impact the Company’s overall margins.


Sustainability

The Group has a well-established mark in the textile segment. Reliance Cotton has to strengthen its footprint along with a capacity expansion that streamlines the conversion costs. The Company must instill flexible plans to overcome operational challenges. However, regular BMR in the spinning and weaving segments during FY24 are likely to have a positive impact on productivity, going forward.


Financial Risk
Working capital

Working capital requirements are met by combination of internal generation and bank borrowings. Net working capital days reduced and stood at 179days (FY23: 218days), owing to decreased inventory days. Inventory days stood at 144days (FY23: 180days). Trade payable days stood at 14days (FY23: 25days). Trade receivables days stood at 48days (FY23: 63days). As of 6MFY25, the Company's working capital cycle stands at 166days (6MFY24: 207days). The Company holds substantial borrowing cushion on its balance sheet.


Coverages

Interest cover is a function of free cash flows and finance cost. As of FY24, the Company reported an FCFO of ~PKR 2.1bln (FY23: ~1.4bln) attributed to profits. Finance costs increased due to higher interest rates leading to reduced interest cover to 2.8x as of FY24 (FY23: 4.4x), reflecting the Company's adequate capacity to fulfill its short-term obligations. As of 6MFY25, the Company debt cover stood at 3.6x (6MFY24: 3x). Going forward, the management requires to further boost its cash flows to manage the overall operations


Capitalization

As of FY24, the Company's debt-to-equity ratio stood at ~29.8% (FY23: ~37.9%). Total borrowings decreased to ~PKR 3.4bln for FY24 (FY23: ~PKR 4.3bln) due to reduceed short-term borrowings (STBs) of ~PKR 1.5bln (FY23: ~PKR 2.3bln). Total equity improved to ~PKR 8.2bln (FY23: ~PKR 7bln), attributable to higher profit retention. As of 6MFY25, the Company's debt to equity ratio stood at ~39.2%. The Company has lately transfered ~PKR 6.5bln to capital reserve to manage investment portfolio. The Company must sustain its capital structure, going forward.
 
 

Mar-25

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Reliance Cotton Spinning Mills Limited

financial summary

(PKR mln)

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Dec-24
6M		 Jun-24
12M		 Jun-23
12M		 Jun-22
12M
Management Audited Audited Audited
A. BALANCE SHEET
1. Non-Current Assets 6,837 4,230 3,600 3,250
2. Investments 256 24 14 53
3. Related Party Exposure 1,074 716 518 92
4. Current Assets 9,791 8,228 9,251 7,551
a. Inventories 6,287 5,339 6,203 4,706
b. Trade Receivables 2,277 1,876 2,013 1,783
5. Total Assets 17,958 13,198 13,384 10,946
6. Current Liabilities 2,548 1,287 1,911 1,658
a. Trade Payables 423 204 891 630
7. Borrowings 5,892 3,474 4,297 2,888
8. Related Party Exposure 0 0 0 0
9. Non-Current Liabilities 396 266 142 113
10. Net Assets 9,122 8,170 7,034 6,287
11. Shareholders' Equity 9,122 8,170 7,034 6,287
B. INCOME STATEMENT
1. Sales 8,319 14,646 11,049 11,386
a. Cost of Good Sold (6,943) (12,278) (9,343) (7,680)
2. Gross Profit 1,376 2,367 1,705 3,707
a. Operating Expenses (329) (370) (354) (336)
3. Operating Profit 1,047 1,997 1,352 3,371
a. Non Operating Income or (Expense) 27 93 4 (199)
4. Profit or (Loss) before Interest and Tax 1,074 2,090 1,355 3,172
a. Total Finance Cost (376) (786) (351) (237)
b. Taxation (219) (119) (166) (171)
6. Net Income Or (Loss) 480 1,185 839 2,764
C. CASH FLOW STATEMENT
a. Free Cash Flows from Operations (FCFO) 1,343 2,134 1,423 3,033
b. Net Cash from Operating Activities before Working Capital Changes 882 1,322 1,126 2,815
c. Changes in Working Capital 846 911 (1,209) (2,332)
1. Net Cash provided by Operating Activities 1,729 2,232 (83) 483
2. Net Cash (Used in) or Available From Investing Activities (487) (688) (1,076) (1,301)
3. Net Cash (Used in) or Available From Financing Activities (1,232) (1,104) 1,329 830
4. Net Cash generated or (Used) during the period 10 440 170 12
D. RATIO ANALYSIS
1. Performance
a. Sales Growth (for the period) 13.6% 32.6% -3.0% 0.0%
b. Gross Profit Margin 16.5% 16.2% 15.4% 32.6%
c. Net Profit Margin 5.8% 8.1% 7.6% 24.3%
d. Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) 26.3% 20.8% 1.9% 6.2%
e. Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Shareholders' Equity )] 11.1% 15.6% 12.6% 44.0%
2. Working Capital Management
a. Gross Working Capital (Average Days) 173 192 243 208
b. Net Working Capital (Average Days) 166 179 218 188
c. Current Ratio (Current Assets / Current Liabilities) 3.8 6.4 4.8 4.6
3. Coverages
a. EBITDA / Finance Cost 3.9 3.2 5.2 16.7
b. FCFO / Finance Cost+CMLTB+Excess STB 1.9 1.9 2.2 7.1
c. Debt Payback (Total Borrowings+Excess STB) / (FCFO-Finance Cost) 1.7 1.4 1.8 0.7
4. Capital Structure
a. Total Borrowings / (Total Borrowings+Shareholders' Equity) 39.2% 29.8% 37.9% 31.5%
b. Interest or Markup Payable (Days) 52.2 26.6 106.8 73.1
c. Entity Average Borrowing Rate 16.0% 16.3% 9.2% 7.2%

Mar-25

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Reliance Cotton Spinning Mills Limited

rating scale

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Mar-25

www.pacra.com

Reliance Cotton Spinning Mills 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.
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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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  6. Probability of Default
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Mar-25

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