Karachi, May 31, 2023 (PPI-OT): VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Al-Karam Textile Mills (Private) Limited at ‘A/A-2’ (Single A/A-Two). Medium to long-term rating of ‘A’ reflects good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. Short-term rating of ‘A-2’ indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small. Outlook on the assigned rating remains ‘Negative’. Previous rating action was announced on May 30, 2022.
Ratings incorporate strong sponsor strength, 40-year track record, vertically integrated operations, diverse product portfolio (including variety of yarn, home textiles, institutional textiles and garments), established clientele of major global retail brands, and a sound retail presence in local market through 52 Al-Karam Studio outlets spread nationwide. Ratings also reflect positive aspects of increased production capacity, new spinning unit under construction, strong revenue growth and improved profitability margin. However, no notable improvement in gearing as envisaged earlier by management, declining debt servicing coverage, elevated stress on working capital cycle and lagging margins and liquidity metrics compared to similarly-rated peers adds to financial risk profile and thus, negative rating outlook has been maintained. In addition, improvements in overall governance and IT infrastructure have been duly noted.
Exports and local sales had an average split of 75:25. Home textiles categorized as either woven or knit made-ups make up the entire export sales, with bedding, curtains, and bedsheets being the major products. Yarn is traded locally, while fabric and garments are sold through a retail brand. Moreover, demand slowdown in knit segment led to a shift towards woven made-ups during the review period.
Sales mix features concentration as more than four-fifths of exports go to US and Sweden, while top ten clients consistently generate over three-fifths of total sales on a timeline, led by IKEA, Walmart and Target; albeit comfort is drawn from long-standing relationship with these reputed international brands. For capacity enhancement, a spinning facility featuring 30,000 spindles is being established in Nooriabad, with building construction currently underway. Machinery was imported in 2021 and funded through a TERF facility, with a repayment term of 10 years. Total project cost went up by ~22% from the initial estimate due to escalating construction and material expenses. The project is scheduled to go live by July’23.
Business risk profile takes into account industry wide growth in exports in FY22; however, recent floods across the country, high interest rate situation, inflationary pressures, higher electricity costs and demand slow down in the current fiscal year pose risks on the sector over the medium term. Ratings are constrained by current weak macroeconomic environment globally and locally. Going forward, improvement in financial performance metrics specifically liquidity and leverage is important for sustenance of ratings.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
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