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The Pakistan Credit Rating Agency Limited
Press Release

Date
14-Apr-23

Analyst
Sehar Fatima
sehar.fatima@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 the Entity Ratings of Reliance Cotton Spinning Mills Limited

Rating Type Entity
Current
(14-Apr-23 )
Previous
(14-Apr-22 )
Action Maintain Initial
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

The assigned ratings of Reliance Cotton reflect the association of the Company with Sapphire Group and good standalone positioning in the peer universe. The current installed capacity is 57,600 spindles. The Company manufactures a wide variety of premium quality yarn from 6 Ne to 80 Ne (single & double), plied, slubs, mélanges, and blends. Board has seven members, five from sponsoring families and two independent directors. The Company’s management has experienced professionals overseeing the operations of the Company, aided by comprehensive reporting. The Company enjoys an established customer base with several export destinations in Italy, Portugal, Argentine, and Bangladesh along with a renowned local customer base. The sales mix, dominated by direct and indirect exports, display improvement over the years. During FY22, the Company’s revenues stood at PKR 11.3bln (FY21: PKR 7.6bln); this year reflected a significant increase in operating profits and net profitability while maintaining decent margins. In 1HFY23, the topline clocked in at PKR 4.7bln whilst net profitability clocked in at PKR 695mln where margins witnessed slight adjustments owing to rationalization in the demand pattern and prices. The financial matrix reflects an increase in the net working capital cycle, a decline in coverage though remained comfortable, and a moderate capital structure. During 7MFY23, the textile exports were valued at $10.08bln compared to $10.93bln, reflecting an 8% decline YoY – the declining trend has been recorded in the last few months. The decline in exports is driven by attrition in the demand pattern of export avenues. The hike in cotton prices and low demand for yarn in international markets is also a challenge. The analysis of 5MFY23 reveals that among value-added items, bedwear has witnessed the largest decline of 19% (on an MoM basis), down to $217 million. Knitwear remained on the downward path in October 2022 and declined by 10% to $392 million. Among non-value-added items, cotton yarn has shown the largest decline of 35%. Moreover, a slowdown is prevailing in textile demand amid burgeoning inflationary pressures in the exporting destinations, especially in the US and European countries. The demand pattern is expected to improve post-Jun-23.
Ratings incorporate the association of the company with the renowned Sapphire Group which enjoys a distinguishing presence in various sectors. The ratings are dependent upon the management's ability to capitalize on growth opportunities in a competitive landscape, operate at an optimal level and sustain margins.

About the Entity
Reliance Cotton is a listed company, incorporated in 1990 under the umbrella of Sapphire Fibers Limited. The Company is exclusively involved in spinning. It manufactures and exports a wide range of premium quality yarn products.
Associated Sapphire Group companies own ~65% shareholding of the Company. Sponsors directly own ~16% of the shareholding whereas various Modarabas and Mutual Funds own ~13%. The CEO, Mr. Shayan Abdullah, belonging to the sponsoring family, is a foreign graduate and possesses expertise in textiles, and has future-oriented goals for the Company. He is assisted by a professional and 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.