PACRA Revises Entity Ratings of Ahmed Hassan Spinning Limited

The assigned rating of Ahmed Hassan Spinning Limited (the Company” or “AHSL”) reflects under the stressed financial risk profile of the Company. The deterioration in the company-specific business fundamentals has diluted the performance matrix and eroded the margins. The projected cotton production estimate is revised and projected to be 12.8mln bales and currently, production reached up to ~10.2mln bales surpassing FY23 total production of 4.91mln bales. During FY23, the company business fundamentals are under stress coupled with the closure of manufacturing facilities for ~five months. The set forth factor behind this closure was a dip in local demand of yarn for indirect export. As per the AHSL management presentation, they resume operations on March ’23. Moreover, in FY23, the floods' detrimental impact on crops caused a significant scarcity of locally produced raw cotton, making it challenging for AHSL to switch to imported cotton due to uncompetitive pricing. These issues primarily led to a pile up in inventory levels and inflated the short-term borrowings requirements to fuel working capital requirements which lead to a magnifying finance cost and consumed profitability matrix of the Company. The management of AHSL is in negotiation with some strategic equity partners to inject equity but this requires time for realization. The sharp increase in the energy cost during the period further strained the bottom line. The financial risk profile of the Company is considered adequate with a moderately leveraged capital structure, and slightly stretched working capital management depicting the industry norm. The cashflows and coverages of the Company are consistently depleting and needs immediate improvement. The company’s performance will be observed in the upcoming quarters with a prime focus on the conversion of operational efficiency into internally generated sufficient cashflows to supplement the core business operation. The downgrade in ratings reflects mainly on the back of depleting equity levels over the years, a steep decline in performance during FY23 and 9MFY24, and resultant losses incurred. During FY24 better local raw cotton yield is expected to supplement the Companies for import substitution. Pakistan's requirement for imported cotton stands at 3.5 million bales to 4 million bales this year. The escalation in energy tariffs & finance costs, PKR devaluation, and ensuring the availability of optimum quality raw materials are prime challenges specific to the industry to assess the international market and stay price-wise competitive.
The ratings are dependent upon the Company’s ability to improve its performance in terms of business fundamentals sustainability and devise a strategy to manage inflated energy costs in the future. The maintenance of capacity utilization at an optimal level while generating sufficient cashflows and coverages remains critical for the ratings. The equity injection from sponsors is set forth for continuity of operations. The governance framework and financial transparency have room for improvement. The adherence to the debt matrix at an adequate level is a prerequisite for the assigned rating.

About the Entity
The Company was incorporated on: 20th October, 2016 under the companies Ordinance 1984 as Ahmed Hassan Spinning Limited. Ahmed Hassan Spinning Limited (“The Company” or “AHSL”) specializes in the manufacturing and export of yarn with an average count of 21/1 CDD with the installed capacity of 28,152 spindles. The Company is family-oriented business therefore the ownership rests with Mian Muhammad Parvaiz (Late) family: Mr. Muhammad Aurangzeb (31%), Mr. Muhammad Jahanzaib (31%), Mrs. Waheeda Parvaiz (28%), Mr. Ahmed Hassan (6%) and Miss Faiza Parvaiz (3%).