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The Pakistan Credit Rating Agency Limited
Press Release

Date
29-Jun-17

Analyst
Ayesha Qasim
ayesha.qasim@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 Entity Ratings of Fazal Cloth Mills Limited

Rating Type Entity
Current
(29-Jun-17 )
Previous
(08-Sep-16 )
Action Maintain Maintain
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

The ratings reflect established business profile emanating from sizeable revenue base and adequate margins. This has helped the entity to sustain its position despite suppressed textile dynamics exerting pressure on prices. With focused marketing efforts, the company has been able to capitalize on additional capacities thereby generating incremental volumes, mainly in spinning segment. Going forward, the management expects improved margins on account of (i) saving in power cost given regular supply of RLNG to industry players, and (ii) better production forecast of cotton crop. Recently completed BMR activity would bring efficiencies. The management is contemplating a gradual entry into value-added segment - dyeing and finishing; once implemented, the decision is likely to further strengthen business risk profile of the entity. Fazal Cloth's financial risk assessment encompasses irrevocable and unconditional inter-corporate debt guarantee provided to wholly owned subsidiary - Fazal Weaving Mills Limited - with fall back on Fazal Cloth's cash flows. Nevertheless, overall financial profile is considered adequate. Although coverages are low, the company's designed financial strategy keeps sizeable cushion in short-term borrowing lines to meet shortfalls in operational cash flows in servicing debt obligations; this provides flexibility in management of financial affairs.

The ratings are dependent on the company's ability to sustain margins. Meanwhile, management of debt (current and planned), thereby impacting coverages, is considered important. Envisaged improvement in business and financial profile along with effective changes in governance framework would be rating positive.

About the Entity
Fazal Cloth, a listed concern incorporated in 1966, is engaged in the manufacturing and marketing of yarn and fabric. The company operates with 190,392 spindles, 224 air jet looms, and 2,220 open-end rotors. The company is majority owned by Fazal Group and Fatima Group (~45% each). In addition to textile, Fazal group has interest in Fertilizer, Energy and Real Estate sectors.

The BoD comprises seven members with equal representation from both the shareholding groups, along with an independent director. The management control vests with Fazal Group. Involvement of Sheikh Naseem - the CEO, is limited as Mr. Rehman Naseem - the Chairman - primarily manages the company's affairs. Mr. Rehman is supported by an 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.