PACRA Maintains Entity Ratings of Fazal Cloth Mills Limited

Fazal Cloth Mills Limited (Fazal Cloth) enjoys a strong business profile in otherwise volatile textile industry. This primarily emanates from its large size – yielding economies of scale – established relationships with a diverse customer base and diversity of operations – spinning & weaving. This has helped the entity to sustain its position despite suppressed textile dynamics in previous years. Recent withdrawal of custom duty and sale tax on cotton imports, coupled with subsidized gas rates for textile sector will help industry margins despite high cotton prices. With improved industry dynamics and focused marketing efforts, the Company has been able to capitalize on additional capacities thereby generating incremental volumes, mainly in spinning segment, eventually translating into improved margins. Volumes declined in 1QFY19, however these are expected to normalize in near future. The management is contemplating a gradual entry into value-added segment – dyeing and finishing; once implemented, it 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 Fazal Weaving Mills Limited – a wholly owned subsidiary – 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. Furthermore dividend stream from investment provides comfort to cash flows; this provides flexibility in management of financial affairs.

The ratings are dependent on the company’s ability to yield improvement in margins. Meanwhile, management of financial obligations amid rising interest rates, thereby impacting coverages, is considered important. 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 seven spinning units (199,044 spindles, 3,660 rotors, 912 MVS spindles and 119 doubling machines) and a weaving unit (224 airjet looms). The Company’s majority stakes are owned by Fazal Group and Fatima Group (~45% each). The remaining shareholding rests with financial institutions (~6%) and general public (~4.7%).

The Company’s board comprises seven members, including the Chief Executive Officer (CEO). The board has equal representation (three each) of Fazal Group and Fatima Group, while one director is independent director. The management control vests with Fazal Group. In Nov-18, Mr. Rehman Naseem was appointed as CEO, replacing his father Mr. Sheikh Naseem. He is supported by an experienced management team supplementing his expertise.