PACRA Maintains Entity Ratings of Mekotex Limited, Assigns Rating Watch, Outlook ''Negative''

The ratings highlight the Company's strong business profile reflected by growing revenues and profitability in recent years. The ratings incorporate strong business acumen of sponsors, making Mekotex group a vertically integrated textile unit. The Company is a composite unit of textile with diversified products mainly denim & greige fabric. Margins remain in-line with industry averages. The Company has adequately invested in BMR and expansion projects to remain competitive through technological upgrades. This has helped in capturing growing demand in the local market, while export markets are pitched through group businesses – Kam International and Kam Apparel. Overall export volumes of textile industry declined during FY20 owing to COVID-19 outbreak in early 2020 and subsequent lockdowns in major export destinations (Europe & USA). Domestic players had to shut down production or remained partially operational during lockdown in 4QFY20 as per Government directives. Resultantly, the industry is facing challenges including low demand, build-up of inventory and receivables and lower capacity utilization. The situation has improved to an extent as orders are now being delivered and gradual improvement is seen in international markets. However, this could be disrupted by second wave of COVID or prolonged slowdown. Mekotex is no exception to this scenario. The Company exhibited strong results till 3QFY20 but its operations, particularly denim segment, was hit hard in 4QFY20. The revenues of the Company are expected to remain low in 4QFY20, impacting margins and profitability in the short-term. The Company’s financial risk profile is characterized by high leveraging and adequate coverages. The Company availed SBP's moratorium relief and deferred principal repayments for one year. This, coupled with reduction of 625bps in interest rates, will provide relief in cashflows.
The 'Rating Watch' signifies the COVID-19 outbreak and a challenging economic environment. The entire textile chain has been impacted due to the lockdowns across the globe. Although demand is recovering gradually, it remains fragile and the relative timeline and extent of full recovery remains uncertain. The Government and SBP has announced several initiatives to provide support. PACRA will monitor the situation closely and accordingly take action.
The ratings are dependent on the Company’s ability to maintain strong business profile and optimal capacity utilization amidst current circumstances. Meanwhile, careful management of financial obligations during and after the pandemic is imperative. Improvement in reporting mechanism and governance framework would be critical for the ratings.

About the Entity
Mekotex Pvt. Limited was incorporated in 1991. It specializes in denim fabric. In 1993, the Company also started producing fabric for home textile. Currently, the Company specializes in ginning, spinning, weaving: both denim and Greig fabric, processing and digital printing. The Company’s operations are supported by 4 ginning machines, ~110,000 spindles (spinning), 450 looms (weaving), and 5 digital printing machines. Mekotex is a family owned business with majority shares owned by three brothers, Mr. Ashraf Majeed (~30%), Mr. Khalid Majeed (23%) and Mr. Shoaib Majeed (~14%), while rest of the shareholding lies with other family members. The group has diversified itself into energy and water projects.
Mekotex's Board comprises 5 individuals, of which 3 are sponsors. The Company has recently inducted two independent non-executive directors on the Board. The overall management of the Company rests with the CEO, Mr. Khalid Majeed.