The Pakistan Credit Rating Agency Limited
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Iqra Toqeer

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PACRA Upgrades Entity Rating of Khawaja Tanneries (Private) Limited

Rating Type Entity
(30-Mar-23 )
(30-Mar-22 )
Action Upgrade Initial
Long Term BBB+ BBB
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

Khawaja Tanneries (Pvt.) Limited (‘KTL’ or ‘the Company’) is principally engaged in the manufacturing of a wide range of leathers from the rawhide to the crust and finished stages, both in Cow & Buffalo. The ratings reflect Company’s long-lived presence in tannery industry underpinned by the foundation stone for Mahmood Group – a known industrial & commercial group. Pakistan’s leather industry has seen declining trends in preceding years, however industry performed slightly better this year in all five divisions (tanned leather, apparel, footwear, gloves, & other products). The industry is ~95% export-oriented and accounts for ~3% of total country’s exports. Amongst the exports; leather apparel & gloves contribute the highest followed by tanned leather, footwear, & other products. Pakistan’s leather products enjoy duty free access to the European Union (prime consumer of leather goods globally) under the EU’s Generalized Scheme of Preferences. Lack of technological advancements, skilled labor force, and introduction of low-priced alternatives can hamper the overall growth of this industry. Nevertheless, rising populace, increasing fashion trends, and depreciating exchange rate (for export-oriented sector) are likely to favor market participants. The key opportunities are generically available to the Company if investments are made in terms of offering value-added products. Considering total leather export’s figure of Pakistan, KTL captures ~8.79pc of market share. The Company’s export sales performance is driven by seasonal effect, volatility in global fashion trends, and local industrial developments. Margins of the Company are significantly dependent on improved topline. Further, the Company must build strong capital base. Ownership structure is majorly represented by sponsoring family members. During review period, KTL went go-live with bespoke leather production software ‘Antara’, added high tech European machinery, modernized its dying process, started production of furniture leather, and upgraded its lab with latest equipment. Going forward, the management intends to materialize the envisaged strategies by moving towards high-valued finished leather products. Financial risk profile of the Company is considered adequate with steady coverages, working capital cycle and cash flows. KTL’s capital structure is leverage; encompassed STBs & low equity. Further, implementation of good governance structure is required to ensure compliance at all levels and smooth running of operations.
The ratings are dependent on the KTL’s ability to sustain its position amidst conservative leather business environment and management’s ability for successful strategy execution pertaining to manufacturing of high-fashion finished leather products. With growth in KTL’s revenue; prudent financial performance and effective liquidity profile shall remain imperative.

About the Entity
Khawaja Tanneries (Pvt.) Limited is a private limited concern established in 1935. Mr. Khawaja Muzaffar Mahmood laid the foundation of Mahmood Group by entering into tannery business, twelve years before the establishment of Pakistan. Ever since, the group has evolved as a diversified business empire by serving various industries. KTL has been involved in the manufacturing and sale of tanned leather, both Cow & Buffalo. Recently, the Company has started manufacturing leather shoe; sales constituted to local brands as well as foreign brands.
KTL’s ownership solely lies with the sponsoring family. Mr. Iqbal (Chairman) and Mr. Younas own highest stake ~33.33% and ~33.34% respectively, Mr. Ilyas (CEO) owns ~3.33% stake whereas remaining shareholding is equally distributed between two sons of CEO – Mr. Mehr Ali and Mr. Qasim. Mr. Ilyas (CEO) is associated with KTL for 4+ decades & holds relevant experience. He is assisted by his son (Mr. Mehr Ali) in the business.

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.