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PACRA Maintains Entity Ratings of Shahzad Textile Mills Limited – Assigns Rating Watch

Rating Type Entity
(11-Apr-23 )
(13-Apr-22 )
Action Maintain Upgrade
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch Yes -

Shahzad Textile Mills Limited is a public listed company that is engaged in the manufacturing of yarn and socks. The specifications include ring-spun yarn, synthetic blended yarns, and a wide range of socks. The Company is a sister concern of Sargodha Jute Mills and has a history of more than four decades. The Company’s management involves experienced professionals looking after the operations of the Company. Over the last few years, the business profile has strengthened manifold. The Company has successfully achieved diversification in the value-added segment of socks. During FY22, the Company’s net profit increased to PKR 377mln (FY21: PKR 306mln). However, afterward, the Company’s performance witnessed significant dilution. This was due to multiple factors, chief among them was the impact of a volumetric decline in exports and cotton price adjustment amidst inflation in the economy and sizable depreciation of the Pak Rupee. Furthermore, floods’ impact on crops resulted in a shortage of raw materials locally produced. This issue along with the price adjustment resulted in high raw material costs. During 6MFY23, the topline declined by ~17% as compared to its corresponding period last year. Whereas, the overall cost structure of the company reflected an increase. Consequently, the bottom line reflected a loss of PKR 77mln. Therefore, the margins of the company have reflected a declining trend. Moreover, the financial matrix reveals moderate leveraging, weakened coverages, and stretched working capital cycle. The Rating Watch incorporates the decline in performance, and resultant losses incurred. During 7MFY23, the textile exports were valued at $10.08bln compared to $10.93bln, reflecting an 8% decline YoY – the declining trend has been recorded in the last few months. The decline in exports is driven by attrition in the demand pattern of export avenues. The hike in cotton prices and low demand for yarn in international markets is also a challenge. The analysis of 5MFY23 reveals that among value-added items, bedwear has witnessed the largest decline of 19% (on an MoM basis), down to $217 million. Knitwear remained on the downward path in October 2022 and declined by 10% to $392 million. Among non-value-added items, cotton yarn has shown the largest decline of 35%. Moreover, a slowdown is prevailing in textile demand amid burgeoning inflationary pressures in the exporting destinations, especially in the US and European countries. The demand pattern is expected to improve post-Jun-23.
The ratings are dependent upon the management's ability to improve the margins, profitability, and financial profile of the company. This includes avoiding any asset-liability mismatch that may arise and effectively managing its position in a competitive segment. Any deterioration in debt coverages leading to higher financial risk or subdued profitability will have a negative impact on ratings.

About the Entity
Shahzad Textile Mills commenced its operations in 1981 as a public limited company. Mr. Imran Aslam (CEO) along with other family members collectively own the majority (74.8%) shares of the Company. The remaining shareholding of the Company is held by Corporates (4.8%) and institutions (20.4%). Shahzad Textile is in the business of manufacturing ring-spun cotton and synthetic blended yarns, with a total installed capacity of 63,648 spindles and 194 knitting machines. The board of the Company consists of seven members, out of which four are executive, one non-executive, and two independent directors. Mr. Imran Aslam is looking after the Company’s operations for three decades as CEO and 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.