The Pakistan Credit Rating Agency Limited
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Iram Shahzadi

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PACRA Maintain Entity Ratings of Denim-E (Pvt.) Limited

Rating Type Entity
(07-Feb-23 )
(07-Feb-22 )
Action Maintain Initial
Long Term BBB- BBB-
Short Term A2 A2
Outlook Stable Stable
Rating Watch - -

The ratings of Denim-E (Pvt.) Limited incorporates progressive growth of the Company in the initial years. The Company is a family-owned business. Apart from this company, the sponsor family is involved in real estate and Biogas businesses. Denim-E is principally engaged in the manufacturing and export of garments/made-up, clothing, knitwear, and the weaving of apparel. The Company’s management is cognizant of the textile industry’s volatility and has planned phase-wise gradation of machinery to remain competitive. Healthy growth has been recorded over the last three years. The Company’s topline has reflected improvement to PKR 2.3bln (FY21: PKR 1.1bln); a result of higher capacity utilization accompanied by better prices. The sales mix represents the contribution from the export market. The Company enjoys a customer base with several export destinations where various retailers are also on board. The net profitability also observed improvement while margins observed slight improvement. Ratings incorporate sound financial risk manifested by significant improvement in coverage YoY. The Company has an adequate financial profile characterized by adequate coverages, low-leveraged capital structure, and improving working capital management. Going forward, the planned CAPEX is expected to bring in efficiency and improve margins.
During 5MFY23, textile exports were valued at $7.44bln compared to $7.76bln, reflecting a 4% dip YoY – the declining trend recorded in the last two months. The fall in export value has mainly come from volumetric decline as prices of almost all categories have either increased or stayed flat. This has taken a fiscal year to date exports into negative with a 1.4% decline in the first four months (July – October) FY23. 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 expected in textile demand amid burgeoning inflationary pressures in the exporting destinations, especially in the US and European countries. The import of raw materials has become a challenge, to manage which is quite essential for continued operations.
The ratings are dependent on the management’s ability to uphold the entity’s growing performance trend. Meanwhile, maintaining strong margins and coverages to fulfill financial obligations will remain critical. The company is expected to adhere to conservative financial discipline, which would be crucial to ratings.

About the Entity
Denim-E (Private) Limited was incorporated on August 13, 2018, as a private limited company. The Company is principally engaged in the manufacturing and export of garments/made-up, clothing, knitwear, and weaving of apparel. The Company has cut to a pack capacity of 6700 Pieces/day which accumulates to 2.4mln pieces annually.

The ownership of the Company rests with the family of Mr. Khalid including his son, and brother. The major shareholding is owned by Mr. Azhar Khalid (67%). The Company has a three-member board with the presence of sponsors and their families. The position of CEO is with Mr. Azhar while the Chairman is Mr. Khalid Farooq. Sponsoring family dominance and the absence of independent oversight indicates room for improvement in the governance framework of the Company.

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.