The Pakistan Credit Rating Agency Limited
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Sehar Fatima

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PACRA Maintains the Entity Ratings of Fazal Cloth Mills Limited

Rating Type Entity
(07-Sep-23 )
(07-Sep-22 )
Action Maintain Upgrade
Long Term A A
Short Term A1 A1
Outlook Stable Stable
Rating Watch - -

Fazal Group is one of the oldest textile houses in Pakistan and Fazal Cloth Mills Limited is the flagship company of the Group. The company enjoys a strong business profile as one of the leading producers of yarn and fabric. The spinning product portfolio comprises specialized varieties including, multi-count/multi-twist, double, and zero twist yarns along with Organic, Supima, Lycra, Giza, and USA cotton yarns. Whereas, the weaving product portfolio comprises greige fabric. The yarn has the lion’s share in the top line of the company. The Company's large size yielding economies of scale, diverse customer base, and broad product portfolio in spinning and weaving segments provide a competitive advantage. Over the years, the Company has been able to capitalize on additional capacities thereby generating incremental volumes, mainly in the spinning segment, eventually translating to improved margins and profitability in the recent year. During 9MFY23, the revenue increased to PKR 56.6bln (9MFY22: PKR 47.6bln). The share of the export sales declined to 11% (9MFY22: 33%). The company’s major export base is in Europe followed by the U.S. and Asia Pacific. Whereas, the bottom line decreased to PKR 533mln (9MFY22: PKR 4.8bln) due to the increase in the overall cost structure. In recent quarters, higher costs of raw materials consumed, surging other costs mainly comprising exchange losses along with a sizable increase in finance costs have affected the net profitability. Margins reflected attrition YoY. Moreover, the financial matrix reveals moderate leveraging, a decline in coverage YoY, and a relatively stretched working capital cycle. The management aims to improve the financial performance of the company in the upcoming quarters for which a strategy has been formulated comprising efficient procurement of raw materials and enhancing the export penetration. Moreover, the management is confident that the company’s capacity utilization levels shall remain healthy. Further, management’s view included comfort driven from the large established export base of the Company. During FY23, textile exports were valued at $16.5 billion compared to $19.33 billion, reflecting a dip of 15% YoY – the declining trend has been witnessed by the start of FY23. The exports tumbled attributable to high energy costs, shortage of cotton, and uncertainty in the foreign exchange rate. The suppressed demand pattern exhibited by export avenues was also a challenge. During FY23, value-added products such as knitwear, bedwear, towels, and ready-made garments witnessed a decline of 13% YoY. The basic textiles including raw cotton, cotton yarn, and cotton cloth posted a drop of 21% YoY.
The ratings are dependent on the company’s ability to maintain a strong business profile amidst current circumstances. The sustainability of relative position along with improved margins and profitability will remain vital.

About the Entity
Fazal Cloth Mills Limited, a listed concern incorporated in 1966, is engaged in the manufacturing of yarn and fabric. The Company operates with eight spinning units (274,524 spindles, 8,820 open-end rotors, 1,752 MVS spindles/rotors, and 119 doubling machines) and a weaving unit (224 air jet looms). The Company’s majority stakes are owned by Fazal Group and Fatima Group (44.6% each). The remaining shareholding rests with financial institutions (6.8%) and the general public (4%). Herein “Group means members of the family without reference to any law of Pakistan”. The Company’s board comprises a of total nine members which includes equal representation (three each) of Fazal Group and Fatima Group, while the remaining three are independent directors. The management control vests with Fazal Group. Mr. Rehman Naseem, CEO, heads the management team; and he is supported by experienced team members.

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