Muhammad Harris Ghaffar
PACRA Maintains Entity Ratings of A.J. Textile Mills Limited
The AJ Textile Mills Limited (“the Company” or “ATML”) rating emanates from the moderate profile of the Company in the spinning sector of Pakistan. The rating takes comfort from ATML sponsoring group which is Aziz group ,– one of the oldest conglomerates, with business ventures in Textile (Yarn Production); FMCG (Match Manufacturing), Laminated Boards, MDF and Particles Chip Board Production. Seven Companies primarily operate under the umbrella of the Aziz group which includes i) AJ Textile Mills Limited, ii) Mohsin Match Factory (Pvt) Limited, iii) AJ Match (Pvt) Limited, iv) Premier Formica Industries Limited, v) Premier Chipboard (Pvt) Limited, and vi) Premier MDF (Pvt) Limited; along with an Ice factory by the name of Aziz Ice Factory and Cold Storage. The primary operational activity of the company involves the manufacturing and sale of yarn, and it has a production capacity of 112,544 spindles. The Companies dedicated to spinning only have an inherent risk of 100% single product concentration and dependency on a sole raw material, primarily raw cotton. This situation can lead to potential vulnerabilities in the supply chain if the supply side disrupts. As of FY24, the raw cotton production target is estimated to be at 12.80mln bales and the cotton yield is expected to ameliorate this year to supplement local production demand in comparison to last year when a substantial portion of Pakistan had a detrimental impact on cotton crops, potentially posing a barrier to local raw material availability and experience a 55% shortfall in its targeted production of domestic cotton. Availability of electricity at subsidized rates, the surge in tax burden, and massive PKR devaluation are other challenges specific to the industry. The Company has executed a CAPEX to serve its two prime purposes; (i) the installation of 8 8-megawatt solar plant for energy cost optimization and (ii) BMR for the upgradation of spindles to the latest available technology. During FY23, the company experienced an 8.8% growth in its revenue, reaching PKR 12.2bln compared to PKR 11.2bln in FY22. This growth was attributed to higher yarn prices in both domestic and international markets as compared to the same period in the previous year. The sales mix is dominated by local sales with an adequate share of exports. The Company plans to procure 100.0% of the raw cotton locally to mitigate foreign exchange risk During the period under review, the elevated cost of production, the surge in energy cost, and the magnifying interest burden have caused a dip in the margins and profitability matrix of the Company. The financial risk profile is considered moderate as the improvement in short-term trade leverage has augmented the working capital management of the Company. The cash flows of the Company are considered moderate accompanied by adequate coverages. The retention of earnings in the form of accumulated profits has supplemented the equity base of the Company. Capital structure is leveraged where borrowings are comprised of long-term (TERF) for BMR and short-term to meet working capital requirements.
The ratings are dependent on management’s ability to sustain its growth in revenues, margins and profitability. Prudent management of the working capital, and maintaining sufficient cash flows and coverages are imperative. Further improvement in governance structure and alignment of the Company's performance with its financial projections remains vital for the ratings.
ATML was incorporated in Pakistan on March 30, 1992, under the repealed Companies Ordinance, 1984 as a public limited unquoted Company. The BOD consists of 04 sponsoring family members. Mr. Mohsin Aziz is the chairman of the board and possesses more than 04 decades of industry-specific experience. Mr. Afan Aziz-son of Mr. Mohsin Aziz is the CEO of the Company.