PACRA Maintains Entity Ratings of Ellcot Spinning Mills Limited

The assigned rating of Ellcot Spinning Mills Limited (“the Company” or “ESML”) reflects the prominent profile of its sponsoring group - Nagina Group, one of the oldest medium-sized textile groups in Pakistan. Three publicly listed Companies primarily operate under the umbrella of the Nagina Group. The Group operates in the spinning sector via Nagina Cotton Mills Limited (NCML) and ESML and in the weaving sector through Prosperity Weaving Mills Limited (PMWL). The rating takes comfort from the consolidated financial strength of the sponsoring group. The Company has achieved capacity utilization of 100.0% with a production capacity of ~16.5mln Kgs. The company's product slate includes pure cotton and polyester cotton. The Company has a total energy requirement of 8.33MW, primarily met through gas generators. ESML has already installed a 1MW solar power plant and is in the process of installing an additional 1.4MW via utilizing conventional borrowings to manage escalated energy cost risk. There is a strategic shift in Nagina group's yarn production strategy by moving from 20/s count to 18/s count yarn production (more coarse yarn count) to meet customers’ demands and it contributed as a set forth factor behind volumetric growth in sales coupled with execution of CAPEX via the installation of ~16,800 new spindles during FY23. During 9MFY24, the Company achieved a topline of PKR 11.4bln (FY23: PKR 12.2bln) with a for-the-period growth of 32%; mainly driven by volumetric impact as shifting towards coarse yarn production has reduced per Kg product price. Exports constitute 15% of the total revenue in 9MFY24. During 9MFY24, approximately 44.0% of local sales were dedicated to the group company, PMWL. The Company's top clientage includes prominent players. The Company recorded a net profitability of PKR 54mln during 9MFY24 (9MFY23: 335mln). The margins of the Company have been impacted by expensive raw material procurement, rising energy tariffs, and magnifying financial costs. The Company's financial risk profile is considered moderate as ESML aptly managed their working capital management via optimizing inventory levels which rationalizes the requirement of short-term borrowings and creates a cushion in short-term trade leverage. However, the Company has witnessed a decline in coverages, owing to high finance costs, adequate cashflows and a dip in the profitability matrix. The Company has maintained a leveraged capital structure with long-term borrowings dominated by subsidized borrowing from SBP.
The ratings are dependent on the Company’s ability to increase business margins through operational efficiencies and product quality. The sustainability of cashflows and coverages at a comfortable level remains critical for the ratings. Going forward, consistent growth in accumulated profits should supplement the equity levels.

About the Entity
ESML was incorporated in 1988 as a public limited Company. The core operating activity of the Company is the manufacture and sale of yarn with a production capacity of 79,200 spindles. The Company operates with a production capacity of ~16.5mln Kgs. ESML is majorly (~71%) owned by Nagina Group, through group companies and sponsoring individuals. The board comprises 10 directors which includes 05 non-executive directors, 03 independent directors & 02 executive directors. Mr. Shahzad Ellahi Shaikh is the Chairman of the board, and Mr. Haroon Shahzada Ellahi Shaikh is the CEO of the Company.