PACRA Maintains Entity Ratings of Tata Textiles Mills Ltd | Assigns Rating Watch

Pakistan's spinning sector is highly fragmented and has an estimated size of ~PKR 775bln. The sector comprises ~368 dedicated spinning units with an installed capacity of ~13.4mln spindles during FY23, as per the economic survey of Pakistan. The production estimates of cotton were revised to be ~11.5mln bales; while currently, the production has reached up to ~8.26mln bales, surpassing FY23's total production of ~4.91mln bales. During FY24, better local raw cotton yield is expected to supplement import substitution. Pakistan's requirement for imported cotton has increased from ~3.5mln bales to ~4mln bales for the ongoing year. The recent hike in energy tariffs further elevated the challenges for the industry. Overall, the industry's cash flow and in turn liquidity remains stretched. This, along with high working capital requirement and related finance cost challenges led the industry's outlook to be placed on Watch.
Tata Textile Mills Limited (‘Tata Textile’ or ‘the Company’), ratings reflect the Company’s strong footing in the textile industry along with its position as one of the largest spinning mills in Pakistan. After the merger of Salfi Textile Mills Limited, Island Textile Mills Limited, and Tata Energy Limited, the Company operates with an installed capacity of 127,092 spindles. The Company has consolidated a strong balance sheet footing post-merger. The Company operates in both local and international markets, with ~71% of its business concentrated in the local market. During FY23, the Company reported a slight sales decline of ~0.5% due to a decrease in market demand. Tata Textile has demonstrated resilience, achieving growth of ~50% during 9MFY24 surpassing the sales quantum of FY23. During FY23, the Company faced inventory losses due to a decline in cotton prices, impacting operational margins. To mitigate this, the Company has revised its inventory management strategy. Profitability has also been affected by a challenging operating environment, characterized by high energy costs and interest rates, leading to increased operating expenses and finance costs, resulting in net losses. The Company has to revamp its strategy for sustainable profits, going forward. This remains crucial for the ratings. The Company is gradually expanding its captive energy capacity through the installation of solar energy systems. Tata Textile's working capital cycle managed through short-term borrowing, has elongated. Moreover, coverages are stretched. However, ratings gather support from a robust equity base. The long-standing association of an experienced management team and the Sponsor's acumen bodes well for the ratings. Going forward, restoring business margins and profits remains essential. The strengthening of coverage and efficient management of working capital is vital to hold the ratings.
The ratings are dependent on improving business margins and achieving profitability while maintaining financial risk consierably low. Prudent management of short-term liquidity and sustained coverages remain important.

About the Entity
Tata Textile Mills Limited (‘Tata Textile’ or ‘the Company’), incorporated in 1987 as a public concern, is engaged in the manufacturing and sale of different varieties of yarn. The Company is operating with a capacity of 127,092 spindles.
Mr. Shahid Anwar Tata and other family members collectively own ~81.65% shares in the Company. The remaining shareholding is held by institutions, mutal funds, and general public. The Board is chaired by Mr. Mazhar Valjee, while Mr. Shahid Anwar Tata is the CEO. He is assisted by an experienced team of professionals.