PACRA Maintains Entity Ratings of Shahzad Textile Mills Limited | Maintains Rating Watch

Pakistan's spinning industry comprises ~368 dedicated spinning units with an estimated size of ~PKR 895bln and ~13.4mln spindles installed as of FY24. The projected cotton production estimate is revised and forecasted to be ~10.9mln bales, and as of 3MFY25, the production has reached up to ~1.4mln bales, which is ~12.8% of the projected production. During FY24, better local raw cotton yield supplemented the industry for import substitution, with domestic production of ~8.4mln bales constituting ~75.5% of the total supply. In comparison, imports shrank to ~10.8% (~1.2mln bales). In FY25, the transition from the final tax regime to the normal tax regime is set to impact the profitability matrix of export-oriented units, with a 29% tax on profits and a super tax of up to 10%. The consistent decline in policy rates, along with the anticipation of further reductions, is expected to provide a cushion to the industry.
Shahzad Textile Mills Limited ('Shahzad Textile' and 'the Company') has an adequate market presence in specialty yarn, offering a range of products including ring-spun yarn and synthetic blended yarn. Over the years, the Company has enhanced its business profile by successfully diversifying into the value-added socks segment. Shahzad Textile remains focused on building long-standing customer relations, both in the local and international markets. During FY24, the Company experienced an increase in its topline, attributed to both volumetric and value-driven growth. However, faced pressure from increased cotton prices due to high inflation. This, along with substantial rupee depreciation and a surge in energy costs, led to a negative net return. However, lately, as policy rates have reduced along with controlled inflation, the Company's business risk profile, including margins, is expected to gradually pick up. The management envisions operating the socks segment at an optimal capacity and generating solid returns, going forward. This, if managed well, is expected to support the Company's overall performance. On the financial risk front, the Company reaps the benefit of a low-leveraged capital structure. The absolute quantum of equity is low, however, the sponsors have given additional interest free loan to the Company. The coverages remain stretched with adequate working capital management. The ratings have been assigned a 'Watch' due to the continued pressure from increasing electricity costs and resultant losses incurred. Nonetheless, strong acumen and demonstrated financial support from the sponsors bode well for the Company.
The ratings are dependent upon the management's ability to improve the margins, profitability, and financial profile of the Company. This includes avoiding any asset-liability mismatch that may arise and effectively managing its position in a competitive segment. Any further deterioration in debt coverages and/or subdued profitability will have a negative impact on ratings.

About the Entity
Shazad Textile Mills Limited ('Shahzad Textile' and “the Company”) commenced operations in 1979 as a public limited company. The Company manufactures ring-spun cotton and synthetic blended yarns, with a total installed capacity of 70,428 spindles and 197 knitting machines. Mr. Imran Aslam along with other family members, collectively owns the majority stake (~78.55%) in the Company. The remaining shareholding is held by corporates & related parties (~5.67%), and ~15.78% is held by numerous individuals and institutions. The Board is chaired by Mr. Mian Parvez Aslam. Mr. Imran Aslam heads the Company as the CEO. He is supported by an experienced management team.