Ali Embroidery Mills (Pvt.) Limited

CREDIT RATING REPORT | Jan-25

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Rating History
Dissemination Date Long-Term Rating Short-Term Rating Outlook Action Rating Watch
23-Jan-25 BBB A2 Stable Maintain -
23-Jan-24 BBB A2 Stable Maintain -
23-Jan-23 BBB A2 Stable Initial -
About the Entity

Ali Embroidery Mills (Pvt.) Limited was incorporated in Pakistan in 1972 as a private limited Company. The Company is associated with the Sefam Group of Industries, and EastGate Industries (Pvt.) Ltd headquartered in Lahore. The Company has a three-member sponsoring family board. The board is chaired by Mr. Hamid Zaman, while the CEO, Mr. Tariq Zaman oversees the Company’s affairs.

Rating Rationale

The assigned ratings of Ali Embroidery Mills (Private) Limited (“AEML” or “the Company”) reflect its passable business profile in the textile landscape. The Company functions in the dedicated embroidery segment, which is considered a highly fragmented part of the textile value chain. According to their management presentation, AEML currently maintains 100% capacity utilization and operates with a production capacity of 122 multi-head embroidery machines and 33 Schiffli machines. The Company is a small-scale enterprise but has demonstrated consistent growth in its business volumes over the past three years. The top line of the Company stood at PKR 1,242mln in FY22, followed by PKR 1,580mln in FY23, and PKR 2,161mln in FY24. The majority of the company's business was generated from sales to related parties, indicating concentration risk. However, the Company’s management is mindful of managing this risk by prudently expanding its customer base, which will ultimately enable them to sustain their growth trajectory. During FY24, most of the Company's business risk fundamentals remained intact; however, the surge in raw material prices due to a change in the prime supplier resulted in a dilution of gross margins, reflecting an adequate price transferability matrix. The optimization of the operating expenses-to-sales ratio has mitigated this impact on net margins and overall cost structure. The Company intends to venture into the online retail business to diversify its revenue streams and enhance its existing production capacity. The Company's financial risk profile is considered adequate with a stretched net working capital cycle and optimal short-term trade leverage. The cashflows and coverages have shown slight improvement. The Company maintained a highly leveraged capital structure, dominated by loans from sponsors, to supplement its working capital requirements. The textile exports of the country reached USD 16.7bln in FY24, a slight increase from USD 16.5bln in the previous year, reflecting a growth of 0.93% YoY. The highest contribution came from the composite and garments segment at USD 9.1bln, followed by the weaving segment at USD 6.5bln and the spinning segment at USD 1.0bln. During 5MFY25, the textile exports stood at USD 7.6bln. 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 over the last two quarters, along with the anticipation of further reductions, is expected to provide a cushion in the financial metrics of the industry.

Key Rating Drivers

The ratings are dependent on the Company's ability to improve its business volumes while maintaining the profitability matrix at an optimal level. The sufficient generation of cashflows from core operations remains imperative. Improvement in the governance framework is considered important.

REPORT CONTENTS
  1. Rating Analysis
  2. Financial Summary
  3. Rating Scale
  4. Regulatory Disclosure

Ali Embroidery Mills (Pvt.) Limited

rating analysis

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Profile
Legal Structure

Ali Embroidery Mills (Pvt.) Limited ("AEML" or "the Company") was incorporated in Pakistan in 1972 as a private limited Company under the repealed Companies Ordinance, 1984. 


Background

The Company is associated with the Sefam Group of Industries and EastGate Industries (Pvt.) Ltd, headquartered in Lahore, Pakistan. Renowned for its pioneering role in introducing the concept of branded products to the Pakistani market, the Group has established a legacy of innovation and leadership. AEML, originally founded by the late Mr. J.A. Zaman, served as the cornerstone for the establishment of Sefam (Private) Limited and Sarena Textile Industries. Today, AEML has formed its presence as an organized player in the dedicated embroidery segment. With over 50 years of expertise, the Company specializes in schiffli embroidery, it integrates traditional craftsmanship with advanced technology to create high-quality products. 


Operations

The Company’s production facility comprises two units, located on Sheikhupura Road, Lahore while the Company’s head office is located on Waris Road, Lahore. Presently, the Company operates with ~33 Schiffli embroidery machines and ~122 Multi-Heads embroidery machines. The Company is principally engaged in the manufacturing and sale of embroidered cloth. The Company's energy requirement stands at 1.3MW which is fulfilled through solar capacity and LESCO. 


Ownership
Ownership Structure

The Company is owned by the descendants of the late Mr. J.A. Zaman. The majority stake of approximately 24.5% is shared equally among Mr. Tariq Zaman, Mr. Hamid Zaman, Ms. Seema Aziz, and Ms. Ambreen Zaman, while Mr. Ali Zaman holds a minority share of about 2%. 


Stability

The group is succeeded by the children of the Late Mr. J.A Zaman; Mr. Hamid Zaman, Ms. Seema Aziz, and Mr. Tariq Zameen. .No ownership change is anticipated in the foreseeable future. The establishment of a formal family constitution will improve the ownership profile of the Company. 


Business Acumen

Mr. Hamid Zaman has been involved with Ali Embroidery Mills (Private) Limited since 1972, working alongside his father, the late J.A. Zaman. He is a co-founder and a key partner, along with Ms. Seema Aziz, in establishing the Sefam and Sarena group of companies. Meanwhile, Mr. Tariq Zaman, the Company’s CEO, is responsible for overseeing its strategic direction and brings extensive expertise in the textile industry.


Financial Strength

Over time, the Group has expanded its footprint in Pakistan by establishing diverse fashion brands, each tailored to address distinct market segments. AEML has evolved within the sector, playing a significant role in the embroidery industry of Pakistan. The group has tapped the export market of the workwear category through Sarena Textile Industries (Pvt.) Limited. Over the years, the Company's equity base has grown consistently, reflecting the investment of profits into the business. 


Governance
Board Structure

AEML has a three-member sponsor-dominated board chaired by Mr. Hamid Zaman. The board includes one executive director, the CEO, Mr. Tariq Zaman. The inclusion of independent oversight will augment the governance framework.


Members’ Profile

Mr. Hamid Zaman, Chairman of the Board and CEO of Sefam (Pvt.) Limited, brings over 40 years of experience in the textile industry and is a graduate of Utah State University, USA. Similarly, Ms. Seema Aziz, CEO of East Gate Industries (Pvt.) Limited, also has over 40 years of extensive experience in the sector and holds a degree from Harvard Business School.


Board Effectiveness

The Board does not hold formal meetings; instead, members convene informally and infrequently to discuss business development, depending on their availability. Furthermore, no sub-committees have been established to assist the Board.


Financial Transparency

M/s Arshad Raheem & Co. Chartered Accountants, who are not rated by the SBP but have a satisfactory QCR rating by ICAP, are the company's external auditors. They have expressed an unqualified opinion on the financial statements of the Company for the year ended June 30, 2024. 


Management
Organizational Structure

The organizational structure of the Company is segmented into key functional departments, which include Production, Marketing, Finance, Procurement, Administration, Inventory Management, Mechanical, Electrical, Human Resources, and Quality Assurance. 


Management Team

Mr. Tariq Zaman, the CEO of the Company, holds an MBA degree from LUMS and possesses extensive experience in the textile sector. Mr. Hafiz Umair Nadeem is the CFO of the Company. Designing and sales fall under the purview of the General Manager of Marketing, Mr Shafqat Khan.  while the remaining production and administrative functions are overseen by the General Manager Factories, Mr. Mubashir Abdali. Management of the group comprises experienced individuals with a wide range of skills and relevant experience.


Effectiveness

MIS reports are prepared and reviewed by senior management at different intervals. Financial position and shop sales reports are submitted to the CEO on a daily basis, while production efficiency reports for Multi-Head machines are generated in real-time. Moving forward, production reports for Schiffli machines will also transition to real-time monitoring through the FPS software.


MIS

The Company implemented Sidat Hyder (GL Mode) as the financial accounting MIS solution in Dec-17, provided by D-Biz Solutions (Pvt.) Ltd. The Company has also deployed several in-house software solutions. These include FPS (Factory Production System) which is used for billing management and monitoring the flow of plain and processed fabric for Multi-Heads embroidery machines.


Control Environment

The Company prioritizes delivering premium quality products to its customers. To ensure an accurate and impartial evaluation, it enables its primary customers, Sefam (Pvt.) Ltd. and EastGate Industries (Pvt.) Ltd., to prepare independent quality reports. Furthermore, the Company plans to hire a head of Internal Audit that will facilitate in improving the Company's overall control environment. 


Business Risk
Industry Dynamics

The textile exports of the country reached USD 16.7bln in FY24, a slight increase from USD 16.5bln in the previous year, reflecting a growth of 0.93% YoY. The highest contribution came from the composite and garments segment at USD 9.1bln, followed by the weaving segment at USD 6.5bln and the spinning segment at USD 1.0bln. During 5MFY25, the textile exports stood at USD 7.6bln. 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 over the last two quarters, along with the anticipation of further reductions, is expected to provide a cushion in the financial metrics of the industry.


Relative Position

AEML is a relatively small Company operating in the value-added textile segment with only local presence. It is one of the largest embroidery companies in Pakistan with competitors including Hira Embroidery Mills in Lahore and a few other players in Karachi.


Revenues

The Company's revenue demonstrated consistent growth, rising from PKR 1,580 million in FY23 to PKR 2,161 million in FY24, reflecting a year-on-year increase of 37%. However, a substantial portion of the revenue was generated through sales to related parties, highlighting a concentration risk. The Company is mindful of improving the customer base, thus mitigating the risk.


Revenues.
Margins

AEML's gross profit margin decreased and was recorded as 15.8% in FY24 as compared to 18.6% in FY23, due to a sizable incline in the raw material cost. Control over administrative expenses has led to a marginal increase in operating profit margins (FY24: ~8%, FY23: ~7.9%) The finance cost also witnessed an incline (FY24: PKR 106mln, FY23: PKR 96mln), however, the finance cost to sales ratio sizably improved (FY24: 4.9%, FY23: 6%). The Company’s bottom line showed growth (FY24: ~PKR 61mln, FY21: ~PKR 47mln). 


Sustainability

In FY24, the Company has proactively expanded its solar capacity to address the increasing energy cost challenges faced by the textile industry. Furthermore, the Company intends to diversify into the online retail sector by introducing a brand tailored to women, expecting to bolster Company's topline growth.


Financial Risk
Working capital

During FY24, the gross working capital days declined to 140days (FY23: 195days) driven by the decline in inventory days (FY24: 102days, FY23: 140days) along with decline in trade receivable days (FY24: 39days, FY23: 54days). The Company’s payable days were reduced to 9 days during the period (FY23: 14 days). The Company’s net working capital days clocked to 131 days (FY23: 180 days), whereas the short-term trade leverage stood at 85.2% (FY23: 92.5%).


Working Capital Management
Coverages

During FY24, FCFO clocked in at ~PKR 237mln (FY23: ~PKR 192mln, FY22: ~PKR 170mln) owing to improvement in operational efficiency which ultimately translated into amelioration in cash flow management. The Company’s interest coverage ratio witnessed an incline to 2.2x (FY23: 2.0x, FY22: 2.6x). Consequently, the debt coverage ratio inclined at 1.4x during the period (FY23: 0.9x).


Coverages
Capitalization

AEML is highly leveraged at (~61.5%) in FY24 this ratio has declined for the past 3 years (FY23: ~67.9%, FY22: ~68%). The Company’s total borrowings clocked at 143mln, (FY23: PKR 199mln). The decline is attributable to a decrease in the CMLTB. The major portion of borrowings is vested in the loan obtained from directors (FY24: PKR 801mln, FY23: PKR 921mln). The Company’s equity base witnessed an YoY incline to PKR 590mln (FY23: PKR 529mln).


Capital Structure
 
 

Jan-25

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Ali Embroidery Mills (Pvt.) Limited

financial summary

(PKR mln)

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Jun-24
12M		 Jun-23
12M		 Jun-22
12M
A. BALANCE SHEET
1. Non-Current Assets 910 860 725
2. Investments 20 18 51
3. Related Party Exposure 1 0 0
4. Current Assets 998 1,050 960
a. Inventories 529 673 542
b. Trade Receivables 244 214 256
5. Total Assets 1,929 1,928 1,736
6. Current Liabilities 389 271 235
a. Trade Payables 77 36 88
7. Borrowings 143 199 126
8. Related Party Exposure 801 921 895
9. Non-Current Liabilities 6 7 0
10. Net Assets 590 529 480
11. Shareholders' Equity 590 529 480
B. INCOME STATEMENT
1. Sales 2,161 1,580 1,242
a. Cost of Good Sold (1,819) (1,286) (994)
2. Gross Profit 342 294 248
a. Operating Expenses (169) (169) (147)
3. Operating Profit 173 125 101
a. Non Operating Income or (Expense) 26 38 18
4. Profit or (Loss) before Interest and Tax 199 163 118
a. Total Finance Cost (106) (96) (65)
b. Taxation (32) (20) (17)
6. Net Income Or (Loss) 61 47 36
C. CASH FLOW STATEMENT
a. Free Cash Flows from Operations (FCFO) 237 192 170
b. Net Cash from Operating Activities before Working Capital Changes 210 164 154
c. Changes in Working Capital 166 (106) (544)
1. Net Cash provided by Operating Activities 376 57 (390)
2. Net Cash (Used in) or Available From Investing Activities (82) (58) (89)
3. Net Cash (Used in) or Available From Financing Activities (220) 2 354
4. Net Cash generated or (Used) during the period 75 1 (125)
D. RATIO ANALYSIS
1. Performance
a. Sales Growth (for the period) 36.7% 27.2% 29.5%
b. Gross Profit Margin 15.8% 18.6% 19.9%
c. Net Profit Margin 2.8% 3.0% 2.9%
d. Cash Conversion Efficiency (FCFO adjusted for Working Capital/Sales) 18.7% 5.4% -30.2%
e. Return on Equity [ Net Profit Margin * Asset Turnover * (Total Assets/Shareholders' Equity )] 10.9% 9.3% 7.7%
2. Working Capital Management
a. Gross Working Capital (Average Days) 140 195 184
b. Net Working Capital (Average Days) 131 180 151
c. Current Ratio (Current Assets / Current Liabilities) 2.6 3.9 4.1
3. Coverages
a. EBITDA / Finance Cost 2.6 2.3 2.9
b. FCFO / Finance Cost+CMLTB+Excess STB 1.4 0.9 1.2
c. Debt Payback (Total Borrowings+Excess STB) / (FCFO-Finance Cost) 6.8 11.2 9.7
4. Capital Structure
a. Total Borrowings / (Total Borrowings+Shareholders' Equity) 61.5% 67.9% 68.0%
b. Interest or Markup Payable (Days) 811.1 597.1 530.7
c. Entity Average Borrowing Rate 10.5% 8.7% 7.9%

Jan-25

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Ali Embroidery Mills (Pvt.) Limited

rating scale

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Jan-25

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Ali Embroidery Mills (Pvt.) Limited

regulatory disclosure

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  1. Rating Team Statements
    1. Rating is just an opinion about the creditworthiness of the entity and does not constitute a recommendation to buy, hold, or sell any security of the entity rated or to buy, hold, or sell the security rated, as the case may be. (Chapter III; 14-3-(x))
    2. Conflict of Interest
      1. The Rating Team or any of their family members have no interest in this rating (Chapter III; 12-2-(j))
      2. PACRA, the analysts involved in the rating process, and members of its rating committee and their family members do not have any conflict of interest relating to the rating done by them (Chapter III; 12-2-(e) & (k))
      3. The analyst is not a substantial shareholder of the customer being rated by PACRA [Annexure F; d-(ii)]
      4. Explanation: for the purpose of the above clause, the term "family members" shall include only those family members who are dependent on the analyst and members of the rating committee.
  2. Restrictions
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    3. PACRA does not make proposals or recommendations regarding the activities of rated entities that could impact a credit rating of the entity subject to rating. (Chapter III; 10-7-(k))
  3. Conduct of Business
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  6. Probability of Default
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Jan-25

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