Fazal Cloth Mills to enhance its business profile by entering into value-added segment: PACRA

January 28, 2019 (MLN): Pakistan Credit Rating Agency has maintained entity ratings of Fazal Cloth Mills Limited at ‘A-’ for long-term and ‘A2’ for short-term, with a stable outlook forecast.  

Fazal Cloth Mills Limited (Fazal Cloth) enjoys a strong business profile in otherwise volatile textile industry. This primarily emanates from its large size – yielding economies of scale – established relationships with a diverse customer base and diversity of operations – spinning & weaving. This has helped the entity to sustain its position despite suppressed textile dynamics in previous years.

Recent withdrawal of custom duty and sale tax on cotton imports, coupled with subsidized gas rates for textile sector will help industry margins despite high cotton prices. With improved industry dynamics and focused marketing efforts, the Company has been able to capitalize on additional capacities thereby generating incremental volumes, mainly in spinning segment, eventually translating into improved margins.

Volumes declined in 1QFY19, however these are expected to normalize in near future. The management is contemplating a gradual entry into value-added segment – dyeing and finishing; once implemented, it is likely to further strengthen business risk profile of the entity.

Fazal Cloth's financial risk assessment encompasses irrevocable and unconditional inter-corporate debt guarantee provided to Fazal Weaving Mills Limited – a wholly owned subsidiary – with fall back on Fazal Cloth's cash flows. Nevertheless, overall financial profile is considered adequate.

The ratings are dependent on the company’s ability to yield improvement in margins. Meanwhile, management of financial obligations amid rising interest rates, thereby impacting coverages, is considered important. Improvement in business and financial profile along with effective changes in governance framework would be rating positive.

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