October 30, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘A+/A-1’ (Single A Plus/A-One) to Gadoon Textile Mills Limited (GTML). Outlook on the assigned ratings is ‘Stable’.
According to the rating agency, the long-term rating of ‘A+’ signifies good credit quality and adequate protection factors; risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ signifies high certainty of timely payment; liquidity factors are excellent and supported by good fundamental protection factors while risk factors are minor.
The assigned ratings favorably factor in GTML’s extensive experience in the spinning industry, large scale and consistent operating performance with continuous focus on efficiency enhancements.
Ratings are further supported by sound liquidity profile and diversification of income streams where market value of investments carried on balance sheet is significantly higher than carrying value.
Ratings also incorporate sound corporate governance infrastructure along with implicit support of Yunus Brothers Group (YBG), a reputable conglomerate with strong financial profile and presence in diversified sectors including textiles, cement, real estate, power generation, chemicals, pharmaceuticals, food and automotive sectors.
However, ratings are constrained by company’s exposure to cyclicality and volatility in margins. Inherent cyclicality of cotton price and crop levels drives performance of players operating in the spinning sector. Historically, margins and financial performance of players have depicted seasonality, the report said.
Moreover, competitive intensity is high due to commoditized nature of the product. Comfort is drawn from GTML’s product diversity (produces both cotton and blended yarn) and presence across a wide count range.
However, as with other local producers in the spinning sector, reliance on China as the major export market translates into country concentration risk. Imposition of duties ranging from 10-25% on Chinese textile exports to USA is expected to impact yarn exports from Pakistan to China.
Net sales of the company have increased at a Compound Annual Growth Rate (CAGR) of 8.3% over the past five fiscal years (FY14-18). Gross margins have witnessed improvement on the back of shift in fuel mix towards cheaper natural gas from furnace oil, strategic procurement of local and imported cotton and BMR activities.
JCR-VIS expects increasing trend in cotton prices and efficiency gains to support margins & profitability. However, increase in finance cost, higher cost of doing business (due to increase in projected inflation) and growth in cost of production due to existing proportion of imported cotton in production mix would be countervailing factors. Profitability profile is supported by returns from strategic investments in ICI Pakistan Limited, Lucky Holdings Limited and Yunus Energy Limited.
Furthermore, GTML has notified Securities & Exchange Commission of Pakistan and Pakistan Stock Exchange regarding shareholders’ approval for investment in various power projects, which may further diversify the company’s asset base in future.
Debt profile is primarily short-term in nature and a function of inventory carried on balance sheet. While Debt Servicing Coverage Ratio (DSCR) is expected to decline slightly as a result of funds mobilized for expansion and diversification projects, the same is expected to remain at comfortable levels given adequate cash flow from operations and extended and staggered long-term debt repayments which will allow GTML financial flexibility in undertaking diversification projects.
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