October 1, 2018 (MLN): JCR-VIS Credit Rating Company Limited has assigned initial entity ratings of ‘BBB/A-3’ (Triple B/A-Three) to Orient Textile Mills Limited (OTML). Outlook on the assigned ratings is ‘Stable’.
According to the press release, assigned ratings take into account extensive experience of sponsors in the textile sector, improving profitability and adequate debt servicing capability of the company. Ratings are constrained by high leverage indicators vis-à-vis peers, low capital base and concentration in sales.
According to the rating agency, the company has witnessed an increase in the installed capacity during the past few years primarily on account of addition and overhauling of looms, with ones which operate at higher speeds.
As per the report, on average basis, capacity utilization of the company continues to be at a high level, given the large number of production orders and the provision of weaving services to third parties.
Gross sales of the company largely comprise export sales to clients primarily based in Europe. As a result, considerable concentration (customer wise and geographic) has been witnessed in sales. However, comfort is drawn from long-term association with clients.
The report further reveals that, OTML had posted net losses in the period from FY15 to FY17, as gross profit was insufficient to cover operating expenses. However, the profitability trend is positive as the volume of losses has been decreased on a timeline basis and the company achieved profit for the first time in FY18.
Assigned ratings incorporate the improvement in profitability of the company on a timeline basis.
Profitability of the company has grown on the back of improvement in gross margins. High value-added products contributed more to the overall sale and replacement of old looms with more efficient new looms contributed to an increase in margins during the last three years (FY16-FY18). Management expects sales of the company to persist at similar levels going forward.
Moreover, given the sufficient cash flow on outstanding debt, the company's liquidity position is considered sufficient, says the rating agency.
Equity base of the company is supported by sizeable long term loan from associated undertaking.
Report concluded that, overall equity base continues to remain on the lower side vis-à-vis peers. On the other hand, due to large number of short-term borrowings, gearing and leverage ratios of the company are at a relatively high level compared with peers.
However, trade debts and inventory levels are more than sufficient to cover short term borrowings. Short term borrowings are expected to decrease on a timeline basis.
Going forward, maintenance of leverage indicators at adequate levels is considered important from ratings perspective.
OTML, a weaving unit, was incorporated in 1986 and is primarily engaged in the manufacturing and sale of textile and related products. The company is a part of Ebrahim Group of Companies, which is a family owned group with specialization in the textile sector. Other related concerns in the group are engaged in bottling and dairy sectors.
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