October 15, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘A-/A-1’ (Single A-Minus /A-One) to Eastern Spinning Mills Limited (ESML). Outlook on the assigned ratings is ‘Stable’.
According to the rating agency, the medium to long-term rating of ‘A-’ denotes good credit quality coupled with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ denotes high certainty of timely payment, liquidity factors are excellent and supported by good fundamental protection factors.
ESML is a medium-sized spinning unit which manufacture a range of cotton yarn. It is a part of Eastern Group, a conglomerate having business interest in leather, textile, and dairy industries. Shareholding of the company is vested with the sponsoring family through a holding company, Zakia Textile Mills (Pvt.) Limited, the report said.
As per the report, the assigned ratings take into account moderate business risk profile of the company underpinned by extensive experience of sponsors and established relationships with the suppliers and customers.
The ratings also derive support from low gearing and leverage indicators and adequate debt service coverages, it added.
However, the report suggested that the ratings factor in the vulnerability of the spinning sector to raw material prices and high geographic and customer concentration. The ratings also taking into account full capacity utilization of existing spinning units and lack of expansion plan. Corporate governance framework has room for improvement.
During FY18, the company exhibited notable growth in net sales mainly on account of increase in yarn exports along with higher prices. Favorable demand dynamics helped ESML attain higher customer orders from the internationals markets, particularly Turkey and Bangladesh, while sales concentration in China remained high.
The overall profit margins of the company improved during FY18 on the back of favorable prices both in the local and international markets, availability of cheaper raw material, and lower operational costs.
“Going forward, sales are expected to remain largely steady as the company is already operating at full capacity with no expansion plan in the foreseeable future” the report said.
Underpinned by notably improved funds from operations (FFO), the overall liquidity position of ESML remained strong with sound debt service coverage ratio. The current ratio remained largely stable at adequate levels while net working capital stood higher during FY18. Equity base of ESML enhanced with the continued accumulation of unappropriated profits during the year.
The debt profile of the company comprises a mix of long-term and short-term borrowings. ESML raised a new long-term debt during FY18 to finance the import of machinery. Similarly, short-term borrowings stood higher as the company is managing the lengthening of cash conversion cycle with short-term credit lines. Gearing and debt leverage indicators remained on the lower side despite slight increase during FY18. The said indicators are projected to remain around the current levels given no plan to mobilize notable amount of debt, going forward. The ratings will remain dependent on the maintenance of leverage indicators, liquidity, and debt service coverages around the current levels.