VIS reaffirms ‘A-’ rating for Artistic Denim Mills

April 01, 2024 (MLN): The VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Artistic Denim Mills Limited (PSX: ADMM) at ‘A-’ for long-term and ‘A-2’ for short term with a stable future outlook, latest press release issued by VIS showed.

The medium to 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-2’ denotes good certainty of timely payment. Liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small.

To recall, the previous rating action was announced on January 09, 2023.

ADMM operates as a vertically integrated denim fabric and garment manufacturer. This includes the four key functions: spinning, weaving, garments and recycling.

The core business of ADML is to manufacture and sell Yarn, Denim Fabric and Value-Added Textile products and the company’s revenue comes mainly from exports.

Assigned ratings incorporate the medium business risk profile of the textile sector in Pakistan, marked by exposure to economic cyclicality and intense competition.

The sector's performance is notably influenced by broader economic conditions, rendering it susceptible to demand fluctuations driven by economic factors.

Furthermore, as a substantial contributor to total exports, the textile industry faces exposure to global economic cyclicality, geopolitical challenges, and liquidity constraints due to lengthy process of sales tax refunds.

Supply-side risks, including local cotton crop production and reliance on imported raw materials, expose the sector to significant exchange rate risk.

Assigned Ratings takes into account the company’s business updates wherein ADML’s net sales inched up for FY23, primarily driven by rupee devaluation.

The company saw a significant boost in profitability margins attributed to the depreciating rupee and inventory gains in FY23.

During 1HFY24, the topline of ADML witnessed a notable increase amid a recovery in volumetric sales, however, margins came under pressure due to increased raw material costs and hike in fuel & power prices. Also, an increase in finance cost further pressurized net margins.

Assigned ratings also consider the company’s financial risk profile. Despite the marginal increase in total debt, the company’s gearing ratio inched down, however, leverage witnessed a marginal uptick. Overall, the capitalization profile largely remained intact and in line with peers.

Given ratings also account for adequate cashflow coverages during the period under review. However, the liquidity profile of ADM leaves room for improvement wherein the current ratio clocked in at 0.97x as at Dec’23.

Going forward, improvement in profitability along with a rebound in liquidity indicators and maintenance of cashflow coverages will remain key considerations from a rating perspective.

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