September 6,2019: VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of ‘A-/A-1’ (Single A Minus/A-One) to Artistic Denim Mills Limited (ADML). Outlook on the assigned ratings is ‘Stable’.
ADML operates as a vertically integrated denim fabric and garment manufacturer. The company’s revenues are largely export centered, comprising more than three-fourth of the top-line.
The ratings incorporate the business risk profile of the denim sector, which is driven by the global demand and pricing dynamics. Business risk profile is supported by stable demand for denim fabric and garments across various geographical markets.
The pricing power is vested with the top-notch retailers who demand competitive pricing, innovation and quality. The rising share of exports from these countries will keep margins under pressure for the domestic industry. However, we expect the denim industry to be positively impacted by the recently undertaken PKR devaluation, despite higher inflation forecasts over the short to medium term horizon.
Assessment of financial risk profile incorporates the company’s strong capitalization as reflected by moderately leveraged capital structure and sound liquidity indicators as evident from healthy cash flows in relation to outstanding obligations.
The gross margins have remained stable and overall profitability has depicted improvement in the ongoing year. In view of additional borrowings undertaken for expansion and concurrent running finance requirements, the gearing and leverage have trended upwards.
However, they are expected to remain within our threshold for the assigned rating. Ratings are dependent upon realization of planned business targets from expansion project, within the leverage and gearing indicators as outlined above.