VIS reaffirms entity ratings of Gadoon Textile Mills

November 06, 2023 (MLN): The VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Gadoon Textile Mills Limited (PSX: GADT) at ‘A+’ for long-term and ‘A-1’ for short term with a stable future outlook, latest press release issued by VIS showed.

Medium to Long-term entity rating of ‘A+’ reflects good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy.

Short Term Rating of ‘A-1’ indicates high certainty of timely payment; liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor.

Previous rating action was announced on November 02, 2022.

Assigned ratings factor in GADT’s extensive experience in the spinning industry, large-scale operations with consistent focus on efficiency enhancements and long term investment portfolio in associates.

Business risk profile is constrained by current weak macroeconomic environment both globally and locally, high-interest rates, inflationary pressures, rising raw material costs, ongoing energy crisis in the country, and a global slump in demand poses a challenge to the sector over the medium term.

However, GADT risk profile is supported by financial strength of the sponsor and group, provision of dividend income from investments, sizeable local sales and diversification plans.

Assessment of financial risk profile incorporates weakening profitability, liquidity and capitalization indicators.

Topline growth in FY23 was largely attributable to impact of rupee devaluation increasing the per unit prices.

However, profitability profile witnessed a regression to historical norms, primarily influenced by elevated raw material prices, escalated power expenses, and higher conversion costs in comparison to the preceding period.

The uptick in financial charges as a result of elevated benchmark interest rates and the growing working capital requirement, offsets increase in profitability buoyed by the share of profits from associates.

However, the company majorly has subsidized financing on its balance sheet under various schemes offered by SBP.

As a result of lower profit generation, cash flow coverages against outstanding obligations exhibited contraction in FY23.

The current ratio stood at 1.19x as at Jun’23 (Jun’22: 1.47) while an extended cash conversion cycle, due to higher inventory holding days, amplifies reliance on short-term finance.

As of Jun’23, the Company witnessed a growth in its equity base, primarily driven by positive bottom-line.

The Board of Directors (BoD) of the company in its meeting held on June 22, 2023 decided to earmark a sum of Rs16.5 billion as not available for distribution by way of dividend on account of long-term investments, capacity expansions and BMR to more accurately reflect the nature of these reserves.

Debt profile comprising of short-term and long-term debt, increased significantly as of Jun’23. Gearing and leverage ratios were also reported higher at 1.24x (FY22: 0.60x) and 1.86x (FY22: 1.27x) respectively.

Maintaining capitalization indicators under manageable levels will remain important from the ratings perspective.

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