VIS reaffirms entity ratings of Shahtaj Textile Mills

November 28, 2023 (MLN): The VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Shahtaj Textile Mills Limited (PSX: SZTM) at ‘A-’ for long-term and ‘A-2’ for short term with a stable future outlook, the latest press release issued by VIS showed.

A medium to long-term rating of 'A-' indicates good credit quality; Protection factors are adequate.

While the short-term rating of 'A-2' indicates good certainty of timely payment.

The previous rating action was announced on November 23, 2022.

Shahtaj Textile Limited (SZTM), is a publicly listed company headquartered in Karachi.

The company specializes in the production of grey fabric. Employing over 480 employees, SZTM operates a manufacturing unit in Kasur.

The energy requirement is met by gas generators, a diesel backup, and grid supply by WAPDA, and plans to integrate a 1MW solar plant to contribute to their environmental initiatives.

The business risk environment of the local textile sector remains elevated amid weak macroeconomic environment, high-interest rates, inflationary pressures, rising raw material costs, an on-going energy crisis, and a global slump in demand.

Resultantly, Pakistan’s textile exports witnessed a 10% YoY decline to $16.7 billion (FY22: $18.5bn).

SZTM’s assigned ratings are supported by over three decades long operational history, strong sponsor support and a limited reliance on imported yarn.

Ratings also take note of elevated client concentration risk and subdued sales growth during the review period.

Rating factor in revenue growth of 9% in FY23 primarily due to increased volumes, surpassing the Rs8bN mark.

However, in 1QFY24 a 16% YOY decrease is observed in net sales.

The top ten clients make up approximately 80% of the entire revenue, indicating a significant concentration risk.

In addition, ratings take account of the weakening of cash flow coverage metrics, with DSCR decreasing on a timeline basis.

The company maintains stable gearing and leverage ratios, although the planned installation of a solar power plant could introduce new long-term debt, potentially affecting capitalization.

Going forward, ratings are dependent on improving cash flow coverage metrics and maintaining capitalization.

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