Press Release

VIS Reaffirms Entity Ratings of AA Spinning Mills Limited

Karachi, December 27, 2023: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of A.A. Spinning Mills Limited (AASML) at ‘A-/A-2’ (Single A Minus/A-Two). The medium to long-term rating of ‘A-’ signifies good credit quality with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-2’ denotes good certainty of timely payments coupled with sound liquidity and company fundamentals. Risk factors are minor. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on August 15, 2022.

AA spinning Mills Limited (‘AASML or ‘the Company’) was incorporated in 2003 and commenced its commercial operations in 2006. The principal business of the Company is manufacture and sale of yarn from cotton and / or man-made fiber. The registered office of the Company is located at 1-A, Ahmad Block, New Garden Town Lahore, in the province of Punjab. The unit is located at 20th K.M, Sheikhupura Road, Khurrarinawala, Faisalabad, in the province of Punjab.

Assigned ratings for AASML incorporate a constrained business risk profile attributed to the spinning sector's susceptibility to economic cyclicality and heightened competition. The spinning sector in Pakistan, comprising of over 400 mills, faces challenges from various economic and environmental factors, including crop damage by flooding and inflation in FY23. Prospects of cotton production in ongoing season are favorable as compared to last cotton season but still below expectations. However, the sector's performance is closely tied to broader economic conditions, rendering it vulnerable to demand fluctuations.

Assigned ratings also incorporate a contracted topline stemming from dampened demand amid weak macroeconomic environment. The decline in sales volume couple with elevated raw material costs as well as high inflationary environment contributed to reduction in gross and operating margins. Similarly, net margins came under pressure due to higher finance cost that emanated from higher debt utilization along with the hike in domestic policy rate. During FY23, the Company experienced a marginal weakening in its capitalization profile, which is attributed to heightened drawdown of short-term debt, driven by increased working capital requirements. Nevertheless, the capitalization indicators remain at comfortable levels. Moreover, in FY23 AASML maintained an adequate liquidity position, however, this liquidity is primarily a result of higher levels of stock in trade and trade debt. Meanwhile, the Debt Service Coverage Ratio (DSCR) exhibited a notable decrease as a result of the decline in the Company's top-line and profitability during the fiscal year, impacting Funds from Operations (FFO).

Going forward, improvement in the profitability and coverage profile while maintaining the capitalization indicators commensurate with assigned ratings will remain important considerations for future reviews. "

For further information on this ratings announcement, please contact Mr. Saeb Muhammad Jafri at 021-35311861-64 (Ext. 202) and/or the undersigned at 021-35311861-64 (Ext. 201) or email at info@vis.com.pk.


Javed Callea
Advisor

Applicable Rating Criteria: Corporates
https://docs.vis.com.pk/docs/CorporateMethodology.pdf

VIS Issue/Issuer Rating Scale
https://docs.vis.com.pk/docs/VISRatingScales.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2023 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .