Press Release

JCR-VIS Assigns Initial Ratings to Eastern Spinning Mills Limited

Karachi, October 15, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘A-/A-1’ (Single A-Minus /A-One) to Eastern Spinning Mills Limited (ESML). The medium to long-term rating of ‘A-’ denotes good credit quality coupled with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ denotes high certainty of timely payment, liquidity factors are excellent and supported by good fundamental protection factors. Outlook on the assigned ratings is ‘Stable’.

ESML is a medium-sized spinning unit which manufacture a range of cotton yarn. ESML is a part of Eastern Group, a conglomerate having business interest in leather, textile, and dairy industries. Shareholding of the company is vested with the sponsoring family through a holding company, Zakia Textile Mills (Pvt.) Limited. The assigned ratings take into account moderate business risk profile of the company underpinned by extensive experience of sponsors and established relationships with the suppliers and customers. The ratings derive support from low gearing and leverage indicators and adequate debt service coverages. However, the ratings factor in the vulnerability of the spinning sector to raw material prices and high geographic and customer concentration. The ratings also taking into account full capacity utilization of existing spinning units and lack of expansion plan. Corporate governance framework has room for improvement.

ESML is an export-oriented spinning unit which manufactures yarn from locally procured cotton. During FY18, the company exhibited notable growth in net sales mainly on account of increase in yarn exports along with higher prices. Favorable demand dynamics helped ESML attain higher customer orders from the internationals markets, particularly Turkey and Bangladesh, while sales concentration in China remained high. The overall profit margins of the company improved during FY18 on the back of favorable prices both in the local and international markets, availability of cheaper raw material, and lower operational costs. Going forward, sales are expected to remain largely steady as the company is already operating at full capacity with no expansion plan in the foreseeable future.

Underpinned by notably improved funds from operations (FFO), the overall liquidity position of ESML remained strong with sound debt service coverage ratio. The current ratio remained largely stable at adequate levels while net working capital stood higher during FY18. Equity base of ESML enhanced with the continued accumulation of unappropriated profits during the year. The debt profile of the company comprises a mix of long-term and short-term borrowings. ESML raised a new long-term debt during FY18 to finance the import of machinery. Similarly, short-term borrowings stood higher as the company is managing the lengthening of cash conversion cycle with short-term credit lines. Gearing and debt leverage indicators remained on the lower side despite slight increase during FY18. The said indicators are projected to remain around the current levels given no plan to mobilize notable amount of debt, going forward. The ratings will remain dependent on the maintenance of leverage indicators, liquidity, and debt service coverages around the current levels.

For further information on this rating announcement, please contact the undersigned at 021-35311861-70 or Mr. Maimoon Rasheed at 042-35723411-13.

Javed Callea

Applicable rating criterion: Industrial Corporate (May, 2016)

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 2018 VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS.

JCR-VIS Credit Rating Company Limited