Press Release

VIS Maintains Entity Ratings of Shadab Textile Mills Limited

Karachi, December 27, 2024: VIS Credit Rating Company Limited (“VIS”) has maintained the entity ratings of Shadab Textile Mills Limited (“STML” or “the Company”) at ‘A-/A2’ (Single A minus/A Two). Medium to long term rating of 'A-' indicates good credit quality; Protection factors are adequate. Risk factors may vary with possible changes in the economy. Short-term rating of 'A2' suggests good likelihood of timely repayment of short-term obligations with sound short-term liquidity factors. Outlook on the assigned ratings has been changed to ‘Stable’ form ‘Negative’. Previous ratings action was announced on January 08, 2024.

STML was incorporated as a public limited company in August 1979 and is listed on the Pakistan Stock Exchange (‘PSX’). STML is engaged in the business of manufacturing, selling, buying and dealing in polyester yarn. The registered office of the Company is situated in Lahore while the manufacturing facilities of the Company are located in District Kasur and District Nankana Sahib.

Assigned ratings consider the high-to-medium business risk profile of Pakistan's textile spinning sector. This evaluation considers demand-side challenges and supply-side constraints, including raw material availability, energy shortages, and evolving regulatory policies. While domestic cotton production increased in FY24, reducing reliance on imports, elevated energy tariffs have significantly impacted operational costs. The sector also contends with competitive pressures from regional peers and macroeconomic challenges domestically, such as currency depreciation and high inflation. Regulatory inconsistencies, particularly the removal of preferential energy tariffs for export-oriented sectors, have introduced additional risks. Additionally, client concentration risk is high, with a notable share of sales derived from a limited number of customers. This heightened concentration could impact on revenue stability, particularly in the event of adverse developments affecting key customers. However, the management believes it not to be a major constraint as it has a diverse customer base and has historically demonstrated its ability to maintain a stable topline with sales volumes up to their maximum production capacity.

Change in outlook considers improvement in the financial risk profile of the Company. Gross margins improved during FY24, supported by higher sales volumes, stable exchange rates, and the addition of solar power capacity, which mitigated rising energy costs. Capitalization metrics reflect historically conservative approach, supported by sponsor backing in the form of quasi-equity, ensuring financial stability. The liquidity position remains stable, on the back of adequate internal cash generation and lower short-term debt utilization. Also, the coverage profile has shown improvement, supported by higher operating profits.

Going forward, the assigned ratings will remain sensitive to the Company’s ability to address client concentration risk and maintain financial metrics. Moreover, the ratings are sensitive to an unresolved commercial dispute at International Cotton Association (“ICA”) related to an unfulfilled import contract. However, the Company maintains that this dispute is not significant enough to warrant concern.

For further information on this ratings announcement, please contact on 021-35311861-64 or email at info@vis.com.pk









Applicable Rating Criteria:
Industrial 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 2024 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .