Press Release

VIS Reaffirms Entity Ratings of Gatron (Industries) Limited

Karachi, May 17, 2024: VIS Credit Rating Company Limited has reaffirmed entity ratings of Gatron (Industries) Limited (GIL) to 'A-/A-2' (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 'A-2' indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small. Outlook on the assigned ratings remains Stable. Previous rating action was announced on February 15, 2023.

GIL was incorporated in 1980 as a public listed company involved in the manufacturing of Polyester Filament Yarn (PFY) and PET Preforms in Pakistan with its plant located at Hub, Baluchistan. The Company forms part of the ‘G&T’ group, which has been in existence for over seven decades having presence in various sectors including textile, plastic resin and power generation. Leading group companies include Novatex Ltd (PET Resin, Preforms & BOPET Films), Mustaqim Industries (home textiles), Bonanza, Krystalite (PET sheets & Thermoforming products).

The assigned ratings reflect the medium-to-high business risk profile of the textile industry in Pakistan, which heavily relies on PFY, with local manufacturers (currently operating at around 60% capacity utilization) meeting 1/3rd of the local demand. However, with 100% capacities, local manufacturers have the ability to meet 50% of the local demand. Dominated by GIL and Rupali Group, local players face fierce competition from low-priced Chinese dumping of PFY, squeezing profit margins. Despite efforts to bolster margins through anti-dumping duties since 2017, implementation gaps remain. The recent termination of anti-dumping duties exacerbates the challenges, making it harder for local manufacturers to compete. Attempts to reinstate anti-dumping duties are underway. However, the profitability and sustainability of local players is expected to remain under pressure, as Chinese dumping continues to strain margins.

Assigned ratings consider the Company’s operational updates wherein GIL started manufacturing and selling intermediate products (e.g., Filament Grade Chips [FGC]), as a result of installation of new plant. Topline reflected growth during FY23, primarily due to higher selling prices, despite volumetric decline. Revenue in 1H’FY24 significantly improved vis-à-vis SPLY, mainly attributed by sale of intermediate products i.e., FGC. Despite improvement in topline over the review period, gross margins declined on account of higher production costs due to increased raw material prices and higher energy prices, which were not completely passed forward to the end consumer mainly due to PFY dumping from China. Higher finance cost suppressed net margins in FY23. However, due to persistent pressures from short-term borrowings coupled with no other income, net margins turned negative in 9M’FY24. Nevertheless, comfort is drawn from the recent equity injection of Rs. 5.6b, that is expected to support bottom line, going forward.

The ratings are reaffirmed mainly on the basis of significant equity injection during Q3’FY24, which has retained the liquidity profile to adequate levels. However, cashflow coverages remain stressed from increased long-term borrowing for Capex with room for improvement. Throughout the review period, the Company despite facing challenges amidst reduced cash flow coverages was successful in meeting the debt obligations. Ratings draw comfort from significant levels of cash and bank balances on balance sheet as at 9MFY24, as a result of equity injection. Post augmentation in core equity, gearing and leverage ratios depicted significant improvement. In the medium to long term, the management does not expect to mobilize any further long-term loans except for solar and other energy efficient projects. Ratings will remain dependent on GIL’s ability to achieve improvement in debt service coverage and maintain capitalization indicators within the targeted levels.

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

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

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