Press Release

VIS Reaffirms Entity Ratings of Arshad Textile Mills Limited

Karachi, April 15, 2025: VIS Credit Rating Company Limited (VIS) reaffirms entity ratings of Arshad Textile Mills Limited (“ATML” or “the Company”) at 'BBB-/A2' (“Triple B minus”/”A Two”). Medium to long term rating of 'BBB-' indicates adequate credit quality; Protection factors are reasonable and sufficient. Risk factors are considered variable if changes occur in the economy. Short term rating of 'A2' indicates a good likelihood of timely repayment of short-term obligations with sound short-term liquidity factors. Outlook on the assigned ratings is ‘Stable’. Previous Rating action was announced on March 06, 2024.

ATML is a public unlisted company incorporated in Pakistan in 1984. Its registered office is situated in Lahore. The Company is engaged in the business of manufacturing and sale of cotton-blended yarn, along with the sale of fabric, utilizing own yarn weaved on others conversion/processing facilities.

Assigned ratings take into account the business risk profile of Pakistan’s textile spinning sector, which remains exposed to demand cyclicality, competitive dynamics, regulatory adjustments, and energy sensitivity. The sector functions as a critical upstream component in the textile value chain, with performance linked to broader economic conditions. Challenges in cotton production due to environmental and pest-related factors have resulted in a continued supply shortfall relative to domestic requirements. A shift by farmers toward alternate crops has further limited cotton availability. Export performance has been affected by political uncertainty and shifts in global procurement preferences, leading to a redirection of orders to regional competitors. Following the withdrawal of the Export Facilitation Scheme, the use of duty-free imported yarn has increased, reducing demand for locally produced yarn. The transition to the Normal Tax Regime has added fiscal pressure, while regulatory changes such as removal of regionally competitive energy tariffs and higher tax rates have increased operational costs. Elevated power tariffs and wage increases have further impacted cost structures. Competitive pressures from regional competitors with advanced technology and diversified offerings remain pronounced. Financial support from sponsors, including equity contributions and interest-free short-term loans, remains an important consideration in the assigned ratings.

Assigned ratings also consider the financial risk profile of the company, reflecting declining revenues and profitability due to lower yarn sales and rising production costs. Gross margins contracted due to higher utility expenses and reduced contribution margin following a decline in sales volumes. Arrangements for toll manufacturing for an associate company has contributed to some margin improvement in the ongoing fiscal period, however overall demand remains weak, impacting cash generation. Capitalization metrics remained stable, with some improvement supported by loans from the directors classified as equity. Total debt levels remained largely unchanged, with repayments of long-term obligations offset by an increase in short-term borrowings. Liquidity and coverage constraints persisted due to insufficient internal cash generation. Coverage indicators weakened further with declining operational cash flows, however, support from sponsors enabled the Company to meet its financial obligations.

Going forward, ratings will remain sensitive to the sustainability of operational performance under prevailing market and regulatory conditions. Key sensitivities include ability to improve liquidity, coverage and capitalization metrics commensurate with the assigned ratings. The ratings will remain underpinned on continued financial support from the sponsors. Continuation of the processing arrangements with the associated company and conversion of sponsor loans into equity will also be important for the ratings.

For further information on this rating announcement, please contact at 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

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