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VIS reaffirms Entity Ratings of Feroze1888 Mills Limited

Karachi, January 13, 2023 (PPI-OT):VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Feroze1888 Mills (‘FML’ or ‘the Company’) at ‘AA-/A-1’ (Double A Minus/A-One). The medium to long-term rating of ‘AA-’ denotes high credit quality coupled with strong protection factors. Moreover, risk factors may vary slightly 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’. The previous rating action was announced on January 07, 2022.

Feroze1888 Mills Limited (FML) is a public listed company and is categorized as one of the largest terry textile exporters of Pakistan. The Company is a vertically integrated entity engaged in end-to-end process from spinning to product packaging. In the outgoing year, the Company enhanced its weaving capacity by 15% and capacity utilization of both spinning and weaving segments remaining at higher levels. However, some reduction in utilization levels was observed in the ongoing year in line with relatively lower demand for products.

Business risk profile takes into account industry wide growth in exports over the last year; however, recent floods across the country, rising interest rates, inflationary pressures, and higher electricity costs pose risks on the sector over the medium term. Ratings are sensitive to the current weak macroeconomic environment globally and locally. Hence, meeting projected growth targets and maintaining financial risk profile will be important for ratings.

The assigned ratings take into account, FML’s association with the US-based 1888 Mills, which provides the Company a competitive advantage in terms of access to the US market. Sales to the associated concern and big retailers in the US market translate in regional and counterparty concentration, which have been incorporated into FML’s risk profile. However, comfort is derived from Company’s long standing association with large retailers in USA and Europe.

Assessment of financial risk profile for FY22 incorporates growth in topline, weakening in profitability margins and liquidity coverages (excluding exchange gain) and sound capitalization profile. Sales revenue exhibited double-digit growth in FY22, which was mainly attributable to higher average selling prices. However, due to a rise in inflationary pressure and resultant fall in consumer purchasing power in export markets, demand has remained subdued in the ongoing year as is evident from lower sales revenue. Gross margins for FY22 reduced due to higher input costs; however, the same witnessed an increase in the ongoing year due to PKR devaluation. Bottom-line of the Company for FY22 and 1QFY23 were supported by one-off exchange gains.

While exposed to currency volatility, maintenance of cash flow coverages against outstanding obligations and debt servicing ability will remain important for ratings. Ratings factor in sound capitalization profile through support from profit retention and issuance of right shares, despite elevation in the quantum of borrowings to finance working capital needs and expansion plans. Going forward, improving profitability profile will be important to enhance liquidity coverages. In view of management’s intention to finance all future expansions through internal cash generation, maintaining short-term liquidity metrics and leverage levels in line with rating benchmarks will be a critical rating factor.

For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: https://www.vis.com.pk/

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