Lahore, 11 Oct 2023:The Pakistan Credit Rating Agency (PACRA) has retained the entity ratings of A.J. Textile Mills Limited (ATML), spotlighting the company’s maneuver through a spectrum of challenges pertaining to the spinning sector in Pakistan, all while demonstrating a moderate profile. ATML, being a part of the multifaceted Aziz group, has adopted strategic initiatives like the implementation of a Capital Expenditure Plan (CAPEX) for energy cost optimization and technology upgradation amidst a convoluted industry scenario that grapples with issues like cotton supply disruptions and economic complexities such as currency devaluation and energy cost surges.
The Aziz group, recognized as one of Pakistan’s venerable conglomerates, operates seven major companies encompassing diverse domains like textile, FMCG, and laminated boards production, with ATML specifically concentrated on the manufacturing and sale of yarn, boasting a production capacity of 112,544 spindles. While this single-product focus inherently casts vulnerabilities in terms of supply chain stability - especially given that the company is dependent on raw cotton, a commodity that experienced a 55% shortfall in its targeted production last year in Pakistan - ATML has managed to post an 8.8% growth in revenue during FY23, elevating it to PKR 12.2bln from PKR 11.2bln in FY22, owing to heightened yarn prices in both domestic and international markets.
The complexities of a 100% single product concentration present palpable risks when disruptions on the supply side occur. As per estimates for FY24, the target for raw cotton production is fixed at 12.80mln bales, and an anticipated enhancement in cotton yield is expected to mollify some pressures on local production demand, which in the prior year was significantly impacted by detrimental factors affecting cotton crops across a substantial portion of Pakistan.
A strategic approach towards energy cost mitigation and technological advancement was manifested in ATML’s execution of a CAPEX, which facilitated the installation of an 8-megawatt solar plant and the Balancing, Modernization, and Replacement (BMR) for spindles upgradation. The company’s inclination towards local procurement, intending to secure 100% of its raw cotton from local sources, emerges as a strategy aimed at buffering against foreign exchange risks. Nevertheless, the elevated production costs, a spike in energy costs, and an amplifying interest burden have constricted margins and profitability.
Despite these challenges, ATML has maintained a moderate financial risk profile, with improvements in short-term trade leverage enhancing the company’s working capital management and a retention of earnings in the form of accumulated profits buttressing its equity base. The capital structure, albeit leveraged, combines borrowings from long-term (TERF) for BMR and short-term to cater to working capital needs.
Moving forward, the ratings hinge on the management’s adeptness in perpetuating its growth trajectory in revenues, margins, and profitability. The judicious management of working capital, ensuring ample cash flows and coverages, along with further refinements in governance structure and aligning the company's performance with its financial projections will be crucial determinants impacting future ratings.