Karachi, VIS Credit Rating Company Limited (VIS) has decided to maintain the entity ratings of The Crescent Textile Mills Limited (Crestex) at 'A-/A-2', signaling good credit and liquidity standings with minor risk factors. However, the outlook on these ratings has been revised from 'Stable' to 'Negative', reflecting concerns over the company's future performance amidst challenging market conditions. This adjustment underscores the complex environment faced by the textile sector, marked by economic cyclicality, intense competition, and supply-side risks.
According to VIS Credit Rating Company Limited, Crestex, a stalwart in yarn production, greige fabrics, processed fabric, home textiles, and institutional garments since 1950, has experienced a downturn in sales volume by 17% YoY. This decline is attributed to various pressures including increased costs of sales due to higher raw material prices, fuel, and energy costs, alongside other inflationary impacts. Additionally, heightened finance charges resulting from a higher monetary policy rate have further compressed net margins.
The textile industry in Pakistan, within which Crestex operates, is highly susceptible to broader economic shifts. Its reliance on exports, coupled with domestic demand fluctuations influenced by both local and international economic factors, poses significant challenges. The industry's dependency on imported raw materials and local cotton production also exposes it to exchange rate volatility, intensifying the sector's business risk profile.
Financially, Crestex's long-term debt witnessed an increase due to the financing of a new weaving unit, with short-term borrowings also rising to address escalated working capital needs triggered by surging raw material costs. Consequently, leverage and gearing ratios have seen a marginal downturn. The revision in the outlook to 'Negative' is mainly predicated on deteriorating cash flow coverage indicators, notably a significant fall in the debt-service-coverage-ratio (DSCR), and a liquidity profile that remains on the edge.
VIS's report indicates that the future ratings of Crestex will hinge on its ability to navigate these profitability, capitalization, and cash flow challenges. Additionally, any enhancement in the company's liquidity profile will be critical for stabilizing or possibly improving its ratings in the face of ongoing economic uncertainties affecting the textile sector.