Karachi, December 31, 2021 (PPI-OT):VIS Credit Rating Company Limited (VIS) has reaffirmed the medium to long-term entity ratings of Artistic Denim Mills Limited (ADML) at ‘A-’ (Single A Minus). The short-term rating of ADML has been revised from ‘A-1’ (A-One) to ‘A-2’ (A-Two). The medium to long-term rating of ‘A-’ signifies good credit quality and adequate protection factors; risk factors may vary with possible changes in the economy. The short-term rating of ‘A-2’ denotes good certainty of timely payment coupled with sound company fundamental and liquidity factors. Outlook on the ratings is ‘Stable’. Previous rating action was announced on November 18, 2020.

ADML operates as a vertically integrated denim fabric and garment manufacturer. The company’s revenues are largely export-oriented. The ratings incorporate the business risk profile of the denim sector, which is driven by the global demand and pricing dynamics. In the outgoing year (FY21), demand for denim products has posted some recovery after contracting in the preceding year. Accordingly, the Company’s gross margin posted improvement and normalized to ADML’s long-term trend. The company’s performance in Q1’FY22 has been noteworthy and continuation of this trend should allow ADML to post strong topline growth in FY22. Nevertheless, given increase in cotton prices, margins have come under pressure, albeit these are likely to normalize as margins will be supported by significant PKR depreciation noted so far in Q2’FY22.

In line with improvement in topline and margins in FY21, cash flow coverage indicators posted improvement. However, as the company undertook SBP’s TERF-scheme based capital expenditure in FY21, gearing has trended up on a timeline. As per management, capital expenditure is likely to continue, as the management pursues capacity expansion; nevertheless, gearing is projected to be maintained at similar level on the back of adequate profit retention.

The company’s short-term rating has been revised, mainly incorporating elongation of the Cash Conversion Cycle (CCC) and higher working capital requirements on a timeline. This elongation in CCC is a result of cotton inventory buildup, mainly done pre-emptively to hedge against further increase in cotton pricing. The assigned ratings remain dependent on maintenance of liquidity and capitalization metrics in line threshold for the assigned rating.

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/