Karachi, December 29, 2022 (PPI-OT):VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Arshad Corporation Limited (ACL) at ‘A-/A-2’ (Single A Minus/A-Two). The medium to long-term rating of ‘A-’ denotes good credit quality coupled with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small. Previous rating action was announced on September 27, 2021. Outlook on the assigned ratings is ‘Stable’.

ACL is an export-oriented composite textile unit and primarily operates four business segments, including grey fabric, processed fabric, made-ups and garments. The U.S. and Europe are the primary target markets, which account for nearly three-fourth of total sales. Shareholding of the company is held by the sponsoring family, who have been in the industry since 1954. The assigned ratings take into account notable growth in revenues primarily led by higher average product prices during FY22. Gross margins remained healthy while net margins were maintained despite increase in financial charges.

The company has recently carried out expansion of its weaving operations which became operational in August’22. The company has also executed BMR to enhance operational efficiencies in its processing and garments units during FY22. Despite notable increase in borrowings to support capex and meet elevated working capital requirements, gearing has remained intact due to augmentation in equity base. The capitalization is supported by profit retention and considerable support by sponsors over the years in the form of provision of interest free loan, payable at the company’s discretion.

During 1Q’23 the company reported slight improvement in gross margins on the back of favourable product prices. As per management, apart from some slowdown in the month of Sep’22, the company has been receiving steady export orders. Meanwhile, continuation of the same trend in full year seems challenging, particularly, in the wake of rising finance cost, weak FFO and its consequential impact on debt service coverage. The marginal current ratio, long operating cycle and relatively illiquid nature of stock in trade, point towards the need for better liquidity management. The ratings will remain sensitive to achieving projected revenues and profitability while maintaining liquidity and capitalization indicators within acceptable range.

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VIS Credit Rating Company Limited
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