VIS Reaffirms Entity Rating of Shahtaj Textile Limited.

Karachi: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Shahtaj Textile Limited at ‘A-/A2’ (Single A Minus/A Two). The long-term entity rating of ‘A-‘ signifies good credit quality with adequate protection factors, though risk factors may vary with potential economic changes. The short-term rating of ‘A2’ indicates a good likelihood of timely repayment of short-term obligations, supported by favorable short-term liquidity factors. The outlook on these ratings remains ‘Stable’. The previous rating action was announced on November 24, 2023.

According to VIS Credit Rating Company Limited, Shahtaj Textile Limited (“STL” or “the Company”), a part of the Shahnawaz Group, was incorporated as a public limited company in January 1990. It focuses on the manufacturing and marketing of greige fabric and commenced commercial production in January 1992. STL is listed on the Pakistan Stock Exchange.

The assigned ratings consider the medium business risk profile of Pakistan’s textile sector, characterized by exposure to economic cyclicality and intense competition. The sector’s performance is closely linked to broader economic conditions, making it vulnerable to demand fluctuations driven by economic factors. As a significant contributor to total exports, the textile industry faces exposure to global economic cyclicality, geopolitical challenges, and liquidity constraints due to the lengthy process of sales tax refunds. Supply-side risks, including local cotton crop production and reliance on imported raw materials, further expose the sector to considerable exchange rate risk.

STL’s ratings are supported by its over three-decade-long operational history, strong sponsor support, and limited reliance on imported yarn. However, the company’s exclusive focus on the weaving segment and lack of growth strategy remain rating constraints. During FY24, net sales remained stable while gross margins improved, although they were lower than the historical average, except for FY23. Net margin faced pressure due to high finance costs in FY24. Looking ahead, management anticipates gross margins to improve with a recovery in sales volumes and cost savings from an upcoming 1MW solar power plant. Additionally, the projected decrease in finance costs in a declining interest rate environment is expected to bolster the company’s overall profitability.

The ratings also reflect the financial risk profile of STL, evidenced by declining cash flow and debt coverages during the review period, although remaining at adequate levels. The liquidity profile remained satisfactory, with the cash conversion cycle aligning with industry averages. Capitalization indicators remained stable at manageable levels. Moving forward, maintaining cash flow coverages and capitalization profiles, along with further recovery in margins, will be crucial for the assigned ratings.

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