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Karachi, Gadoon Textile Mills Limited (GTML) has once again secured the entity ratings of ‘A+/A-1’ from VIS Credit Rating Company Limited (VIS). The medium to long-term rating of ‘A+’ represents good credit quality with adequate protection factors. However, these might be influenced by potential economic dynamics. The short-term ‘A-1’ rating emphasizes a high assurance of punctual payment, strengthened by exceptional liquidity aspects and reliable foundational protection components. The outlook for the mentioned ratings remains ‘Stable’, echoing the prior announcement from November 02, 2022.
According to VIS Credit Rating Company Limited, the ratings awarded to GTML are influenced by the firm’s profound expertise in the spinning sector, its expansive operations consistently geared towards enhancing efficiency, and a longstanding investment portfolio in associates. The ratings further benefit from a robust sponsor profile. Although the business risk profile of GTML is hampered by the present subdued macroeconomic climate, both on global and local scales, exacerbated by factors like high-interest rates, inflation, escalating raw material expenses, the country’s energy predicament, and an international decline in demand, GTML’s risk position remains buttressed by the financial fortitude of the sponsor and group, the receipt of dividend income from its investments, substantial local sales, and diversification strategies.
The financial risk profile of GTML reveals a decline in profitability, liquidity, and capitalization indicators. The revenue growth for the fiscal year 2023 was primarily linked to the rupee’s depreciation, which bolstered per unit costs. Nevertheless, the profitability outlook regressed to historical levels, predominantly due to surging raw material expenses, heightened power costs, and escalated conversion expenses compared to the earlier period. The surge in financial expenses, propelled by increased benchmark interest rates and the expanding working capital need, counterbalances the uptick in profitability garnered from the profit share of associates. The primary form of financing on GTML’s books is subsidized financing, provided through multiple schemes initiated by the State Bank of Pakistan (SBP).
A dip in profit generation in FY23 resulted in the contraction of cash flow coverage against its liabilities. As of June 2023, the current ratio was recorded at 1.19x (compared to June 2022’s 1.47). Moreover, an elongated cash conversion cycle due to extended inventory holding days heightened reliance on short-term financing. In the same period, GTML observed an expansion in its equity base, mainly propelled by a favourable bottom-line. During a board meeting on June 22, 2023, the company’s directors resolved to allocate Rs. 16.5 billion as funds not available for dividend distribution, taking into account long-term investments, capacity augmentations, and balancing, modernization, and replacement (BMR) to more precisely signify the essence of these reserves. As of June 2023, the company’s debt profile, encompassing short-term and long-term debts, saw a significant rise. Both gearing and leverage ratios also climbed to 1.24x and 1.86x respectively, compared to the prior year’s figures. Keeping capitalization metrics within manageable parameters will be pivotal from the standpoint of future ratings.
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