The Pakistan Credit Rating Agency Limited / Textile

Ratings (July 2014)

Maqbool Textile Mills Limited (MTML)

Entity / Initial
Long Term / BBB+
Short Term / A2

Financial Data PKR (mln)

9MFY14* / FY13 / FY12
Total Assets / 2,803 / 2,155 / 1,485
Total Debt / 1,530 / 947 / 526
Equity / 658 / 688 / 552
Turnover / 3,716 / 4,554 / 3,422
Net Income / 16 / 174 / 126
FCFO/Interest / 1.8 / 2.4 / 3.1
Total Debt/FCFO / 1.7^ / 1.0 / 0.4
Gross Margin (%) / 7.1 / 10.8 / 10.2
Debt/Debt + Equity (%) / 69.9 / 57.9 / 48.8

*Based on 9 months unaudited accounts

^Annualized

Analysts

Saira Rizwan

+92 42 3586 9504

Rana M. Nadeem

+92 42 3586 9504

Profile

§ Maqbool Textile Mills Limited (MTML) – the flagship company of Maqbool Group (MG) – commenced operations in 1989 and is listed on all bourses of the county. With 70,000 plus spindles and 10 saw gin machines, the company is engaged in cotton ginning, manufacturing and sale of cotton and polyester yarn. MG, with an equity base of ~ PKR 1.1bln at end-FY13, has main interests in textile (spinning and ginning), flour milling, and seed oil extraction businesses.

§ The company’s overall control vests with eight-member BoD, including the CEO. The CEO, Mian Tanvir Ahmed Sheikh, also holds the office of the Chairman. Seven directors are Maqbool Group’s family members, while one director is the NIT nominee. Three of the family directors are in executive roles. The CEO is supported by a team of individuals with relevant textile experience.
Rating Rationale and Key Drivers

§ The ratings reflect largely commodity-like nature of MTML’s spinning operations that limit the cushion to absorb industry volatility. The management, being cognizant of this, is attempting to change its count mix and export geographies along with focusing on domestic market to capitalize on GSP Plus driven demand. This would take time, while pressure on core margins have started building-up lately due to changing demand dynamics in China – key export market for MTML with one third contribution. MTML’s financial profile has lately constrained, albeit adequate, on account of expansion-related debt and recent deterioration in cashflows. The company has a well-defined and efficient management structure with clear operational focus. The management is in the process of upgrading overall technology infrastructure to improve integration and decision making process.

§ The ratings are dependent on the management's ability to add profitable incremental volumes, given thin bottom-line margins. Meanwhile, any increase in debt levels without adequate support from cash flows, compromising debt servicing capacity, would negatively impact the ratings. Strengthening of governance framework for better oversight of strategic affairs is considered important.

Assessment

§ MTML operates mainly in spinning and ginning segments of the textile chain. The company has lately strengthened its spinning capacity with acquisition of 23,904 spindles unit located in Pir Mahal. MTML’s topline predominantly comprises contribution from spinning (FY13: 98%, FY12%: 97%), followed by a meagre proportion of ginning segment. The revenue mix tilted in favor of local sales (61%). Moreover, export sales are highly concentrated in China (75%). The top ten customers’ concentration has notably improved (FY13: 46%, FY12: 71%) on YoY basis, though remained high.

§ Over the years, the company has been growing, albeit slowly. During FY13, MTML’s existing operations witnessed performance deterioration on account of lower capacity utilization. However, the effect was neutralized on the back of additional new capacity which helped revenues to register an increase. The decline in capacity utilization (FY13: 76%, FY12: 91%) is attributable to higher power shortages. As the company solely relies on WAPDA for power supply, the risk of production interruptions increases given the present energy situation in the country. The company witnessed rise in raw material vis-à-vis personnel costs. Hence, despite higher revenues, the gross and operating margins YoY were largely intact. The finance cost jumped by 30% YoY on the back of rise in total debt. However, the net profitability for the period registered a sizeable uptick.

§ During 9MFY14, MTML’s performance weakened notably. Decline in spring demand from China and Pak Rupee appreciation against USD negatively impacted both volumes and per unit price in export revenues. At the same time, availability of yarn on account of import from India at lower prices resulted in decline in local yarn prices. Resultantly, despite improvement in local volumes, the topline was largely intact. Rise in operational costs owing to increase in power tariff resulted in significant decline in margins. Furthermore, MTML reported loss during 3QFY14 owing to higher interest expense. This further dented the company’s bottomline, which sharply declined by 85% YoY for 9MFY14.

§ As sizeable amount of MTML’s sales is concentrated in China, changing demand dynamics and related uncertainty regarding China’s cotton policy can impact the company’s performance. This can be observed in recent attrition in the company’s business margin. Cognizant of that, MTML intends to (i) diversify into fine counts to tap the indirect demand from GSP Plus status, and (ii) focus on local market to neutralize the slow down impact from China. At the same time, direct marketing efforts to reach countries like Japan, Korea, Turkey, and Egypt are being focused. In the medium term the company plans set up a weaving unit by adding 200 looms. MTML is also working to obtain gas connection to reduce its dependence on single source of electricity.

§ During FY13, the company’s cashflows from operations – a factor of its profitability – witnessed robust increase of 41% on YoY basis. Resultantly, the interest coverage improved; however, higher debt liability pushed the debt service coverage downward to 2.4x at end-Jun13. Owing to lower profitability in 9MFY14, the operational cashflows declined, and hence, the coverages, both interest and debt, were negatively impacted.

§ Since FY11, MTML’s working capital needs have been depicting a rising trend. With acquisition of spinning unit in Oct-12, there was a sharp increase in inventory needs, thus net cash cycle days increased. The company net working capital requirement through a combination of internal cashflows and short-term borrowings (STB). The STBs showed an increasing trend, though seasonality is observed period on period. MTML maintains sufficient self-liquidating assets to shield against STBs.

§ MTML has a leveraged capital structure in line with most of the peers. Increase in leveraging was witnessed when MTML financed the acquisition of spinning unit’s assets mainly through debt. Further to this, in tandem with seasonality, the rise in short-term debt to finance the working capital also pushed the leveraging upward. The company has been regularly paying dividends since FY11.

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