PROSPERITY WEAVING MILLS LIMITED

Transcription

1 PROSPERITY WEAVING MILLS LIMITED NEW [DEC-14] PREVIOUS [MAR-14] REPORT CONTENTS 1. RATING ANALYSES Long-Term A- A- 2. FINANCIAL INFORMATION Short-Term A2 A2 3. RATING SCALE Outlook Stable Stable 4. REGULATORY AND SUPPLEMENTARY DISCLOSURE DECEMBER 2014

2 RATING ANALYSES (DECEMBER 2014) PROSPERITY WEAVING MILLS LIMITED (PROSPERITY WEAVING) RATING RATIONALE The ratings reflect the strength of Prosperity Weaving's conservative business model that has helped the company to maintain its position amid suppressed textile fundamentals. With reasonably diversified geographical presence, the company has gradually expanded its scale of operations. However, debt driven capacity addition has stretched the financial risk profile. At the same time, dip in profitability - a factor of squeezed margins - has suppressed operational cashflows. This has dented the company's debt servicing ability. The ratings draw comfort from company's association with Nagina Group. KEY RATING DRIVERS The ratings are dependent on the management's ability to recuperate business margins through efficient utilization of new capacity. Moreover, prudent debt management is considered important to maintain ratings at current level. PROSPERITY WEAVING MILLS LIMITED (PROSPERITY WEAVING) December 2014 TEXTILE Industry: Pakistan s textile sector continued to dominate the country s total exports by maintaining its share (52%) during FY14. Textile exports registered YoY increase of 5% with highest contribution by weaving segment both in terms of quantity and value, followed by knitwear. Due to China led change in spinning dynamics, yarn export quantities witnessed decline on YoY basis (1QFY15: ~33%, FY14: ~10%), thereby reducing its contribution (1QFY15: ~13%, FY14: ~14%, 1QFY14: ~16%, FY13: ~17%) in overall exports value. Nevertheless, with industry s focus on value-addition, demand for final textile products has emerged strongly. Resultantly, the profitability of the sector remained healthy. Key challenges to the sector include (i) continuing energy crisis, (ii) ability to tap potential demand originating from GSP Plus status in terms of related infrastructure investment and establishing relationship with buyers, and (iii) absorption of dip in spinning demand from China by local industry. Performance: Prosperity Weaving witnessed a slow year, as FY14 revenues dropped by ~4% YoY. This is mainly attributable to decline in export price and volumes. Local sales volumes also plunged; however, rise in unit price helped in sustaining the total revenues largely at last year s level. Amidst the Asian region, exports to China, the key market, were significantly affected (FY14: 23%, FY13: 56 %) as a result of subdued demand. However, the company managed to expand its outreach in other Asian countries mainly Korea. Top ten customers concentration in export market up-ticked (FY14: 46%, FY13: 44%), while the company achieved diversification in the local market (FY14: 37%, FY13: 36%). Besides depressed sales, cost of sales registered a rise a factor of inventory losses due to declining cotton prices and higher energy costs. At the same time, due to YoY surge in administrative expenses operating margins came down. Hence, net profits declined. During 1QFY15, the textile chain fundamentals remained subdued. Due to lower fabric prices, both in local and international market, the revenue plunged down by 18% YoY. The existing perennial power shortages and tariff hike put further dent on margins. Consequently, the company managed to break even marginally. Going forward, in the absence of volumetric growth in business volumes net margins are expected to remain suppressed on the back of rise in finance cost, as the company has lately obtained significant debt for expansion. Business Strategy: The first phase of expansion (48 out of 84 additional looms) started operations in Aug14, while the remaining is expected to come online by end-dec14. To enhance efficiency in operations, the company is in process of replacing its existing looms (192 old looms to be replaced by 128 modern air-jet looms) in phased manner. Going forward, amid challenging textile sector dynamics, the effective utilization of additional capacities to generate incremental revenues is considered critical. Moreover, sizeable revenues from EU market to support the dwindling topline remains to be seen. Working Capital Management: During FY14, the working capital needs remained low a factor of lower capacity utilization on a YoY basis. However, incorporating additional capacity coming online in 1QFY15, the inventory level increased. The company manages its working capital requirements through a combination of short-term borrowings (STBs) and internal cashflows. In the absence of sufficient profitability, reliance on STBs would increase (unutilized lines of PKR 1,356mln as at end-jun 14). Cashflow & Coverages: Prosperity Weaving s operating cashflows, a function of EBITDA, declined significantly. Also, the impact of additional loan further hampered the coverages. Consequently, the coverages, both interest and debt, impaired to 2.2x (end-jun14: 5.5x; end-jun13: 5.9x) and 1x (end-jun14: 2.2x; end-jun13: 3x), respectively. Considering currently constrained cashflows, the company may resort to short-term borrowings to pay long-term debt. Capital Structure: In line with the management s plan to finance capacity expansion through debt, the debt to equity ratio (net of revaluation surplus) surged to 58% at end-sep14 (end-jun14: 53%, end-jun13: 41%). Profile: Prosperity Weaving Mills Limited (Prosperity Weaving), incorporated in November 1991, is primarily engaged in production of apparel and home furnishing greige fabric and dyed yarn fabric of various widths and constructions (capacity: 392 air jet looms). The company is listed on Karachi and Lahore Stock Exchanges. Prosperity Weaving is majority owned by Nagina Group (NG), through key sponsoring individuals (~57%) and group companies (30%). Governance and Management: Prosperity Weaving's BoD, comprising eight members including the Chief Operating Officer (CEO), is dominated by sponsoring family. The company's CEO, Mr. Shaukat Ellahi Shaikh, is a graduate of Columbia University and has been associated with Prosperity Weaving since its inception. He is supported by a team of professionals with relevant experience in the textile industry.

3 TEXTILE Financials (Summary) PKR mln Prosperity Weaving Mills Limited BALANCE SHEET 31-Sep Jun Jun Jun-12 1QFY14 Annual Annual Annual Non-Current Assets 1,468 1, Current Assets 1, Inventory Trade Receivables Others Total Assets 2,642 2,299 1,774 1,652 Debt 1,280 1, Short-term Long-term (Inlc. Current Maturity of long-term debt) Other short-term liabilities Other longterm liabilities Shareholder's Equity Total Liabilities & Equity 2,642 2,299 1,774 1,652 INCOME STATEMENT Turnover 1,433 6,347 6,600 5,382 Gross Profit Operating Expenses (40) (160) (157) (152) Financial Charges (20) (61) (83) (107) Net Income Cashflow Statement Free Cashflow from Operations (FCFO) Net Cash changes in Working Capital (192) 33 (86) (63) Net Cash from Operating Activities (162) Net Cash from InvestingActivities (87) (655) (47) (74) Net Cash from Financing Activities (257) 28 Net Cash generated during the period 6 (36) Ratio Analysis Performance Turnover Growth (SPLY) -18.3% -3.8% 22.6% -9.6% Gross Margin 4.3% 7.6% 10.1% 7.0% Net Margin 0.2% 2.9% 5.2% 1.4% ROE 1.0% 21.4% 39.7% 13.3% Coverages Debt Service Coverage (X) (FCFO/Gross Interest+CMLTD+Uncovered STB) Interest Coverage (X) (FCFO/Gross Interest) Debt Payback (Years) (Total Debt (excluding Covered Short Term Borrowings) / FCFO) Liquidity Short Term Borrowings Coverage (Adjusted Quick Assets/Short Term Borrowings) n.a. Net Cash Cycle (Inventory Days + Receivable Days - Payable Days) Capital Structure (Total Debt/Total Debt+Equity) 57.0% 51.6% 40.2% 57.6% Prosperity Weaving Mills Limited (Prosperity Weaving) Dec-14

4 STANDARD RATING SCALE & DEFINITIONS Credit rating reflects forward-looking opinion on credit worthiness of underlying entity or instrument; more specifically it covers relative ability to honor financial obligations. The primary factor being captured on the rating scale is relative likelihood of default. LONG TERM RATINGS AAA Highest credit quality. Lowest expectation of credit risk. Indicate exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA+ Very high credit quality. Very low expectation of credit risk. Indicate very strong capacity for timely payment of financial commitments. AA This capacity is not significantly vulnerable to foreseeable events. AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- High credit quality. Low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be vulnerable to changes in circumstances or in economic conditions. Good credit quality. Currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. Speculative. Possibility of credit risk developing. There is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Highly speculative. Significant credit risk. A limited margin of safety remains against credit risk. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment. SHORT TERM RATINGS A1+: The highest capacity for timely repayment. A1:. A strong capacity for timely repayment. A2: A satisfactory capacity for timely repayment. This may be susceptible to adverse changes in business, economic, or financial conditions. A3: An adequate capacity for timely repayment. Such capacity is susceptible to adverse changes in business, economic, or financial conditions. B: The capacity for timely repayment is more susceptible to adverse changes in business, economic, or financial conditions. CCC CC C D High default risk. Substantial credit risk CCC Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. CC Rating indicates that default of some kind appears probable. C Ratings signal imminent default. Obligations are currently in default. C: An inadequate capacity to ensure timely repayment. Rating Watch Alerts to the possibility of a rating change subsequent to, or in anticipation of, a) some material identifiable event and/or b) deviation from expected trend. But it does not mean that a rating change is inevitable. Rating Watch may carry designation Positive (rating may be raised, negative (lowered), or developing (direction is unclear). A watch should be resolved with in foreseeable future, but may continue if underlying circumstances are not settled. Outlook (Stable, Positive, Negative, Developing) Indicates the potential and direction of a rating over the intermediate term in response to trends in economic and/or fundamental business/financial conditions. It is not necessarily a precursor to a rating change. Stable outlook means a rating is not likely to change. Positive means it may be raised. Negative means it may be lowered. Where the trends have conflicting elements, the outlook may be described as Developing. Suspension It is not possible to update an opinion due to lack of requisite information. Opinion should be resumed in foreseeable future. However, if this does not happen within six (6) months, the rating should be considered withdrawn. Withdrawn A rating is withdrawn on a) termination of rating mandate, b) cessation of underlying entity, c) the debt instrument is redeemed, d) the rating remains suspended for six months, or e) the entity/issuer defaults. Disclaimer: PACRA's ratings are an assessment of the credit standing of entities/issues in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors. PACRA's opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security s market price or suitability for a particular investor.

5 Regulatory and Supplementary Disclosure Rated Entity Name of Rated Entity Sector Type of Relationship Purpose of the Rating Prosperity Weaving Mills Limited Textile Solicited Independent Risk Assessment Rating History Dissemination Date Long Term Short Term Outlook Rating Watch 29-Dec-14 A- A2 Stable - 20-Mar-14 A- A2 Stable - 10-Jan-13 A- A2 Stable - 30-Nov-11 A- A2 Stable - 01-Nov-10 A- A2 Stable - 5-Nov-09 BBB+ A2 Stable - Related Criteria and Research Methodology: Corporate Rating Methodology Research: Textile Sector Overview Rating Analysts Rehan Alam Khan Saira Rizwan rehan.alam@pacra.com saira.rizwan@pacra.com ( ) ( ) Rating Team Statement Disclaimer Rating is an opinion on relative credit worthiness of an entity or debt instrument. It does not constitute recommendation to buy, hold or sell any security. The rating team for this assignment does not have any beneficial interest, direct or indirect in the rated entity/instrument. 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