Karachi: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Feroze1888 Mills Limited, a prominent textile manufacturer, maintaining its 'AA-/A1' status, according to a press release issued by the company on May 19, 2025. The medium to long-term rating of 'AA-' signifies high credit quality with strong protection factors, while the short-term rating of 'A1' indicates a strong likelihood of timely repayment of obligations, supported by excellent liquidity factors. The outlook on the assigned ratings remains 'Stable'. The previous rating action occurred on February 27, 2024.
Feroze1888 Mills Limited (FML), established in 1972, is a vertically integrated textile manufacturer in Pakistan, specializing in the production and export of specialized yarn and textile products. The company has a significant presence in key markets, including the United States, the United Kingdom, and Europe, where it offers a diverse range of terry and non-terry textile products. FML's operations include spinning, weaving, dyeing, printing, stitching, and packaging, and the company collaborates with 1888 Mills USA to enhance its global reach.
The business risk profile of Pakistan's textile sector remains a crucial consideration for FML's ratings, given its vulnerability to economic cyclicality and intense competition. The sector faces demand volatility, rising production costs, and regulatory challenges, such as the removal of subsidies and increasing energy costs. Although global demand has shown signs of recovery following reductions in policy rates by central banks, competition from regional players and rising energy costs continue to dampen profitability.
The company's operating performance is underscored by a 22% year-over-year increase in revenue to PKR 69.76 billion in FY24, driven by higher sales volumes and effective pricing strategies. Export sales dominated the revenue mix, comprising 97% of the total, with the United States accounting for 74.5% of total exports. The company's focus remains on the Terry towel segment, which represented the majority of sales. While efforts to reduce client concentration are ongoing, the top two clients still contributed 52% of total sales in FY24.
During the first nine months of FY25, FML experienced margin compression due to lower sales, rising energy costs, competitive pricing pressures, and a reduced contribution margin. By FY25, the topline is expected to normalize, although it will likely remain below the previous year's level. A decline in interest rates is anticipated to provide some support, but profitability margins are expected to remain under pressure due to persistent high energy costs and global competition. FML is in the process of establishing a wholly-owned foreign subsidiary in the UK to enhance export sales through international e-commerce operations.
According to information available from the Pakistan Stock Exchange (PSX), financial risk factors underpin the assigned ratings, as higher production costs have increased reliance on short-term borrowings to support working capital needs. This reliance is particularly significant for funding credit sales to foreign clients, leading to elevated debt utilization. Management reports that the rise in short-term borrowings was seasonal, linked to raw material procurement, while scheduled repayments have reduced the company's long-term debt. Overall capitalization levels remained manageable, with only a minor increase in gearing and leverage.
Margin pressures contributed to a decline in Funds from Operations (FFO), negatively impacting debt coverage metrics. Although the Debt Service Coverage Ratio (DSCR) weakened, it remained adequate. Liquidity stress and an extended cash conversion cycle led to a declining current ratio. Looking ahead, a rebound in sales and a reduction in finance costs are expected to support profitability margins, but significant improvement will likely remain constrained.