Karachi, In a recent evaluation, VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Union Apparel (Private) Limited (UAPL) at 'A-/A-2' (Single A-Minus/A-Two), signifying a stable outlook. The medium to long-term rating of 'A-' indicates good credit quality with adequate protection factors, though risk factors may vary with economic changes. The short-term rating of 'A-2' reflects good certainty of timely payment, underpinned by sound liquidity factors and company fundamentals, alongside good access to capital markets with small risk factors. This announcement follows the previous rating action on January 18, 2023.
According to VIS Credit Rating Company Limited, the reaffirmed ratings consider the medium business risk profile of the textile sector in Pakistan, characterized by its cyclicality and intense competition. The sector's performance is closely tied to broader economic conditions, making it vulnerable to fluctuations in demand influenced by economic factors. The textile industry, a significant contributor to the country's total exports, faces challenges from global economic cycles, geopolitical issues, and liquidity constraints due to delayed government sales tax refunds. Additionally, supply-side risks, such as local cotton crop production and dependence on imported raw materials, pose significant exchange rate risks.
The ratings also reflect UAPL's recent business performance, including revenue growth driven by increased unit prices despite a slight drop in sales volumes in FY23, leading to an improved gross margin. However, a higher finance cost due to the raised monetary policy rate pressured the net margin. In the first quarter of FY24, UAPL's net sales and profitability metrics saw further improvement with the start of operations at a new facility. Management expects sales growth to persist and margins to align with historical trends in the current fiscal year.
Further considerations include UAPL's financial risk profile, which showed slight improvement in FY23 due to debt reduction. The company's capitalization profile improved as both gearing and leverage indicators trended downwards. The liquidity profile remains adequate for meeting outstanding obligations, with Funds from Operations (FFO) increasing due to higher operating profitability. Consequently, the Debt Service Coverage Ratio (DSCR) and cash flow coverages improved following debt repayment. The future ratings are sensitive to the enhancement of profitability metrics and the maintenance of capitalization indicators.