KARACHI: VIS Credit Rating Company Limited has maintained the entity ratings of Two Star Industries Limited at 'BBB+/A2', indicating adequate credit quality with reasonable protection factors. The ratings outlook, however, remains 'Negative', reflecting the challenges faced by the company amid economic uncertainties.

Two Star Industries, co-owned by Umer Group of Companies and RYK Group, has been engaged in the manufacturing and sale of white refined sugar since its incorporation in 2016. Headquartered in Lahore, its manufacturing facility is located in Toba Tek Singh.

The ratings take into account the business risk profile inherent in Pakistan's sugar sector, which is influenced by seasonal cycles, competitive procurement, and regulatory changes. The discontinuation of government-mandated minimum support pricing for sugarcane from the 2024-25 season may alter supply dynamics in the future. The production for the 2024-25 season fell short of expectations, with sugar output reaching only 5.8 million metric tons, significantly below earlier estimates.

The company faced profitability challenges in FY24 due to reduced sales volume, thin margins, and increased financial costs, despite higher average selling prices. However, in early FY25, Two Star Industries successfully offloaded previous inventory at strong margins, aiding positive cash flow for new season working capital needs. Inventory management and financial cost control remain critical concerns.

Additionally, the company is working to strengthen its capital structure, currently reliant on sponsor loans. Management has reprofiled its borrowing, converting some short-term debt to long-term debt to facilitate working capital financing.

VIS last adjusted the ratings on November 17, 2023, and continues to monitor the company's financial health and market conditions.