Karachi, July 01, 2022 (PPI-OT):VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of ‘BBB/A-2’ (Triple B /A-Two) to Sheikhupura Textile Mills Limited (STML). The medium to long-term rating of ‘BBB’ denotes adequate credit quality coupled with reasonable protection factors. Moreover, risk factors are considered variable if changes occur in the economy. The short-term rating of ‘A-2’ indicates good certainty of timely payment, sound liquidity factors supported by good fundamental protection factors and small risk factors. Access to capital markets is good. Outlook on the assigned ratings is ‘Stable’.
Ratings assigned to STML factor in high cyclicality and competitive intensity for spinning segment along with volatility in polyester and cotton prices which translate into moderate to high business risk profile. The company has some revenue diversification through retail sales of fabric under the brand name “Cross Stich”; however, the contribution of spinning segment accounting for over two-thirds of topline is sizable, therefore the company is exposed to moderately high business risk. Assigned ratings capture the extensive sponsor experience, increasing trend in yarn production volume, sound revenue growth and continued improvement in margins over the last three years. However, rising energy cost and sizeable uptick in cotton prices given the present commodities super-cycle will exert pressure on operating margins, going forward.
Liquidity profile is sound with healthy cash flow generation in line with improvement in profitability indicators. Stock levels have increased on a timeline while trade debts and stock in trade are more than sufficient to cover short-term borrowings. On the other hand, management would have to vigilantly monitor the current ratio given the same was reported just a little over threshold requirement for the assigned rating. Equity base despite growth on a timeline basis has remained limited in terms of size due to which leverage metrics remain elevated.
The ratings also incorporate management’s focus on gradual expansion in the scale of spinning operations with recent installation of 3,000 spindles, on-going capacity expansion of retail unit through procurement of embroidery machines and other cost rationalization initiatives. Going forward, sales are expected to improve on account of adequate orders in pipeline along with expansion in scale of operations. The capitalization plan of the expansion would need to be aligned with that existing capital structure and dovetailing of timely revenue from the same. However, the ratings remain sensitive to any adverse changes in regulatory changes, limited revenue diversification and overall nominal scale of operations. The ratings are dependent on sustenance of margins, realization of projected targets, incremental cash flow generation and cost savings from recent capital expenditure and improvement of leverage indicators.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: https://www.vis.com.pk/