Karachi, June 24, 2021 (PPI-OT):VIS Credit Rating Company Limited (VIS) has maintained the entity ratings of Sadaqat Limited (SL) at ‘A/A-2’ (Single A/A-Two). Moreover, VIS also maintains the rating of debt instrument (TFC) at ‘A’ (Single A). Medium to long-term rating of ‘A’ denotes good credit quality coupled with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. Short-term rating of ‘A-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are considered sound. Rating-Watch has been removed and the outlook on the assigned ratings has been changed to ‘Positive’. Previous rating action was announced on April 15, 2020.
The revision in rating outlook captures the plans for backward integration envisaging better margins along with SL’s overall performance during the pandemic and subsequently in the ongoing year. Reaffirmation of ratings take note of topline growth (on the back of increase in production capacity in knitting segment, higher export orders and favourable pricing) along with the timeline recoupment in gross margins (mainly due to cost reduction measures), sound capitalization levels, adequate cash flows and debt servicing ability.
Moreover, ratings factor in the projected capitalization support through additional capital issue as planned to be raised through IPO over the rating horizon. Assigned ratings also continue to take into account the sponsor’s extensive experience in the value-added textile sector along with SL’s sound track record of operations, client base and IT infrastructure. Given the aggressive growth strategy followed by the management, leverage indicators historically have remained on the higher side and will continue to remain elevated on account of debt drawdown planned for capital-intensive investment projects. This in turn adds to the risk profile of the company and acts as a rating constraint.
During the period under review, the management in order to achieve operational and managerial synergies rolled out a capex plan for backward integration of operations through setting up spinning and weaving facility with 29,664 spindles (including 29,184 ring frames and 480 MVS) and 132 Airjet looms, respectively. Total estimated cost of these project stands at Rs. 7.1b; of which 70% will be funded by a 10-year (inclusive of 2 years grace period) long term financing facility (TERF/LTFF) while remaining project’s cost will be arranged through internal cash flows and additional capital issue as planned to be raised by initial public offerings (IPO).
The projects are expected to come online in FY22 and would reduce the dependency of procuring raw material from outsourced suppliers by ~30%. In the long run, margins are expected to improve on account of reduced cost of production and is considered important from a ratings’ perspective. Moreover, SL has voluntarily opted with best corporate governance practices and has restructured BOD composition and its committees accordingly.
TFC Issue
In July’20, SL raised Rs. 1.5b through a privately placed TFC issue in order to fund the expansion in knitted/woven garment segment by addition of new machinery. Tenor of the instrument is 5 years (including one year of grace period) with 8 equal semi-annual principal installments commencing from Jan’2022. In addition, the instrument carries an interest rate of 3-month KIBOR plus a spread of 225 bps and the interest is payable quarterly in arrears.
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/