Karachi, April 08, 2022 (PPI-OT):VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Ashraf Sugar Mills Limited (ASML) to ‘A-/A-2’ (Single A Minus/A-Two). Long-term rating of ‘A-’ signifies good credit quality with adequate protection factors. Risk may vary slightly from time to time because of economic conditions. Short-term rating of ‘A-2’ depicts good certainty of timely payment where liquidity factors are sound with good access to capital markets. Outlook on the assigned rating is ‘Stable’. The previous rating action was announced on February 22, 2021.
The ratings assigned to ASML take into account the company’s association with ‘Ashraf Group of Industries’ having business interests in sugar, coal mining, stone quarry, livestock and dairy, power, corporate agriculture farming and real estate. Business risk profile of sugar sector is high given inherent cyclicality in crop levels and raw material prices along with any adverse changes in regulatory duties. However, given the projected higher crop coverage area and yields, the balance of raw material, demand supply dynamics is expected to remain manageable.
The ratings further take note of developments with regards to penalties imposed by Competition Commission of Pakistan (CCP) on certain sugar mills and legal proceedings for interim relief initiated by the subject company. However, in the meanwhile, uncertainty of the outcome would persist on the sector. The material impact of penalty imposed (amounting to Rs. 835m) on ASML will be significant therefore VIS will continue to monitor further development in this matter.
The ratings are underpinned by extensive sponsors experience, long-standing business relationships with institutional customers and relatively maintained scale of crushing operations. The ratings incorporate dip in revenues during the outgoing year owing to decline in volumetric sale of sugar, monotone revenue stream coupled with gross margins being on a lower side than peers primarily on account of lower sucrose recovery. The management has been striving for quality improvement and process efficiencies through extensive BMR to meet quality standards of corporate clientele which contributes over four-fifths to the revenue.
The ratings also factor in capital expenditure contemplated by the management by the end of next financial year to conserve energy and reduce production losses which is likely to bode well for the company. The capex would also include upgradation of power house and installation of furnaces in view of the management’s plan to tap steel business, going forward. This would allow the Company to remain competitive and curtail the risk emanated from cyclicality of sugar sector to some extent through diversification. The liquidity profile exhibited improvement in line with higher cash flow generation to meet contractual obligations.
The ratings reflect improvement in gearing by end of outgoing year; however, owing to notable increase in total liabilities in line with recognition of customer advance as contract liability under the new accounting policy, leverage increased on a timeline basis. Both leverage and gearing indicators exhibit a magnified position at end-1QFY22 given the seasonality in the sugar industry where each quarter has sizably varying working capital requirements. The ratings remain sensitive to completion of efficiency initiatives with improvement in gross margins while maintaining leverage and liquidity at comfortable levels.
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/