Karachi, August 11, 2021 (PPI-OT):VIS Credit Rating Company Ltd. (VIS) has reaffirmed entity ratings of Faran Sugar Mills Ltd (FSML) at ‘A-/A-2’ (Single A minus/Single A-Two). The medium to long term rating of ‘A-’ signifies good credit quality with adequate protection factors. Risk factors are considered variable if changes occur in the economy. The short term rating of A-2 depicts good certainty of timely payment. Liquidity factors and company fundamentals are sound with good access to capital markets. Outlook on the assigned ratings has been revised from ‘Stable’ to ‘Negative’. Previous rating action was announced on March 20th, 2020.
Revision in rating outlook incorporates weakening profitability and liquidity indicators. While recoveries have been largely maintained, margins and debt coverage have been impacted due to narrowing of sugarcane and sugar price differential. The company offloaded stocks early in the season when prices were low which has constrained profitability in the current year. Some mitigation maybe available from sale of remaining inventory at better prices.
Investment income support from related parties has also been under pressure owing to lower average selling price of ethanol in Unicol and losses emanating from UniFood Industries. Cash flow coverage consequently decreased with debt service coverage below 1x. Leverage indicators also stood higher on account of increase in total debt majorly short term borrowings to fund high stock levels. Ratings may come under stress in case margins and debt coverage are not recouped in the medium term.
Assigned ratings take into account management plans on containing operating expenses through setting up various cost-saving projects for which the company has mobilized subsidized borrowings. Profitability of the company shall be contingent on timely selling of carry over stock at higher average selling prices given the significant jump in the selling price of sugar. Investment income from Unicol is expected to improve on account of rising trend observed in ethanol prices but is likely to be offset by the capex requirements in Uni Food Industries (at nascent stage).
Ratings remain sensitive to business risk emanating from inherent cyclicality in crop levels, raw material prices and any adverse changes in regulatory duties and are dependent on achieving improvement in financial profile while keeping leverage indicators at manageable levels. Also, VIS will continue to monitor developments regarding inquiries being conducted by ‘Inquiry Committee’, setup by the Prime Minister of Pakistan and will incorporate the outcome in ratings accordingly.
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/