Karachi: VIS Credit Rating Company Limited has reaffirmed the entity ratings of Umar Spinning Mills Private Limited (USMPL) at 'BBB+/A2'. These ratings indicate an adequate credit quality for medium to long-term obligations and a good likelihood of timely repayment for short-term obligations. The outlook on these ratings remains stable, following the previous rating action in February 2024.
USMPL, established in 1991, operates as a private limited company in Pakistan, engaging primarily in the manufacturing and sale of yarn. While its registered office is in Karachi, the company's manufacturing plant is situated in Lahore. Recently, USMPL ventured into salt processing with a new plant in Karachi, currently undergoing testing. The company is part of the Pervaiz Group, a conglomerate with interests across various sectors including textiles and logistics.
The reaffirmed ratings reflect the current business risk profile of Pakistan's textile spinning sector, which is marked by high to medium risk exposure. The sector faces challenges such as demand cyclicality, competitive pressures, regulatory changes, and energy cost sensitivity. These factors, coupled with insufficient domestic cotton production and political uncertainties affecting export demand, have impacted order volumes.
The sector is also navigating regulatory changes, including the withdrawal of the Export Facilitation Scheme and a transition in tax regimes, which have escalated cost pressures. Regional competition and rising energy tariffs further strain the industry's viability. Despite these challenges, USMPL's ratings benefit from sponsor support, including financial assistance through equity injections and interest-free loans.
USMPL's financial risk profile is characterized by revenue growth alongside significant cost pressures, resulting in margin contraction and reduced profitability. While sales volumes have increased, high production costs and limited pricing power due to competitive pressures have impacted gross margins. The company's net margins have also been affected by rising finance costs.
Capitalization metrics show increased leverage, mainly due to reliance on short-term debt to finance working capital needs. Liquidity remains stable, supported by improved working capital management, although debt coverage is constrained by lower profitability and higher financial expenses. Continued sponsor support is crucial to bridge financial gaps.
The ratings will remain sensitive to USMPL's ability to restore profitability and improve financial metrics. Ongoing financial support from sponsors will also be a key factor influencing future ratings.