Karachi: The VIS Credit Rating Company Limited has revised its outlook on Sheikhupura Textile Mills Limited (STML) from 'Stable' to 'Positive' while maintaining the entity's ratings at 'BBB/A-2'. This adjustment reflects an improvement in the company's profitability and liquidity amid broader economic challenges.

According to VIS Credit Rating Company Limited, the medium to long-term rating of 'BBB' signifies that STML possesses adequate credit quality with reasonable and sufficient protection factors, though risk factors may vary with economic shifts. The short-term rating of 'A-2' suggests a strong likelihood of timely payment, supported by solid company fundamentals and good access to capital markets.

The updated outlook to 'Positive' from 'Stable' takes into account the stabilization of STML's profitability, capitalization, liquidity, and coverage profiles during a challenging period. In the fiscal year 2023, STML reported topline growth driven by an increase in retail sales, despite a decline in yarn sales. Gross margins benefited from inventory gains and a higher contribution from the retail segment, although operating margins were pressured by inflationary costs and elevated expenses.

STML, a part of the Ayesha Group since its inception in 1989, operates in the competitive textile sector of Pakistan, which is highly sensitive to economic cycles and global market conditions. The sector faces risks from local cotton crop fluctuations and dependence on imported raw materials, which expose it to significant exchange rate volatility and potential government import restrictions.

Moving forward, the ratings and outlook for STML will hinge on the company's ability to navigate ongoing challenges in the spinning sector, such as high interest rates, rising energy costs, and inflationary pressures. Improvements in key financial ratios and operational efficiencies will be crucial for sustaining the positive trajectory.