Rupee devaluation favors Siddiqsons Ltd’s margins due to increasing prices of cotton: PACRA

January 7, 2019 (MLN): Pakistan Credit Rating Agency (PACRA) has maintained entity ratings of Siddiqsons Limited at ‘A-’ for long-term, and ‘A1’ for short-term with a stable outlook forecast.

Siddiqsons Limited, the flagship company of Siddiqsons group, is the pioneer of the denim industry in Pakistan. The company has managed to increase its revenues and exports in line with the rising global demand for denim and garments. The company's top line is driven mainly by exports, with Bangladesh as the prime export location. The gross margins of the company remain under pressure, due to higher raw material prices, however other costs stayed under control as the company sustained its operating margins.

Recently, the dynamics have changed favourably for the textile industry with rupee devaluation and better pricing for products due to increasing prices of cotton. Ratings draw comfort from income generated from the strategic investments made by the company in banking, energy, real-estate and metal industries.

The company's high inventory needs during cotton procurement season gave rise to increased working capital requirements. However, prudent working capital management means that the company's financial profile remains strong with low leveraged capital structure and strong coverages. Ratings reflect sponsors ability to provide support when required, as demonstrated in the past.

The ratings are dependent upon the management's ability to capitalize on growth opportunities in a competitive landscape while also improving the margins. Excessive borrowing, leading to higher leverage, and deterioration in coverages can impact the ratings negatively. Meanwhile, going forward a strong governance framework will be important.

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