VIS downgrades rating of Nishat Chunian

June 08, 2022 (MLN): The VIS Credit Rating Company Limited (VIS) has downgraded the entity ratings of Nishat Chunian Limited (PSX: NCL) from ‘A/A-2’ to ‘A-/A-2’ with a stable future outlook, the latest press release issued by VIS showed.

The previous rating action was announced on June 2, 2022.

Ratings incorporate the strong sponsor strength, 33-year track record, vertical integration, moderate reliance on imported raw materials, and sound retail presence in the domestic market through eight linen company outlets in four major cities.

The downward revision in ratings reflects the prevailing weak macroeconomic environment both globally and locally as well as the weakening of financial indicators of the company.

The current fiscal year noted a sizeable dip in gross margins, higher operating overheads, and a surge in financial charges, leading to a negative bottom line.

This weakened the capital buffer, increased leverage ratios, and negatively impacted debt coverage metrics.

In addition, the extended cash conversion cycle over time, primarily due to high inventory holding days, has also put pressure on liquidity.

The business risk profile takes into account industry-wide growth in exports in FY22.

However, recent floods across the country, high-interest rate situations, inflationary pressures, higher electricity costs, and demand slowdown in the current year pose risks to the sector over the medium term.

In addition, high cyclicality and intense competitiveness in the spinning sector add to business risk.

Exports sales, including direct and indirect, contribute to over 80% of revenues on a timeline while the rest is derived from local sales.

Product-wise, yarn and made-ups dominate the revenue stream, while the rest is shared by grey and processed cloth, wastages, and electricity sales.

Going forward, improvement in financial performance metrics specifically margins, cash flows, and leverage is considered important.

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