December 9, 2019: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Sapphire Textile Mills Limited (STML) at ‘A+/A-1’ (Single A Plus/A-One).
Long Term Rating of ‘A+’ reflects good credit quality, adequate protection factors. Risk factors may vary with possible changes in the economy.
Short Term Rating of ‘A-1’ indicates high certainty of timely payment, excellent liquidity factors supported by good fundamental protection factors and risk factors are minor. Outlook on the assigned ratings is ‘Positive’.
The assigned ratings incorporate STML being part of the Sapphire Group of Companies. Sapphire group is amongst the leading textile exporters in the country and has presence across the broader value chain.
The group after venturing in the retail segment has successfully diversified in the denim segment. Ratings also reflect the company’s diversified business risk profile with core textile operations being complemented by investment in power sector along with a sizeable portfolio of marketable securities.
Financial risk profile draws support from improvement in income from core operations with textile business posting healthy growth in profitability during FY19.
Adjusted leverage indicators continue to remain within manageable levels while cash flow coverage of outstanding debt increased. Going forward, leverage indicators are expected to improve on the back of projected increase in profitability and net debt repayments over the rating horizon.
Positive outlook on the assigned ratings capture favourable sector outlook, timeline improvement in financial performance and successful operations of 3x50MW wind power project- Tricon Boston Consulting Corporation (Private) Limited (TBCCL). Materialization of dividend income along with continued improvement in financial indicators may result in a rating upgrade.
The assigned ratings incorporate STML’s strong operating performance with capacity utilization of all segments remaining high. Focus remains on value addition and increasing proportion of finished segment in the sales mix.
Favourable government policies for enhancing exports and improving country’s perception and law & order situation bode well for the textile sector.
Key risk factor includes rising cost of doing business (increasing electricity and gas tariff and rising local cotton prices) which may impact competitiveness of the textile sector vis-à-vis regional peers.
Assessment of financial risk profile incorporates improving profitability from the textile operations. Despite significant jump in finance cost, growth in revenues, improvement in gross margins and dividend income from subsidiary & listed equity portfolio translated into 51% growth in profit before tax during FY19.
Going forward, organic growth from core operations and increase in dividend income from wind power projects is expected to support profitability growth. Given the increase in funds generated from operations, cash flow coverage of outstanding debt increased. Liquidity profile of the company is supported by sizeable liquid investments carried on the balance sheet.