June 08, 2022 (MLN): VIS Credit Rating Company Limited (VIS) has revised Nishat Chunian Limited (NCL)’s outlook from stable to positive on the back of improvement in the company’s liquidity profile.
As per the rating agency, NCL generated a healthy bottom line leading to a notable improvement in liquidity profile as reflected by adequate cash flows in relation to outstanding obligations. Despite high debt levels, gearing improved on a timeline basis on the back of equity expansion. Therefore, the outlook has been revised from ‘Stable’ to Positive’.
The rating agency maintained NCL’s entity ratings of ‘A’ for medium to long term and ‘A-2’ for short-term. The medium to long-term rating of ‘A’ denotes good credit quality, with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-2’ denotes good certainty of timely payments coupled with sound liquidity and company fundamentals. The previous rating action was announced on May 16, 2021.
VIS highlighted that the ratings assigned to NCL take into account the company’s association with Nishat Chunian Group; one of the leading groups in Pakistan with sizable financial strength. The ratings incorporate diversification of revenue stream into spinning, weaving and made-up segments. Given the significant reliance of the company on spinning operations, ratings factor in high cyclicality and competitive intensity for the spinning industry along with volatility in cotton prices. Meanwhile, the overall business risk profile of the textile industry is supported by stable demand and a favourable regulatory regime.
The ratings derive strength from sound growth in revenues on account of an increase in volumetric sales and average product prices during FY21 and the ongoing year. Gross profit margins have improved considerably mainly due to a higher contribution margin of the spinning segment in line with favourable yarn prices and economies of scale leading to fixed overheads absorption.
On the expansion front, NCL is in process of conducting major BMR primarily to enhance operational efficiencies in the spinning segment along with some capacity enhancement and up-gradation in weaving, processing and made-up segments, VIS said.
The above-mentioned projects are projected to be funded through a combination of debt and equity. The leverage indicators are projected to decrease from FY23 onwards.
The ratings will remain dependent on maintaining a profitability profile while improving liquidity and leverage indicators, going forward, it added
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