June 23, 2021: VIS Credit Rating Company Limited (VIS) has maintained entity ratings of Sapphire Textile Mills Limited (STML) at ‘A+/A-1’ (Single A Plus/A-One).
The assigned ratings have been placed on the ‘Stable’ outlook from ‘Rating Watch-Developing’ status. 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. The previous rating action was announced on April 22, 2020.
Revision in rating outlook derives impetus from the recovery in the textile industry on the back of increasing local demand and export orders; supported by the Government of Pakistan’s (GoP) incentives to players through subsidized utility tariffs, low-interest rates, and sales tax refund. Going forward, while most of the textile players indicate a strong order book; sustainability of the same post-re-opening of export markets and outcome of vaccination drive in the country remains to be seen.
Ratings also draw comfort from the company’s diversified investment portfolio comprising of investments in subsidiaries, associates, and blue-chip companies. The company has also agreed to form a joint venture with longtime customer Carrington Textile in the United Kingdom which is expected to boost dyed fabric sales going forward. Furthermore, STML is undergoing capital expenditure involving modernization programs in the spinning, weaving, and finishing departments; thus, leading to operational efficiencies and capacity enhancements.
Revenues were sustained during FY20 despite the pandemic which remained a crucial rating driver for the assigned ratings; with primary revenue generators being yarn and fabric sales. The home textile segment remained under pressure as demand from the hospitality sector declined. Gross margins were impacted due to pricing pressures in the market. Net margins also remained under pressure on the back of lower other income and financial charges. However, net margins are tracking back to historical levels evident through 9M’FY21 results. Increasing return on investments will be an important factor going forward.
Cash flow coverage indicators declined during a pandemic due to lower profitability and dividend income. An increase in debt utilization also factored to suppress the indicators; however, recovery is seen during 9M’FY21 upon improving profitability. The liquidity profile of the company continues to remain sound upon supporting sizeable liquid investments adequately covering the outstanding debt. Capitalization indicators increased minimally upon an increase in debt utilization; however, debt servicing remains on the lower side vis-à-vis peers and will remain important for ratings in the future. Going forward, capitalization indicators are expected to remain elevated for financing CAPEX; however expected profitability provides comfort.
VIS
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