Press Release
VIS Downgrades Entity Ratings of Nishat (Chunian) Limited
Karachi, June 08, 2023: VIS Credit Rating Company Limited (VIS) has downgraded the entity ratings of Nishat (Chunian) Limited (NCL) from ‘A/A-2’ (Single A/A-Two) to ‘A-/A-2’ (Single A Minus/A Two). Medium to long-term rating of ‘A-’ reflects good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. Short term rating of ‘A-2’ indicates good certainty of timely payment; liquidity and fundamental factors are sound. Access to capital market is good. Risk factors are small. Outlook on the assigned ratings has been revised from ‘Positive’ to ‘Stable’. 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 The 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. 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 situation, 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 entire revenues on a timeline while the rest is derived from local sales. Spinning being the core segment constitutes three-fifths of total revenues, followed by processing & home textile, weaving, and power generation. Product-wise, yarn and made-ups dominate the revenue stream, while the rest is shared by grey and processed cloth, wastages, and electricity sales. Exports span Europe, USA, Canada, Asia, Africa, and Australia, reflecting a well-balanced geographic sales distribution. Going forward, improvement in financial performance metrics specifically margins, cash flows, and leverage is considered important.
For further information on this rating announcement, please contact Mr. Muhammad Tabish (Ext: 206) or the undersigned (Ext: 207) at (021) 35311861-4 or email at info@vis.com.pk
Sara Ahmed
Director
Applicable Rating Criteria: Industrial Corporates (May 2023)
https://docs.vis.com.pk/docs/CorporateMethodology.pdf