Press Release
VIS reaffirms Entity Ratings of Fatima Sugar Mills Limited
Karachi, October 25, 2022: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Fatima Sugar Mills Limited (FSML) at ‘A-/A-2’ (Single A Minus/A-Two). The medium to long-term rating of ‘A-’ denotes good credit quality coupled 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 repayment, sound liquidity factors and good company’s fundamentals. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on November 05, 2021.
Ratings factor in association of FSML to ‘Fatima Group’ which is a large conglomerate operating in the country, having business interests in fertilizer, textile, energy, sugar, and commodities trading sectors. FSML is mid-sized sugar mill with installed crushing capacity of 16,000 MT per day. The Company also sells refined sugar, molasses, and bagasse both in the local and international markets. During the review period, long-term loan provided to Fatima Energy Limited (FEL) was converted into equity leading to overall long-term investment portfolio to Rs. 1.8b at end-June’22, contributing 11% of the total asset base.
While short-term outlook of sugar sector remains favorable due to greater availability of sugarcane and higher sucrose recovery rates, the ratings are constrained by inherent cyclicality and price vulnerability in the sector.
Assessment of financial risk profile incorporates improving profitability metrics and deterioration in liquidity and capitalization profile of the Company. Topline growth in the review period was largely attributable to growth in sales of by-products (bagasse and molasses). In line with higher export based selling prices of molasses and lower cost of procurement, gross margins showcased improvement. However, due to a significant rise in distribution expenses associated with exports and higher finance cost, net margin remained at similar levels as preceding year. With increase in quantum of debt to finance working capital needs, liquidity coverages depict weakening in the review period; however, remain within manageable levels. In lieu of the same, leverage levels also reported higher despite growth in equity base. Going forward, timely offloading of sugar inventory while maintaining profit margins remains key. Ratings remain underpinned on projected improvement in liquidity and leverage profile accordingly.
The ratings have incorporated the developments with regards to penalties imposed by CCP on certain companies and an appeal filed by the subject company wherein they expect a favorable decision. However, in the meanwhile the uncertainty of the outcome of the penalty imposed would persist on the sector. Ratings remain dependent on the cyclicality of sugarcane production and prices along with maintenance of threshold financial indicators and a favorable outcome of the imposed penalty (Rs. 862m on FSML) wherein it does not materially impact the risk profile of the company.
For further information on this rating announcement, please contact Ms. Asfia Aziz (Ext: 212) or the undersigned (Ext: 207) at (021) 35311861-66 or email at info@vis.com.pk
Sara Ahmed
Director
Applicable Rating Criteria: Industrial Corporates (August 2021)
https://docs.vis.com.pk/docs/CorporateMethodology202108.pdf