Press Release
VIS Reaffirms Entity Ratings of Umar Spinning Mills (Pvt.) Ltd
Karachi, March 16, 2020: VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Umar Spinning Mills (Pvt.) Ltd (USMPL) at ‘BBB+/A-2’ (Triple B+/A-2). Long Term Rating of BBB+ reflects adequate credit quality; protection factors are reasonable and sufficient. Risk factors are considered variable if changes occur in the economy. Short Term Rating of A-2 indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on February 13, 2019.
The ratings reaffirmation takes into account decreasing leverage indicators and satisfactory liquidity profile & debt servicing ability. Ratings also factor in the company’s healthy growth in topline on a timeline basis. However, ratings are constrained by limited size of the company in relation to peers and high cyclicality & competitive intensity for spinning industry and volatility in cotton prices which translate into moderate to high business risk profile. Corporate governance framework also depicts room for improvement.
Growth in sales during FY19 and the ongoing year vis-à-vis the corresponding periods last year was a function of higher average selling prices due to rupee devaluation and higher demand. Proportion of direct export sales in overall sales mix decreased to 32.7% (FY18: 41.3%) in FY19 as the management gave preference to local markets due to higher average selling prices. Client wise concentration continues to remain on the higher side as top 10 clients constituted 67.4% (FY18: 64.1%) of total net sales. However, client concentration is partly mitigated due to long term association with clients.
Increase in topline contributed to improvement in overall profitability of the company. Net margins have remained under pressure due to higher finance cost on account of increase in average interest rates and higher taxation expense due to expiration of tax credits. Going forward, overall profitability is expected to remain a function of average selling prices and cotton prices. Liquidity profile is considered satisfactory on the back of adequate cash flows in relation of outstanding debt obligations. Inventory and trade debts provide sound coverage for short-term debt obligations. Leverage ratios have improved during FY19 and HY20 on account of increase in equity base due to profit retention and decrease in the quantum of total debt. Going forward, leverage indicators are expected to increase slightly in view of additional capex for BMR but are expected to remain at manageable level over the ratings horizon.
For further information on this rating announcement, please contact Mr. Narendar Shankar Lal (Ext: 203) or the undersigned (Ext: 207) at (021) 35311861-66 or email at info@vis.com.pk.
Jamal Abbas Zaidi
Advisor
Applicable Rating Criteria: Corporates (April 2019)
https://s3-us-west-2.amazonaws.com/backupsqlvis/docs/Corporate-Methodology-201904.pdf