Press Release

VIS Reaffirms Entity Rating of Nishat (Chunian) Limited

Karachi, July 05, 2024: VIS Credit Rating Company Limited (VIS) reaffirms entity ratings of ‘A-/A-2’ (Single A Minus/A-Two) for Nishat (Chunian) Limited. Long-term entity rating of ‘A-’ reflects good credit quality, and adequate protection factors. Risk factors may vary with possible changes in the economy. Short-term rating of ‘A-2’ indicates good certainty of timely payment, with sound liquidity factors. Access to capital market is good and risk factors are small. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on June 08, 2023.

Nishat (Chunian) Limited (referred to as "NCL" or "the Company") commenced its operations in 1991 with a modest spinning setup, subsequently evolving into a vertically integrated textile enterprise and amongst the Pakistan's major exporters. Its core activities encompass spinning, weaving, dyeing, printing, stitching, processing, and trading of yarn, fabrics, and made-ups derived from raw cotton and synthetic fibers.

Assigned ratings incorporate the medium business risk profile of the textile sector in Pakistan, marked by exposure to economic cyclicality and intense competition. The sector's performance is notably influenced by broader economic conditions, rendering it susceptible to demand fluctuations driven by economic factors. Furthermore, as a substantial contributor to total exports, the textile industry faces exposure to global economic cyclicality, geopolitical challenges, and liquidity constraints due to lengthy process of sales tax refunds. Supply-side risks, including local cotton crop production and reliance on imported raw materials, expose the sector to significant exchange rate risk.

Assigned ratings take into account the Company’s business updates, whereby in FY23, despite the Company's sales growing by 9.1%, it faced challenges with low gross margins of 10% due to inventory losses. The Company recorded a negative bottom line of -1.5%, primarily attributed to reduced gross margins and high finance costs. However, there has been a rebound in profitability during the 9M’FY24, with gross margins reaching 12%. Nonetheless, the Company's net margin remained negative at -0.03%.Moving forward, NCL projects the net margins, though remaining thin, to become positive in FY24 with commensurate efforts.

Assigned ratings also take into account for the Company's financial risk profile, wherein as of June 2023, the Company's equity declined due to reduced retained earnings resulting from a negative bottom line, leading to an increased gearing ratio of 2.1x. By March 2024, the gearing ratio had improved marginally to 2.0x. Due to the Company's negative bottom line in FY23, FFO decreased, resulting in low debt coverage metrics such as FFO to total debt and Debt Service Coverage Ratio (DSCR). Management expects the positive direction achieved up to March 24 to continue and provide improvement in gross margins and debt coverages to be aligned with the assigned ratings. Going forward, the ratings are dependent upon achieving improvements in gross margins and debt coverages.

For further information on this ratings announcement, please contact at 021-35311861-64 or email at info@vis.com.pk.


Applicable Rating Criteria: Corporates:
https://docs.vis.com.pk/docs/CorporateMethodology.pdf

VIS Issue/Issuer Rating Scale
https://docs.vis.com.pk/docs/VISRatingScales.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2024 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .