Press Release

VIS Reaffirm Ratings of Suraj Cotton Mills Limited

Karachi, December 29, 2022: VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Suraj Cotton Mills Limited (SCML) at ‘A+/A-1’ (Single A Plus/A-One). The medium to long-term rating of ‘A+’ denotes good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ denotes high certainty of timely payments; liquidity factors are excellent and supported by good fundamental protection factors. Risk factors are minor. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on December 1, 2021.

SCML consists of five operating units of integrated spinning and weaving facilities at different locations. Majority of the shareholding is held by its associated company and sponsoring family. The assigned ratings take into account sound financial risk of the company underpinned by sizeable margins, adequate liquidity and capitalization profiles. The company reported healthy growth in topline largely due to considerable increase in average selling prices driven by covid led expansion in textile industry of Pakistan. The company has executed expansion in its weaving unit which became operation in Jan’22. The BMR entailing upgradation of one of its spinning units is currently in progress, and expected to come online by the end-3QFY23. The required financing for both of these projects has been mobilized under subsidized Temporary Economic Refinance Facility (TERF) and own sources. Despite increase in overall debt levels, the gearing remained low on the back of augmentation in equity base in line with internal capital generation.

Meanwhile, during 1QFY23, the company reported substantial decline in profitability and margins owing to lower fixed cost coverage amid drops in utilization levels coupled with relative increase in cost of sales vis-à-vis selling prices due to regressed demand. The ratings factor in high cyclicality and competitive intensity of the spinning industry along with volatility in cotton prices. The growth outlook of the textile industry seems uncertain on account of contraction in exports and compression in local demand amid looming recession. Given majority of the industry players have expanded their scale of operations in the past two years, diseconomies of scale are expected hit the profitability of the companies. Additionally piled up inventory levels would keep the prices under pressure. Therefore, maintaining capitalization levels and coverages will remain key rating sensitivities, going forward.

For further information on this rating announcement, please contact Ms. Tayyaba Ijaz, CFA at 042-35723411-13 (Ext. 8004) and/or the undersigned at 021-35311861-66 (Ext. 207) or email at info@vis.com.pk.


Sara Ahmed
Director

VIS Entity Rating Criteria: Corporates (August 2021)
https://docs.vis.com.pk/docs/CorporateMethodology202108.pdf

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