Press Release

VIS Reaffirms Entity Rating of Suraj Cotton Mills Limited

Karachi, February 09, 2024: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Suraj Cotton Mills Limited (‘SCML’ or the ‘Company’) at 'A+/A-1' (Single A Plus/A-One). The medium to long-term rating of ‘A+’ denotes good credit quality coupled with adequate protection factors. Risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ denotes high certainty of timely payments, encompassed with sound company fundamentals and liquidity factors. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on December 29, 2022.

Suraj Cotton Mills Limited (‘SCML’ or the ‘Company’) was incorporated in 1984 and commenced its commercial operations in 1985. The principal business of the Company is manufacturing and sale of yarn, fabric, and processing of fabric. The registered office of the Company is located at 7-B-III, Aziz Avenue, Gulberg-V, Lahore, in the province of Punjab.

Assigned ratings for SCML incorporate a business risk profile constrained by cyclicality and competition in the sector. The sector’s performance is influenced by broader macroeconomic conditions, making it vulnerable to fluctuations in demand driven by economic factors. The sector’s profitability is constrained by increase in energy costs and an elevated policy rate in the country. During the year, reduced availability of cotton as a result of crop damage and import restrictions, coupled with recessionary trends in international markets hampered operational performance of the industry in FY23. Going forward, the sector’s performance is expected to remain sluggish owing to challenges including high interest rates, increasing energy costs, and sustained inflationary pressures.

Assigned ratings consider the Company’s financial updates wherein due to slow demand, the topline has weakened by 19.7%. Additionally, the decline in sales volumes, elevated raw material and energy costs, and heightened inflationary pressure led to a contraction in gross and operating margins, while escalating finance charges, owing to greater utilization of short-term debt, exerted pressure on the net margin to deteriorate to -2.2%. For the ongoing fiscal year, the management expects both the topline and margins to rebound on the back of demand recovery.

Assigned ratings also consider a marginal weakening in the Company’s capitalization profile as SCML’s overall debt has risen on account of higher drawdown of short-term debt amidst increased working capital needs. Funds from Operations (FFO) along with cashflow coverages and Debt Service Coverage Ratio (DSCR) deteriorated in FY23 due to downturn in the Company’s topline and negative profitability. However, the same have improved, in 1QFY24, owing to better profitability driven by demand recovery. Liquidity profile of the Company remained sound during the period under review.

For further information on this ratings announcement, please contact Mr. M. Amin Hamdani at 021-35311861-64 (Ext. 217) and/or the undersigned at 021-35311861-64 (Ext. 201) or email at info@vis.com.pk.

Sara Ahmed
Director
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 .