Press Release

VIS Assigns Preliminary Medium to Long Term Sukuk Rating of Sitara Chemical Industries Limited

Karachi, June 14, 2024: VIS Credit Rating Company Limited (VIS) assigns preliminary medium to long term Sukuk ratings of Sitara Chemical Industries Limited (‘’SCIL’’ or ‘’the Company’’) at 'AA-' (Double A Minus). The medium to long-term rating of 'AA-' denotes high credit quality coupled with strong protection factors. Moreover, risk factors may vary slightly with possible changes in the economy. Outlook on the assigned ratings has been assigned at Stable. SCIL has an entity rating of ‘’A+/A-2’’ and a ‘’Stable’’ outlook.

Sitara Chemical Industries Limited was incorporated in Pakistan on September 08, 1981 as a public limited Company under the Companies Act, 1913 (now the Companies Act, 2017). The Company is listed on Pakistan Stock Exchange Limited (PSX) and is a Shariah Compliant Company certified by the Securities & Exchange Commission of Pakistan (SECP) under the Shariah Governance Regulations 2018 (now the Shariah Governance Regulations, 2023). The principal activities of the Company include operating a Chlor Alkali plant, an Oleo Chemical plant and a yarn spinning unit. The registered office of the Company is situated at 601-602, Business Centre, Mumtaz Hasan Road, Karachi, while the manufacturing facilities are located at 28/32 K.M., Faisalabad - Sheikhupura Road, Faisalabad.

SCIL plans to raise a medium to long term, rated, secured, and privately placed Sukuk of PKR 2.3 bln to finance a new 50-megawatt coal-fired power plant (CFPP). The instrument has tenor of seven years, including a 24-month grace period and quarterly rental payments at the rate of 3M KIBOR+a spread (to be finalized later). The rentals shall be paid quarterly. The security structure, features an exclusive hypothecation charge over specified fixed assets, a ranking hypothecation charge over company’s receivables from Collected Customer via a Letter of Hypothecation (LoH). Additionally, lien and right of set off over the debt payment account (DPA) and collection account (CA). After 36 months from the Issue Date, the Issuer holds the option to buy back all or a portion of the Sukuk Certificates from the Investors at the applicable Buy out Price. The Issuer must provide written notice at least 60 days in advance to exercise this Call Option, which is irrevocable once issued. The buyback can occur in multiples of PKR 1,000,000/- or for the entire Sukuk Certificates. The buyback will take place on a Rental Payment Date, and upon exercising the Call Option, the Issuer will pay the Investors the Buy Out Price as per the Sale Undertaking. If the Call Option is exercised for only certain Sukuk Certificates, the Rental Payments under the Payment Agreement will be adjusted accordingly by the Investment Agent, based on the outstanding Sukuk Certificates. Any amounts received from the Call Option will be applied in reverse order to which they were due and notified to all parties involved.

The assigned ratings are underpinned by a strong security structure alongside the establishment of a DPA and CA, with a waterfall mechanism for repayment prioritization. Additionally, the call option further supports the assigned ratings.
Assigned ratings also incorporates the medium to low business risk profile of SCIL, supported by its moderate cyclicality, high barrier to entry owing to capital-intensive nature of the industry. A diverse product portfolio also provide assurance to the assigned ratings. Additionally, a strong clientele with major multinationals further provide comfort to the ratings.

The ratings also consider the financial risk profile of the Company in FY23 buoyed by growth in topline primarily due to higher sales driven by price increases. Consequently, the gross margin and net margin improved as a trickling down effect of revenue growth. The coverage profile improved due to higher profitability during the year. Capitalization metrics remained stable while the liquidity metrics commensurate with the assigned ratings.

Moreover, the debt procurement for the under construction 50 MW coal fired power plant (CFPP) has impacted the Company’s financial metrics in 9MFY24. Drawdown of debt during the period has affected the profitability, coverage profile, and capitalization metrics. Going forward, while the installation of CFPP is in process, the ratings will continue to be sensitive to any strain on the company's coverages, as well as SCIL's strategies to address and mitigate this gap.

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



Rating the Issue
https://docs.vis.com.pk/docs/Rating-the-Issue-Aug-2023
Applicable Rating Criteria:
Industrial 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 .