Press Release

VIS Reaffirms Instrument and Entity Ratings of Sadaqat Limited

Karachi, October 10, 2023: VIS Credit Rating Company Limited (VIS) has reaffirmed instrument and entity ratings of Sadaqat Limited (SL) at ‘A’ (Single A) and ‘A/A-2’ (Single A/A-Two), respectively. Medium to long-term 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’ signifies good certainty of timely payment. Liquidity factors and company fundamentals are sound and access to capital markets is good; risk factors are small. Outlook on the assigned ratings remains ‘Stable’. Previous rating action was announced on June 22, 2022.

Ratings continue to reflect the company's long-standing operational history in the exports of the value-added textile sector, with expertise in delivering home textiles, knit apparel, denim, and non-denim woven outfits. Ratings recognize the recent moves towards backward integration into weaving and spinning capacity along with a commitment to eco-friendly manufacturing practices. Ratings reaffirmation highlights steady revenue growth influenced by consistent rupee depreciation, sizeable equity infusion, and profit retention keeping leverage metrics on par with peer median. However, a significant rise in borrowing cost has impacted net margins and thus, cash flows. This, combined with higher debt levels, has weakened the debt service coverage ratio, trailing industry peers. Extended inventory cycles delay cash conversion, and a current ratio below 1.0x needs to be addressed. Business risk profile factors in the high-interest rate environment, inflationary pressures, rising raw material costs, the ongoing energy crisis in the country, and a global slump in demand. The same is reflected in a ~15% year-on-year decline in Pakistan's textile exports in FY23, totaling USD 16.5b (FY22: USD 19.3b). Moreover, all these factors pose a challenge to the sector over the medium term in terms of margin sustainability and future growth. Ratings are constrained by the current weak macroeconomic environment both globally and locally.

The integration into weaving and spinning capacities is expected to support the supply chain and manage the operational risk. The results from thereon are timeline-bound. Home textile products contribute over 70% to revenues, trailed by knitwear and denim garments. Exports dominate the sales mix, with some client concentration in the UK mitigated by longstanding relationships with major clients. Going forward, the ratings will hinge on improving cash flows, debt coverage, and liquidity metrics.

For further information on this rating announcement, please contact Mr. Muhammad Amin Hamdani (Ext: 217) or the undersigned (Ext: 201) at (021) 35311861-4 or email at info@vis.com.pk.



Javed Callea
Advisor

Applicable Rating Criteria: Industrial Corporates (May 2023)
https://docs.vis.com.pk/docs/CorporateMethodology.pdf

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

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