Press Release

VIS Downgrades Entity Ratings of Muhammad Shafi Tanneries (Pvt.) Ltd (MSTL)

Karachi, May 19, 2022: VIS Credit Rating Company Ltd. (VIS) has downgraded the entity ratings of Muhammad Shafi Tanneries (MSTL) to ‘BBB+/A-2’ (Triple B Plus/A-Two) from ‘A-/A-2’ (Single A Minus/A-Two). The long-term rating of ‘BBB+’ signifies adequate credit quality with reasonable and sufficient protection factors. Risk factors are considered variable if changes occur in the economy. The short-term rating of A-2 indicates good certainty of timely payments coupled with sound company fundamentals and liquidity factors. Access to capital markets is good and risk factors are small. Outlook on the assigned ratings has been revised from ‘Negative’ to ‘Stable’. The previous rating action was announced on July 26, 2021.

This revision in ratings reflects consistent slowdown in leather industry given a shift towards artificial leather to contain environmental degeneration and diversion from leather due to its comparatively higher prices. High business risk led by demand compression of goat and sheep tanned leather has presented a challenging environment for MSTL, significantly impacting company’s performance in FY21. Sales revenue of the Company after declining by nearly 50% in FY21 exhibited some stability in 1HFY22, as global economic activity resumed post COVID-19. Margins decreased in FY21; however reverted to pre-pandemic levels in 1HFY22. While overall profitability is supported by share of profits from associates, given subdued leather demand, operational profitability of the business is considered to be under pressure. Improvement in profitability profile going forward is contingent on management’s plan to diversify towards cow leather along with materialization of innovation plans.
Liquidity profile of the Company has depicted a downward trend on a timeline basis due to subdued profitability. MSTL continues to have a conservative capital structure, which in turn has helped to keep the leverage indicators at low levels. Short-term debt at end-Dec’21 was reported on the higher side comprising SBP’s refinance salary support scheme. Given no debt drawdown plans going forward and repayment of outstanding long term dues, capitalization indicators are projected to remain on the lower side. Management also plans to diversify its customer base by exploring new markets as well as introducing cow leather, which has better demand prospects. To maintain the assigned ratings, improving operational profitability and liquidity while maintaining low levels of leverage will be important.

For further information on this rating announcement, please contact Ms. Asfia Aziz or the undersigned (Ext: 201) at (021) 35311861-66 or email at info@vis.com.pk.



Javed Callea
Advisor


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

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