Press Release

VIS Reaffirms Entity Rating of Union Fabrics (Private) Limited

Karachi, February 29, 2024: VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Union Fabrics (Private) Limited (‘UFPL’ or the ‘Company’) at 'A-/A-2' (‘Single A-Minus/A-Two’). Medium to long term rating of 'A-' indicates good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. Short term rating of 'A-2' indicates good certainty of timely payment. Liquidity factors and company fundamentals are sound. Access to capital markets is good. Risk factors are small. Outlook on the assigned ratings remains Stable. Previous Rating action was announced on January 18, 2023.

Union Fabrics (Pvt.) Limited (‘UFPL’ or ‘the Company’) deals in the weaving and finishing business of fabric and home textiles with around 80% of the sales geared towards the export market. UFPL possesses necessary information technology infrastructure, utilizing SAP enterprise resource planning software which provides operational efficiency. The overall corporate governance framework depicts room for improvement given status of a private limited company.

Assigned ratings incorporate the medium business risk profile of the textile sector in Pakistan, marked by exposure to economic cyclicality and intense competition. The sector's performance is notably influenced by broader economic conditions, rendering it susceptible to demand fluctuations driven by economic factors. Furthermore, as a substantial contributor to total exports, the textile industry faces exposure to global economic cyclicality, geopolitical challenges, and liquidity constraints due to government delays in sales tax refunds. Supply-side risks, including local cotton crop production and reliance on imported raw materials, expose the sector to significant exchange rate risk.

Assigned ratings also consider the Company’s business updates wherein UFPL demonstrated a revenue decline owing to a slowdown in demand in FY23. The gross margin showed improvement due to lower raw material prices and rupee depreciation; however, higher finance cost due to elevated monetary policy rate put pressure on the net margin. Nonetheless, during 1QFY24, net sales rebounded mainly due to a strategic agreement signed with a key client. The Company sustained its gross margin, while the net margin significantly increased because of lower finance cost with reduction in outstanding debt. For the current fiscal year, the management anticipates the recovery in sales to continue and margins to come in line with the historical trend.

Assigned ratings take into account the Company’s financial risk profile. Amid debt reduction in FY23, the Company’s capitalization profile showed slight improvement as both gearing and leverage indicators have trended downwards. The liquidity profile of the Company is considered adequate in relation to outstanding obligations. However, the Funds from Operations (FFO) posted a decline owing to a fall in profitability. Consequently, the DSCR slightly decreased, while cashflow coverage showed minor improvement amid debt repayment. Going forward, the ratings remain sensitive to improvement in profitability metrics and maintenance of capitalization indicators in line with the assigned ratings benchmark.

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.

Javed Callea
Advisor
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 .