Press Release

VIS Maintains Entity Ratings of MIMA Leather (Pvt.) Ltd.

Karachi, March 9, 2020: VIS Credit Rating Company Limited has maintained the entity ratings of MIMA Leather (Pvt.) Limited (MLPL) ‘BB+/A-3’ (Double B Plus/A-Three). Medium to long-term rating of ‘BB+’ denotes that obligations deemed likely to be met. Protection factors are capable of weakening if changes occur in the economy. Overall quality may move up or down frequently within this category. Outlook on the assigned ratings has been revised from ‘Negative’ to ‘Stable’. Previous rating action was announced on November 28, 2018.

MLPL is a private limited concern, predominantly engaged in manufacturing and export of finished goat leather. Shareholding of the company is vested with family members, who are represented on the company’s Board of Directors while also holding key management positions.

MLPL’s business volumes remain depressed, given industry-wide slowdown precipitated by the international demand weakening. Over the last 5-year period leather export revenues have dropped from USD 1.3b (FY14) to USD 0.8b (FY19). Furthermore, in the past 3-year period export price per square foot of tanned leather, from Pakistan, has dropped at an average of 18% per annum. In terms of industry exports, some quantitative increase was witnessed in FY17 & FY18, albeit in the outgoing year, exports fell in both quantitative and revenue terms. Keeping in line with industry trend, MLPL’s sales also dropped, by almost a fifth, in quantitative terms, and the topline reduced by 5%. However, MLPL has certainly benefited from the significant depreciation in USD/PKR parity, as a result of which gross margins doubled in FY19 and improved by another 50% in 1H’FY20. The outlook has been revised, in view of the improved profitability margins.

Given depressed business volumes, MLPL continues to face the issue of slow inventory turnover, as a result of which the working capital cycle has elongated. The longer working capital cycle calls for higher reliance on short term borrowings, which is a constraint on the company’s bottom line. Despite the improvement in gross margins, the bottom line remains in the red and is expected to remain in the red unless business volumes improve.

As per management, sales in 1H’FY20 remained depressed, albeit some uptick has been reported in Q3’FY20. The management is projecting full year sales to be ~10% higher than prior year, which should allow the company to break even at the bottom line. Furthermore cognizant of the depressed profitability, dividend payout has remained nil and the sponsors have injected an additional Rs. 100m into the business. The management and sponsors have also provided assurance that the additional funds will be retained within the business for the foreseeable future.

The ratings assigned remain constrained by the depressed business volumes - which is akin to commodity based businesses like leather - , an elongated working capital cycle (slow inventory turnover) and gearing and leverage indicators, which are on the higher side.

For further information on this rating announcement, please contact the undersigned (Ext: 201) at 35311861-70 (10 lines) or fax to 35311873.



Jamal Abbas Zaidi
Advisor

Applicable Rating Criteria: Industrial Corporates (April, 2019)

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