Press Release

VIS Maintains Entity Ratings of Sheikhupura Textile Mills Limited

Karachi, July 24, 2024: VIS Credit Rating Company Limited (‘VIS’) maintained entity ratings of Sheikhupura Textile Mills Limited ('STML’ or 'the Company’) to 'BBB/A-2' (‘Triple B/A-Two’). Medium to long term rating of 'BBB' indicates adequate credit quality; protection factors are reasonable and sufficient. Risk factors are considered variable if changes occur 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 have been changed to ‘Positive’ from ‘Stable’. Previous Rating action was announced on July 12, 2023.

STML was incorporated in Pakistan and commenced its operations in 1989. The Company is engaged in the business of manufacturing, selling, buying and dealing in all types of yarn including different counts of blended yarn. In line with revenue diversification, the Company also sells Women Fashion Cloth under the brand name of ‘Cross Stitch’. STML belongs to the Ayesha Group, which entered the spinning industry with the establishment of Ayesha Spinning Mills Ltd. in 1972. Since then, the group has grown into four spinning units, with a combined capacity of more than 120,000 spindles, a leather tannery, a leather shoe factory, a shoe retail chain under the brand name of ‘EPCOT’, socks factory and an embroidery factory. The head office of STML is located in Gulberg area, Lahore while manufacturing facilities are located at Ferozepur Road, Lahore and District Kasur, Punjab. The ownership of the company is shared majorly among four members of the sponsoring family while presently three are actively involved in business affairs.

Assigned ratings incorporate the medium to high business risk profile of the textile sector in Pakistan, marked by high exposure to economic cyclicality and intense competition. The sector's performance is 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 delays in sales tax refunds. Additionally, the industry is sensitive to supply-side risks, including local cotton crop production, which impacts margins, and reliance on imported raw materials, exposing the sector to significant exchange rate risk and government import restrictions.

Change in outlook considers the stability in the Company's profitability, capitalization, liquidity, and coverage profiles within a challenging period. In FY23, the Company achieved topline growth driven by increased retail sales, despite a decline in yarn sales. Gross margins improved due to inventory gains and higher retail segment contributions, while operating margins were constrained by inflationary pressures and higher expenses. Net margins were suppressed by increased finance costs. The capitalization profile saw improved gearing, though the leverage ratio remained stable. In 9MFY24, operational activities led to increased short-term debt, affecting gearing and leverage ratios. The coverage profile showed adequate funds from operations and debt service coverage, despite some weakening. The liquidity profile is also considered adequate.

Going forward, the assigned ratings will be influenced by key business risk indicators, including ongoing challenges in the spinning sector such as high interest rates, energy costs, and inflationary pressures. Moreover, the Company's performance remains dependent on improvements in key ratios and operational efficiencies.

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






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

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