Press Release

VIS Assigns Initial Ratings to JK Sugar Mills (Pvt.) Limited

Karachi, April 27, 2023: VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of BBB/A-2 (Triple B/A-Two) to JK Sugar Mills (Pvt.) Limited (JKSML). Medium to long-term rating of ‘BBB’ signifies 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’ depicts 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 rating is ‘Stable’.

JKSML is principally involved in production and sale of sugar and allied products. The shareholding of the company is vested with family members and associated concerns. The assigned ratings factor in strong financial strength and extensive experience of sponsors in the sugar industry. In addition, the company has cordial relationship with growers underpinned by timely payments and financial support in form of relaxed credit limits and agri loans. The company was incorporated in 2017 and subsequently acquired two sugar mills over a span of 1.5 years while started commercial operations in MY18. Around four-fifth of the acquisition cost was financed by syndicate long-term financing. Financial risk profile of the company has remained high marked by elevated leverage indicators despite sizeable equity injection and profit retention. A negative capital reserve was recognized in MY19 in lieu of merger with its associated firm which acquired one of the mill’s unit, and accumulated losses in the early years of operations. Given high finance cost burden during the initial years of operations and accumulating losses, financial restructuring was undertaken in Sep’2021. According to new terms and agreements, the restructured loans will be fully retired after 10 years from the date of restructuring. The pricing on loans was also revised down and the repayments were structured as stepped-up payments.

During the outgoing year, the company reported modest growth in topline with some improvement in gross margins largely on account of better sucrose recovery rates and economies of scale. However, net margins declined as around 20% of the stock remained unsold during the outgoing year and due to the impact of substantial increase in average markup rates leading to elevated finance cost. Leverage indicators remained very high while liquidity and coverages have considerable room for improvement. The management contemplates improvement in profitability on the back of higher sugar prices and recovery rates along with some increase in volumetric sales in the ongoing year. Inventory gains emanating from selling carried over sugar stocks at higher rates would also positively impact the profitability profile. Additionally, leverage indicators are projected to improve on account of growth in equity base led by profit retention and additional equity injection, along with decrease in short-term borrowings due to offtake of sugar inventory by the end-MY23. Nonetheless, achieving the same amidst strenuous economic conditions marked by high inflation, political unrest and external factors seems challenging. Profit margins may improve at the gross level while inflated markup rates are likely to put drag on the bottom line. Improvement in capitalization and liquidity indicators while realizing projected growth in revenues and profitability will remain key rating sensitivities.

For further information on this rating announcement, please contact Ms. Tayyaba Ijaz, CFA (042-35723411-13, Ext. 8005) and/or the undersigned at 021-35311861-4 (Ext. 207) or email at info@vis.com.pk.


Sara Ahmed
Director

Applicable rating criterion: Corporates (August 2021)
https://docs.vis.com.pk/docs/CorporateMethodology202108.pdf

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