Press Release

VIS Assigns Initial Entity Ratings to Utopia Industries (Private) Limited

Karachi, June 05, 2023: VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of ‘A-/A-2’ (Single A Minus/A-Two) to Utopia Industries (Private) Limited (UIPL). Medium to long-term rating of ‘A-’ reflects 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 and fundamental factors are sound. Access to capital market is good. Risk factors are small. Outlook on the assigned ratings is ‘Stable’.

UIPL, a division of Utopia Group, was established in 2018 and is owned and actively managed by two Pakistani brothers. As the 27th largest exporter in Pakistan, UIPL specializes in manufacturing and exporting a wide variety of products, including home textiles, cookware, plastic goods, and personal care items. Almost all of its sales come from exporting to Utopia Towels, which sells the products on Amazon as Utopia Deals. Starting with $0.2m in sales, the brand achieved an average annual growth rate of 150% and reached over $440m in 2022. It is now one of the top 5 sellers on Amazon.

The ratings factor in the competitive advantage in e-commerce retail sales, support extended through sponsor loan and foreign currency loan from the associate company, capacity enhancement focus, and aggressive projected growth. Ratings further reflect the sizeable revenue growth since inception and consistent healthy gross margins. However, a significant jump in administrative overheads and foreign exchange losses has led to a decline in net margins. Cash flow generation is sufficient for debt obligations, as reflected by strong debt coverage metrics. The cash conversion cycle is extended due to high inventory holding days, which builds up pressure on liquidity. High leverage metrics would trend downwards through projected equity growth as indicated by management. Ratings also take note of the sponsor loan status (remaining in place or converted into equity) and are constrained by gradual repayment of the interest-free foreign currency loan.

The business risk profile takes into account industry-wide growth in exports over the last year; however, recent floods across the country, high interest rate situation, inflationary pressures, higher electricity costs, and demand slowdown pose risks to the sector over the medium term. Ratings are constrained by the current weak macroeconomic environment globally and locally. Product-wise, towels, bedsheets, comforters, mattress protectors, and pillows contribute to nearly four-fifth of the revenue mix followed by knit garments, plastics, kitchenware, and others. Geographic sales mix depicts concentration as the majority of exports are directed toward USA followed by Europe, UK, and Canada. The ongoing capacity expansion is expected to drive future sales growth. Going forward, maintenance of earning profile and cash flow coverages along with improvement in leverage metrics is important for ratings.

For further information on this rating announcement, please contact Mr. Muhammad Tabish (Ext: 206) or the undersigned (Ext: 201) at (021) 35311861-4 or email at info@vis.com.pk



Javed Callea
Advisor

Applicable Rating Criteria: Industrial Corporates (May 2023)
https://docs.vis.com.pk/docs/CorporateMethodology.pdf

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