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VIS Reaffirms Entity Ratings of Ashraf Sugar Mills Limited

Karachi, March 17, 2023 (PPI-OT): VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Ashraf Sugar Mills Limited (ASML) to ‘A-/A-2’ (Single A Minus/A-Two). Long-term rating of ‘A-’ signifies good credit quality; protection factors are adequate. Risk may vary with possible changes 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’. The previous rating action was announced on April 08, 2022.

ASML is involved in production and sale of crystalline sugar, molasses and other by-products. Majority of the shareholding is vested with the sponsoring family. The company is a part of ‘Ashraf Group of Industries’ having business interests in sugar, coal mining, stone quarry, livestock and dairy, power, corporate agriculture farming and real estate.

The inherent cyclicality in crop yields and raw material prices is believed to have a substantial impact on the business risk profile of the sugar sector. During CY22, almost 33% of the 22 million hectares of total cultivable land was inundated by flood. Resultantly, sugar output in 2022-2023 is predicted to be reduced by 4% to 7.0 million MT.

However, despite expected modest reduction in output, there will still be a surplus that may be exported. The Govt. has so far allowed 250,000 tons of sugar exports in 2022-2023. The ratings take note of developments with regards to penalties imposed by Competition Commission of Pakistan (CCP) on certain sugar mills.

The operation of the said order has been suspended and CCP has been restrained from recovering the penalty imposed in terms of an order of the LHC dated October 2021 followed an interim stay order for the same by the Commission Appellate Tribunal. Given the material impact of penalty imposed on the company, VIS will continue to monitor further development in this matter.

The ratings assigned to ASML are underpinned by extensive sponsors experience and long-standing business relationships with institutional clients, which accounts for nearly three-fourth of the revenues. During MY22, growth in topline was driven by notably higher volumetric sale.

Despite increase in recovery rates, the company reported lower gross margins owing to increase in average procurement cost of sugarcane coupled with decrease in average selling prices vis-à-vis preceding year. In addition, net margins declined primarily on account of elevated finance cost. Resultantly, cash flow coverage came under pressure in the outgoing year while liquidity profile in terms of working capital management remained somewhat adequate.

Given considerable increase in overall debt levels to finance capex and to meet working capital requirements, gearing has increased notably by end-MY22. The management expects to largely recover its profit margins in the ongoing year on the back of better sucrose recovery rates and higher average sugar prices.

Leverage indicators are also expected to improve on account of decrease in short-term borrowings in line with higher offtake of sugar stocks, and growth in equity base due to profit retention. Meanwhile, ratings will remain sensitive to achieving projected growth in revenues and profitability while maintaining capitalization and liquidity indicators at comfortable levels.

For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873

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