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Karachi, September 13, 2023 (PPI-OT): VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Sapphire Textile Mills Limited (STML) at ‘A+/A-1’ (Single A Plus/A-One). Medium to long-term rating of ‘A+’ reflects good credit quality and adequate protection factors. Risk factors may vary with possible changes in the economy. Short-term rating of ‘A-1’ indicates high certainty of timely payment; liquidity factors are excellent and supported by good fundamental factors. Risk factors are minor. Outlook on the assigned ratings remains ‘Stable’. Previous rating action was announced on July 04, 2022.
Ratings continue to reflect STML’s extensive five-decade operating history, vertical integration in yarn, fabric, and home textile production, established market positioning as 16th largest exporter in FY23, global outreach with diversified client base, and commitment to environment sustainability. Ratings reaffirmation incorporates robust revenue growth backed by strong dividends that enhance profitability, and steady leverage metrics aligning with peer median. However, margins have reverted to their historical levels. Business risk profile factors in the high-interest rate environment, inflationary pressures, rising raw material costs, ongoing energy crisis in the country, and a global slump in demand. The same is reflected in a ~15% year-on-year decline in Pakistan’s textile exports in FY23, totaling USD 16.5b (FY22: USD 19.3b). Moreover, all these factors pose a challenge to the sector over the medium term in terms of margins sustainability and future growth. Ratings are constrained by the current weak macroeconomic environment both globally and locally.
Ratings further take note of recent capacity enhancements: spinning grew by ~16%, and weaving by ~39% over the past two fiscal years. This progress stemmed from adding nearly 22,000 spindles, 77 new looms, and upgrading existing ones for efficiency. Management also highlighted a notable expansion in the finishing segment, elevating monthly capacity from 3m to 7m square meters through a new production line financed by a 64:36 debt-to-equity split. Debt portion comprised equal share of LTFF and KBOR-based loans. The project commenced operations from July’23.
Currently, sales are distributed as: 45% yarn, 33% fabric, and 15% home textiles (primarily bedsheets, quilt and table covers), and the rest is shared by sale of raw materials, waste disposal, and processing income. Exports remain dominant, with over four-fifth of contribution in total revenues on a timeline. Product-wise, the ratios are 60:40 for yarn, 90:10 for fabric, and a stark 2:98 for home textiles. Geographically, the bulk export – over 50% – is channeled towards Denmark and UK, with Italy, South Korea, Japan, Germany and Bangladesh trailing behind. Top ten clients consistently generate more than one-third of total sales; management ensures that no single client exceeds a 10% concentration to mitigate risk. Going forward, the ratings will hinge on maintaining consistent leverage ratios while margins, cash flows, debt coverage metrics indicate room for improvement.
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
Email: bilal@jcrvis.com.pk
Website: https://www.vis.com.pk/
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