Lahore, November 24, 2020 (PPI-OT): The ratings reflect Sapphire Fibres Limited’s (Sapphire Fibres) established business profile emanating from a strong presence in the broader value-chain; enabling the company to manage volatility in the textile industry. The business profile has improved on the back of the newly established denim weaving segment despite the negative impact of the COVID-19 pandemic and withdrawal of zero-rated sales tax. During FY20, Company’s gross and net margins mostly remained stagnant while net margin improved on the back of dividend from Sapphire Electric.
A sizable investment book (~PKR 10.6bln, ~67% of equity) built over the years by deploying surplus funds augments the Company’s profile. Meanwhile, recent economic conditions and volatility in the stock market diminished trading portfolio performance and ensuing income, despite investment in blue-chip stocks. However, strong core operations have led to continued improvement in profitability. Reduction in policy rates and the moratorium relief by SBP provided respite to the whole sector. The markets gradually opened in some parts of the world towards the end of 1QFY21.
Going forward, the second wave of the pandemic has begun its course and lockdowns may be a cause of concern. However, the business community is expecting to continue operations under strict SOPs, both; locally and in most of the export destinations of the Company. The Company took the SBP facility of deferment of the principal amount of the long-term loan. The financial risk of the company is stretched; as the debt coverage remained stretched, however, Company bounced back in 1QFY21 and the coverages improved due to a reduction in finance cost.
Free cashflows have shown significant improvement due to better performance in core operations, reflected in improved coverages in 1QFY21 after being stagnant in FY20. The expected continuity of the dividend stream from Sapphire Electric will further supplement the bottom-line and coverages. Ratings incorporate association of the company with well-established Sapphire Group.
The ratings are dependent on sustaining the business profile of the Company by maintaining profitability and margins achieved from core textile operations. At the same time, the sustainability of non-core income and prudent management of the surplus funds are important. Sustainability of coverages would remain critical to avoid any drag on financial profile due to a prolonged downturn in capital markets.
For more information, contact:
Analyst
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore – Pakistan
Tel: +9242 586 9504 -6
Fax: +9242 583 0425
Email: hammad.rashid@pacra.com
Web: www.pacra.com
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