VIS Maintains ‘BBB-/A-2’ Ratings for Sohail Textile Mills with Stable Outlook

Karachi, VIS Credit Rating Company Limited (VIS) has reaffirmed the entity ratings of Sohail Textile Mills Limited (SOT) at ‘BBB-/A-2’. The medium to long-term rating of ‘BBB-’ reflects adequate credit quality with reasonable protection factors, while the short-term rating of ‘A-2’ indicates good certainty of timely payment with sound liquidity factors and company fundamentals. The outlook on these ratings is stable, following the previous rating action announced on October 19, 2022.

According to VIS Credit Rating Company Limited, Sohail Textile Mills Limited, established in 1981, operates primarily in the manufacturing and selling of yarn products. The company's registered office is in Karachi, with its head office in Lahore, and a manufacturing facility located in District Sheikhupura, Punjab.

VIS's ratings consider the business risk profile of SOT, which is influenced by economic cyclicality and intense competition within Pakistan's spinning sector. In FY23, the sector faced significant challenges, including damaged cotton crops, inflation, and foreign exchange constraints, leading to a decline in yarn production and profitability. The global outlook for cotton production is expected to slightly recover; however, local challenges such as high interest rates, increasing energy costs, and difficulties in obtaining letters of credit persist, likely resulting in continued sluggish performance for the spinning sector in FY24.

The ratings also reflect a contraction in SOT's top line, mainly due to the global economic downturn that dampened demand. This decline in sales, along with increased raw material costs, led to reduced gross and operating margins. Net margins were further impacted by a surge in finance costs due to higher interest rates, despite a reduction in short-term debt. As operations reduced, the company's working capital requirements decreased, easing pressure on the capitalization profile with lower short-term borrowings.

SOT has plans to install a small stitching unit, fully financed through internal cash generation. Although the company's coverage profile has been stressed due to lower profitability, its liquidity profile remains in line with the assigned ratings.

Looking ahead, SOT's ability to manage capital expenditure requirements through internal sources and achieve its projected plans will be crucial for future ratings. Improvements in profitability and coverage benchmarks, while maintaining capitalization indicators, will also be key factors in the assessment.

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