Karachi, August 16, 2021 (PPI-OT):VIS Credit Rating Company Limited (VIS) has maintained entity ratings of Lucky Knits (Pvt.) Limited (LKPL) at ‘A-/A-1’ (Single A Minus/A-One). The assigned ratings have been placed on ‘Stable’ outlook from ‘Rating Watch-Developing’ status. Long term entity rating of ‘A-’ reflects good credit quality, 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. The previous rating action was announced on April 29, 2020.
The assigned ratings take into account the industry wide recovery in textile exports post ease in COVID-19 lockdown; which provides support to the risk profile of the company on the back of incentives provided by the Government of Pakistan as well as projected uptick in export demand. Ratings also draw comfort from strong sponsor profile of Yunus Brother Group (YBG). Recently, LKPL has undergone a change in the management team post sudden death of their Chief Operating Officer (COO). The changeover hindered operating performance and impacted profitability of the company in the interim. However, the transition has now been completed and all operational issues addressed.
During FY20, revenues were impacted amid COVID slowdown. Gross margins were up on account of lower yarn prices in FY20, however, operating and net margins were adversely impacted largely due to higher air freight charges incurred to meet order timelines in the wake of operational inefficiencies faced by the company during management transition and also due to higher financial charges on account of increased working capital utilization.
Moreover, reduced other income on account of lower duty drawback income and exchange gains on export sales also contributed towards lower profitability. During H1’FY21, sales continue to remain subdued on account of COVID-19. However, with the opening of international markets the company is projecting better prospects going forward. Margins are expected to remain under pressure in FY21 on account of higher yarn prices and operational constraints, which since then have been rectified. Recovery of operational efficiencies while maintaining topline growth will be important from ratings perspective.
Liquidity profile of the company continues to remain within satisfactory levels; while cash flow coverage indicators depict decline during FY20 owing to lower profitability and high debt utilization. Long term debt financing increased on account of SBP Salary Refinancing Scheme and long term finance agreement availed by the company; while sizeable increase in short term borrowings was recorded due to high working capital requirements resulting from COVID-19 slowdown. Resultantly, capitalization indicators witnessed increase. Capitalization indicators are expected to remain high in the medium term as the company plans to incur capacity additions in the knitting and stitching units over the rating horizon to cater to projected growth. Going forward; projected growth in profitability while maintaining gearing at manageable levels will be important for ratings.
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
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