Press Release

VIS Upgrades Entity Ratings of Universal Leather (Private) Limited

Karachi, January 30, 2023: VIS Credit Rating Company Ltd. (VIS) has upgraded the entity ratings of Universal Leather (Pvt) Limited (ULPL) to ‘BBB/A-3’ (Triple B/A-Three) from ‘BBB-/A-3’ (Triple B Minus/A-Three). Long-term rating of ‘BBB’ signifies adequate credit quality, reasonable and sufficient protection factors. Risk factors are considered variable if changes occur in the economy. Short-term rating of ‘A-3’ indicates satisfactory liquidity and other protection factors qualify entities/issues as to investment grade. Risk factors are larger and subject to more variation; nevertheless timely payment is expected. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on November 18, 2021.

The upward rating revision reflects the recovery of financial performance metrics and the recoupment of leather industry exports to FY18 levels, following a dip during the pandemic, as a result of subsequent global economic recovery and resumption of international trade. Over the last two years, exports grew by ~25% driven by both increase in average unit prices and higher volumetric exports, with leather garments leading the way, followed by gloves and footwear. Going forward, sector is expected to face challenges from regional competitors, particularly India, as well as rising inflation and finance costs. However, currency depreciation, government support, changing fashion trends and resumption of trade with China after ease in pandemic restrictions would keep the demand stable.

Assessment of financial risk profile indicate improvement as reflected from healthy revenue growth owing to strong volumetric uptick in exports and increase in average prices over time combined with currency depreciation. Given higher demand and better pricing, almost entire sales pertain to products made from cowhides with major focus towards shoes leather. Exports continue to dominate the sales mix, with major export destinations including Europe and Far East. Client concentration risk is high, indicating significant room for improvement.

Topline growth and cost-cutting initiatives supported gross margins; however, net margins remained thin in the absence of one-time gains. As a result, cash flow generation remains limited, and increased inventory-holding days have stretched the working capital cycle. Furthermore, low equity base limits capitalization; however, gearing and leverage indicators have improved over time given lower utilization of running finance. The ratings are dependent on improvement of net margins, prudent working capital cycle management and keeping leverage indicators in line with assigned ratings will be critical.

For further information on this rating announcement, please contact Mr. Muhammad Tabish (Ext: 206) or the undersigned (Ext. 201) at 021-35311861-70 or email at info@vis.com.pk




Javed Callea
Advisor

Applicable Rating Criteria: Industrial Corporates (August 2021)
https://docs.vis.com.pk/docs/CorporateMethodology202108.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2023 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .