Press Release

VIS Reaffirms Entity Ratings of Muhammad Shafi Tanneries (Pvt.) Ltd (MSTL)

Karachi, May 09, 2023: VIS Credit Rating Company Ltd. (VIS) has reaffirmed the entity ratings of Muhammad Shafi Tanneries (MSTL) at ‘BBB+/A-2’ (Triple B Plus/A-Two). The long-term rating of ‘BBB+’ signifies adequate credit quality with reasonable and sufficient protection factors. Risk factors are considered variable if changes occur in the economy. The short-term rating of A-2 indicates good certainty of timely payments coupled with sound company fundamentals and liquidity factors. Access to capital markets is good and risk factors are small. Outlook on the assigned rating is ‘Stable’. The previous rating action was announced on May 19, 2022.

Muhammad Shafi Tanneries (Private) Limited (MSTL) is a family owned company, engaged in the business of converting goat, sheep and deer hides to finished leather which is used in the making of shoes, fashion articles (purses and handbags) and gloves. MSTL belongs to Shafi Group, which has presence in the textile (Shafi Texcel Limited-STL), food (Everfresh Farms-EFPL, Shafi Foods- SFPL) and footwear sectors. Business risk of the Company is supported by locally abundant raw material (animal hides and skins) and export-friendly government policies (in form of financing schemes and additional custom duty on import of leather products). However, low use of advanced technology results in higher production costs along with constrained availability of skilled labor force, low presence in global fashion market, and substitution by low-cost alternatives such as synthetic leather impact the business risk of the industry.

Ratings factor in improvement in the overall financial position of the Company due to recovery in mid-tier products demand post COVID-19 as evident from growth in sales revenue during the review period. The growth was a function of both volumes and prices. Going forward, the management expects client base and sales mix to further diversify by venturing into new business lines such as products made from deer leather. On the profitability front, gross margins in the past two years have recouped to the pre- pandemic level owing to better absorption of fixed cost per unit given volumetric increase in sales and improved export prices. Net profitability of the Company continue to rely on support from share of profit from associates. Ratings remain dependent on further improvement in core profitability levels going forward and is contingent on management’s plan to diversify business towards high margin yielding products along with materialization of other innovation plans.

Moreover, in line with the uptick in profitability profile and manageable increase in debt level, cash flow coverages against outstanding obligations have witnessed improvement in the review period. Gearing and leverage remain on the lower side reflecting a conservative financial policy of the Company. Going forward, with planned repayment of long –term debt along with maintenance of short-term debt at similar levels, capitalization indicators are expected to remain on the lower side. However, given the challenging market dynamics in inflationary and high interest rate environment maintaining financial risk profile over the rating horizon will remain critical for ratings.

For further information on this rating announcement, please contact Ms. Asfia Aziz (Ext: 212) or the undersigned (Ext: 201) at (021) 35311861-66 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

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