Press Release

JCR-VIS Reaffirms Ratings of Sitara Chemical Industries Limited
 

Karachi, November 14, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has reaffirmed the entity ratings of Sitara Chemical Industries Limited (SCIL) at ‘A+/A-1’ (Single A Plus/A-One). The medium to long-term rating of ‘A+’ denotes good credit quality coupled with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy. The short-term rating of ‘A-1’ denotes high certainty of timely payment, liquidity factors are excellent and supported by good fundamental protection factors. Outlook on the assigned ratings is ‘Positive’. Previous rating action was announced on November 14, 2017.

The ratings assigned to SCIL take into account its leading position in the Chlor-alkali sector with the highest market share. The ratings incorporate moderate business risk profile; the company has been able to maintain positive momentum in revenues and largely sustain margins in a highly competitive operating environment. The ratings draw comfort from low financial risk appetite emanating from its low leveraged capital structure and adequate debt service coverage. The company’s strong sponsor profile remains a key rating factor. Further, conversion of investment property into an earning asset and additional liquidity generation from its sale therein is considered a positive rating factor. Going forward, rising international coal prices, increase in natural gas tariff and cost of imported RLNG along with adverse exchange rate parity are key challenges to be managed for maintaining profitability.

Over the last five years, sales of the company have grown at a CAGR of around 9%. The chemical sector remains the major revenue driver; textile segment supplements the sales on an ongoing basis. Net sales of the company increased during FY18 with both divisions reporting higher sales. The augmentation in sales was a combined outcome of increase in sales volumes and higher average retail prices of yarn, caustic soda and allied products. However, the increase in output prices did not reflect in the gross margins of both divisions mainly on account of considerable increase in input cost mainly related to fuel and power. Operating and net margins experienced slight decline as a consequence of higher operating expenses, financial charges and tax expense.

Liquidity profile of the company is considered sound in view of improving cash flows in relation to outstanding obligations and adequate debt service capacity. In line with higher profit before taxation along with higher non-cash adjustments, Funds from Operations (FFO) exhibited an increasing trend. This along with lower debt levels owing to repayment of long-term obligations, resulted in higher FFO to total debt. Debt service coverage ratio, albeit decreased slightly owing to higher long-term contractual payments made, remained at adequate level during FY18. According to the management, cash flows are expected to improve on account of increase in sales supported by incremental revenue from newly installed brick making unit and cost saving from improving operational efficiencies.

Core equity expanded on account of internal capital generation; given lower debt levels, leverage indicators improved by end-FY18. SCIL plans to mobilize additional long-term funding during FY19; scheduled repayments of existing long-term loan are projected to nullify any adverse impact on gearing. The ratings are dependent on the company’s ability to largely sustain its market share and profit margins while maintaining a low leveraged capital structure and adequate coverages.

For further information on this rating announcement, please contact the undersigned at 021-35311861-70 or Mr. Maimoon Rasheed at 042-35723411-13.


Javed Callea
Advisor

Applicable rating criterion: Industrial Corporate (May, 2016)
http://jcrvis.com.pk/docs/Corporate-Methodology-201605.pdf

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Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS Credit Rating Company Limited JCR-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.JCR-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.JCR-VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings.JCR-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 2018 JCR-VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS.

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