Press Release

JCR-VIS Assigns Initial Ratings to Sheikhoo Sugar Mills Limited

Karachi, October 16, 2018: JCR-VIS Credit Rating Company Limited (JCR-VIS) has assigned initial entity ratings of ‘A-/A-2’ (Single A-Minus/A-Two) to Sheikhoo Sugar Mills Limited (SSML). 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-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are considered sound. Outlook on the assigned ratings is ‘Stable’.

SSML is a sugar manufacturing company located in the Southwestern Punjab. Shareholding of the company is vested with the sponsoring family, which owned Baksh Group of Companies in the early 1950s. The assigned ratings take into account moderate business profile of the company, largely underpinned by ample experience of sponsors led management in the sugar sector, sizeable crushing operations, and strong business relationships with institutional customers. Planned steel billets manufacturing plant is expected to provide a cushion against cyclicality risk of sugar sector. The ratings also derive strength from sound financial risk profile as depicted by sustained profit margins, low gearing and leverage indicators, and adequate debt coverage. However, the ratings are constrained by vulnerability in sugar prices and increased susceptibility of business performance to oversupply in the market, thereby propelling the company to carry over considerable inventory into the next financial year. Material delays and cost overruns in steel project and loss of major institutional clients may negatively impact the ratings.

The business model of SSML is considered relatively medium-risk as its customer base largely comprises institutional customers, which on average account for around 80% of total volumetric sales. Meanwhile, the credit risk is deemed low owing to the company’s policy of making sales on advance payment terms to the corporate clients. However, the business performance remained susceptible to depressed selling prices, driven largely by oversupply in the market which emanated from the bumper crop during the previous crushing season. Thereby, gross margins were recorded slightly lower while inventory levels remained on the higher side during 9MFY18. The company intends to carry over about one fourth inventory to the next year in anticipation of some improvement in sugar prices. Moreover, the government’s recent initiative of allowing export of 1.0m tons of sugar is expected to help in reducing surplus stock and to have positive connotation for the overall industry. The establishment of steel billets manufacturing plant having production capacity of 150,000 M.T. is expected provide a cushion against the cyclicality risk of sugar sector. Electricity generated from internally produced bagasse will power the steel plant that is projected to come online by June 2019.

Equity base has augmented with the continued retention of profits, whereas the utilization of debt financing has increased in the past two years. During 9MFY18, SSML raised new long-term debt to fund the import of new crushing machines, falling film evaporators, and commence civil work on steel project. The utilization of short-term borrowings also increased due to elevated working capital requirements. The gearing and debt leverage indicators increased but are considered manageable. The ratings will remain dependent on the maintenance of healthy relations with the major corporate customers, relatively low leverage and adequate debt service coverage.

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

Jamal Abbas Zaidi

Applicable rating criterion: Industrial Corporate (May, 2016)

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 2018 VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS.

JCR-VIS Credit Rating Company Limited