Press Release

VIS Assigns Initial Entity Ratings to Two Star Industries (Pvt.) Limited

Karachi, April 22, 2019: VIS Credit Rating Company Limited (VIS) has assigned initial entity ratings of ‘A-/A-2’ (Single A Minus/ A-Two) to Two Star Industries (Pvt.) Limited. 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’.

The assigned ratings incorporate sound financial profile and demonstrated track record of support of the major sponsor, Umer Group. Umer Group has business interests in textile, footwear, dairy, power generation and sugar. Ratings also reflect projected improvement in financial risk profile with reduction in leverage indicators and improvement in cash flow coverages. Business risk profile incorporates concentration of operations in a single sector which limits company’s ability to withstand the impact of cyclicality of sugar sector. However, recent price increase given the lower sugar production bodes well from a profitability perspective. Ratings remain dependent on achieving projected improvement in financial profile and continued sponsor support.

Sugar sector has witnessed sizeable increase in ending inventory over the last two years. With significant decline expected in production, local demand supply dynamics are projected to depict some improvement in MY19. However, overall surplus inventories are expected to persist (even after accounting for strategic reserves) for the sugar sector given significant ending inventory at end-MY18. In line with the industry trend, TSIL has carried high inventory levels despite increase in export sales in MY18. Reducing inventory level in line with projections is considered important.

Inherent business risk present with volatility in sugar prices had limited overall local sales for the company in MY18. However, the Company was able to export a major chunk of its overall sales which supported the increment in net sales. In line with a sizeable increase in net sales, overall profitability of the company also posted a considerable jump in the outgoing year. Debt profile of the company largely comprises sizeable long term borrowings to finance acquisition of the sugar mill while rest relates to short term borrowings to finance sugarcane procurement. Sizeable portion of debt in the overall capital structure has resulted in elevated leverage and gearing levels vis-à-vis benchmark. A combination of increasing internal cash flows and equity injection is projected to be utilized for reducing long-term debt levels.

For further information on this rating announcement, please contact the undersigned (Ext: 201) at 021-35311861-71 or fax to 021-35311872.

Javed Callea

Applicable Rating Criteria: Industrial Corporates (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 not an NRSRO and its credit ratings are not NRSRO credit ratings.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 2019 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

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