Press Release

VIS Maintains Entity Ratings of Muhammad Shafi Tanneries (Private) Limited

Karachi, May 2, 2019: VIS Credit Rating Company Limited (VIS) has maintained the entity ratings of Muhammad Shafi Tanneries (Private) Limited (MSTL) at ‘A-/A-2’ (Single A Minus/A-Two). Outlook on the assigned ratings has been revised from ‘Stable’ to ‘Negative’. The long term rating of ‘A-’ signifies good credit quality, adequate protection factors. Risk factors may vary with possible changes in the economy. Short term rating of ‘A-2’ depicts good certainty of timely payment. Liquidity factors and company fundamentals are sound with good access to capital markets. Risk factors are small. The previous rating action was announced on January 26, 2018.

Revision in rating outlook reflects challenging operating environment for leather manufacturers with subdued global demand for leather products. Resultantly, sales outlook for MSTL is constrained. Moreover, ratings factor in existence of sizeable portion of non-earning assets in the form of investments and loans to subsidiaries/associates on MSTL’s balance sheet and market risk emanating from equity market exposure which are constraints on profitability. Nevertheless, comfort is drawn from considerable experience of the management in the leather business, stable gross margins along with sound capitalization and leverage indicators on a timeline basis. Going forward, ratings remain dependent on improving earning profile of core operations and income from long term investments.

The global trade of leather products is subject to cyclical demand patterns while industry gross margins have also seen notable volatility. Leather industry in Pakistan remains largely export-oriented. Given fall in trade volumes of leather products globally, sales volumes of MSTL have declined on a timeline basis. Although MSTL’s prices were maintained in FY18, reduction in volumes translated into 9% decline in the topline. Going forward, management expects volumes to improve on the back of ongoing new product development efforts. Despite decline in volumes, MSTL was able to sustain gross margins on account of strategic raw material procurement and stable average selling prices. However, with losses booked on equity investments, bottom line of the company declined in FY18 and 1HFY19. Going forward, profitability is expected to remain under pressure due to subdued demand of leather products. Hence, cost rationalization and achieving projected sales volumes through product modification are considered important.

Liquidity profile of the company has improved with lower quantum of debt. Equity base has grown over the years on account of consistent profits generated by the company. Management does not plan to extend undertake further investments/loans to its subsidiaries/associates over the rating horizon.

For further information on this rating announcement, please contact Mr. Javed Callea (Ext: 201) or Mr. Talha Iqbal (Ext: 213) at 021-35311861-71 or fax to 021-35311872-3.

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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