Press Release

VIS Reaffirm Entity Ratings of Faran Sugar Mills Limited

Karachi, March 20, 2020: VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of Faran Sugar Mills Limited (FSML) at ‘A-/A-2’ (Single A minus/Single A - Two). The long term rating signifies good credit quality with adequate protection factors. Risk factors are considered variable if changes occur 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. Outlook on the assigned rating is ‘Stable’.

The assigned ratings take into account satisfactory operating track record, extensive experience of sponsors in the sugar sector and low leverage indicators (as at end-1QMY20). However, financial profile has weakened in MY19 given the decline in cash flow coverages. VIS expects financial profile to remain under stress in MY20 given the sharp rise in cost of production which is expected to further weaken coverages and result in an increase in leverage indicators. Comfort is drawn from carryover stock carried on balance sheet (at lower cost), dividend income from investment in Unicol limited, release of funds due on account of subsidy receivable and low current maturity of long-term debt due in MY20 which is expected to result in sufficient cash flow generation to support timely debt servicing. Ratings will remain contingent on improving cash flow coverages and maintaining adequate leverage indicators.

Business risk profile of the sugar sector is considered high given the inherent cyclicality in crop levels and raw material prices. Moreover, distortion in pricing mechanism of raw material prices and refined sugar also creates challenges for sugar mills. Given the decline in area under cultivation in MY19 and the ongoing year and the resultant decline in sugar production, average sugar prices have increased by 19% in MY19 and 16% in the ongoing year. However, increase in profitability is expected to be limited (barring those players that have sizeable carryover stock) due to significant jump in sugar cane prices and decline in recovery ratio in the ongoing year. While demand and supply dynamics are expected to result in an increase in sugar prices, significant politicization of sugar prices may cap increase in sugar prices. Recent decline in international sugar prices ($329.4/ton as of 12th March vis-à-vis average price of $413.9/ton in the month of February) is also expected to cap increase in sugar prices given the threat of imports. Business risk profile of FSML draws support from recurring dividend income from investment in Unicol Limited which has consistently contributed to profitability over the last few years. Dividend income from Unicol Limited is expected to decline in MY20 given sizeable increase in prices of molasses in the ongoing year.

For further information on this rating announcement, please contact Mr. Talha Iqbal (Ext: 213) or the undersigned (Ext: 207) at (021) 35311861-66 or email at .

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 2020 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .

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