Press Release

VIS Revises Entity Ratings of Two Star Industries (Pvt.) Limited

Karachi, May 16, 2020: VIS Credit Rating Company Limited (VIS) has revised the entity ratings of Two Star Industries (Pvt.) Limited to ‘BBB+/A-2’ (Triple BBB Plus/ A-Two) from ‘A-/A-2 (Single A Minus/A-Two). The medium to long-term rating of ‘BBB+’ denotes adequate credit quality; Protection factors are adequate. Risk factors are considered variable if changes occur in the economy. The short-term rating of ‘A-2’ denotes good certainty of timely payments. Liquidity factors and company fundamentals are considered sound. Access to capital markets is good, risk factors are small. Outlook on the assigned ratings is ‘Stable’. The previous rating action was announced on 22nd April 2019.

The revision in ratings incorporates financial performance of the Company remaining significantly below budgeted levels. Ratings take into account elevated leverage indicators despite sizeable reduction projected in the same. Moreover, liquidity profile remains weak with low cash flow coverage of outstanding obligations. The assigned ratings draw comfort from sound financial profile and extensive experience of sponsors in the sugar sector.

The business risk profile of the sugar sector is considered high given the inherent cyclicality in crop levels and raw material prices. Moreover, distortion in the 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 alongwith sizeable exports, average sugar prices have depicted sizeable increase. 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. The recent decline in international sugar prices is also expected to cap increase in domestic sugar prices given the threat of imports. Going forward, given the attractive prices for the farmer, area under cultivation is expected to increase during MY21.

Liquidity profile of the company is weak given low cash flow coverages, limited debt servicing cushion and current ratio being below 1(x). Comfort is drawn from sizeable reduction in benchmark rates and regulatory relief granted by SBP which the management expects to result in no principal repayments over the next 1 year. Nevertheless, leverage indicators will continue to remain elevated at over 3(x) despite significant reduction targeted in stock levels and short-term borrowings. Going forward, profitability of the company will be a function of sizeable carryover stock (at lower cost), significant increase in cost of sugar production due to higher sugar cane cost and average selling price of sugar for MY20. Ratings remain dependent on expected sponsor support once required and improvement in financial profile including decrease in leverage indicators and enhancement in cash flow coverages.

For further information on this rating announcement, please contact Mr. Talha Iqbal (Ext: 213) or the undersigned (Ext: 306) at (021) 35311861-66 or email at

Faryal Ahmad Faheem
Deputy CEO

Applicable Rating Criteria: Industrial Corporates (April 2019)

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

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