Press Release

JCR-VIS Reaffirms Entity Ratings of Muhammad Shafi Tanneries (Private) Limited

Karachi, June 17, 2015: JCR-VIS Credit Rating Company Limited has reaffirmed the entity ratings of Muhammad Shafi Tanneries (Private) Limited (MST) at ‘A-/A-2’ (Single A Minus/A-Two). Outlook on the assigned rating is ‘Stable’. The previous rating action was announced on May 20, 2014.

Leather industry in Pakistan is an export-oriented industry contributing ~5.4% of the total export earnings. During FY14, leather exports grew by 11% in comparison to the preceding year. However, the industry is presently facing a number of challenges including slowdown in the Eurozone, which is a major export destination for Pakistan’s leather industry. In addition to this, steep decline in Euro/PKR parity subsequent to year-end 2014 has impacted margins of industry players. Resultantly, there has been an industry-wide consolidation with smaller players exiting the market which will allow more established players to benefit over the long term.

Despite the challenging operating environment, operating performance of MST was largely maintained during FY14. Sustainability of the company’s current market position can be attributed to the company’s specialization in specific segments which include shoe soles, amongst others. Moreover, MST’s topline features considerable geographical diversification which minimized the impact of adverse movement in PKR/EURO parity observed in the latter half of 2014. While margins have dipped; the decline is less severe relative to other entities in the rated universe. Profitability indicators also showcased some weakening, albeit some reversal is expected in second half of 2015 as finance cost is expected to decline in line with cut in export refinance rate.

Given the quantitative decline in sales in 2H2015, inventory holding period has increased and cash conversion cycle has lengthened. Resultantly, utilization of short-term borrowings has also increased. With rise in debt levels, leverage indicators have trended upwards. Liquidity profile of the institution is however considered adequate in view of stable cash flows from operations and sizeable liquid assets carried on balance sheet, though increase in cash conversion cycle needs to be arrested. Further increase in debt levels may also not be considered prudent. Exposure to market risk has increased given that investment in equities has been undertaken during FY14 and in the ongoing year.

MST is part of Shafi group of companies having presence in the leather, leather garments, specialty chemicals, food and textiles. The assigned ratings draw strength from the considerable experience of the management in the leather business. A sizable proportion of the company’s equity is deployed in subsidiaries/associates in form of equity/advances and the company’s own loss absorption capacity is limited to that extent. The management plans to sell the Chinese subsidiary in the ongoing year.

For further information on this rating announcement, please contact the undersigned (Ext: 501) or Ms. Sobia Maqbool, CFA (Ext: 604) at 35311861-70 (10 lines) or fax to 35311873.

Javed Callea

Applicable Rating Criteria: Industrial Corporates (October 2003):

Information herein was obtained from sources believed to be accurate and reliable; however, JCR-VIS Credit Rating Company Limited (JCR-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. JCR-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. JCR-VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings. JCR-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 2015 JCR-VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to JCR-VIS.

JCR-VIS Credit Rating Company Limited