Karachi, January 30, 2023 (PPI-OT):VIS Credit Rating Company Ltd. (VIS) has upgraded the entity ratings of Universal Leather (Pvt) Limited (ULPL) to ‘BBB/A-3’ (Triple B/A-Three) from ‘BBB-/A-3’ (Triple B Minus/A-Three). Long-term rating of ‘BBB’ signifies adequate credit quality, reasonable and sufficient protection factors. Risk factors are considered variable if changes occur in the economy. Short-term rating of ‘A-3’ indicates satisfactory liquidity and other protection factors qualify entities/issues as to investment grade. Risk factors are larger and subject to more variation; nevertheless, timely payment is expected. Outlook on the assigned ratings is ‘Stable’. Previous rating action was announced on November 18, 2021.
The upward rating revision reflects the recovery of financial performance metrics and the recoupment of leather industry exports to FY18 levels, following a dip during the pandemic, as a result of subsequent global economic recovery and resumption of international trade. Over the last two years, exports grew by ~25% driven by both increase in average unit prices and higher volumetric exports, with leather garments leading the way, followed by gloves and footwear. Going forward, sector is expected to face challenges from regional competitors, particularly India, as well as rising inflation and finance costs. However, currency depreciation, government support, changing fashion trends and resumption of trade with China after ease in pandemic restrictions would keep the demand stable.
Assessment of financial risk profile indicate improvement as reflected from healthy revenue growth owing to strong volumetric uptick in exports and increase in average prices over time combined with currency depreciation. Given higher demand and better pricing, almost entire sales pertain to products made from cowhides with major focus towards shoes leather. Exports continue to dominate the sales mix, with major export destinations including Europe and Far East. Client concentration risk is high, indicating significant room for improvement.
Topline growth and cost-cutting initiatives supported gross margins; however, net margins remained thin in the absence of one-time gains. As a result, cash flow generation remains limited, and increased inventory-holding days have stretched the working capital cycle. Furthermore, low equity base limits capitalization; however, gearing and leverage indicators have improved over time given lower utilization of running finance. The ratings are dependent on improvement of net margins, prudent working capital cycle management and keeping leverage indicators in line with assigned ratings will be critical.
For more information, contact:
Director Compliance and Rating Analytics,
VIS Credit Rating Company Limited
VIS House, 128/C, 25th Lane off Khayaban-e-Ittehad,
Phase VII, DHA, Karachi, Pakistan
Tel: +92-21-35311861-72
Fax: +92-21-35311873
Email: bilal@jcrvis.com.pk
Website: https://www.vis.com.pk/