Karachi, May 18, 2023 (PPI-OT): VIS Credit Rating Company Ltd. (VIS) has downgraded the entity ratings of Ana and Batla Industries (Private) Limited (ABI) to ‘BBB/A-2’ from ‘BBB+/A-2’. The long-term rating of ‘BBB’ reflects adequate credit quality. Protection factors are reasonable and sufficient. Risk factors are considered variable if changes occur in the economy. The short-term rating of ‘A-2’ indicates good certainty of timely payment, liquidity factors and company fundamentals are sound. Access to capital is good. Risk factors are small. The outlook for the assigned ratings is ‘Stable’. The previous rating action was announced on February 7th, 2022.
Assigned ratings take into account ABI’s moderate business risk profile. The long-term demand outlook for baby diapers, which is the major segment in which ABI operates, is supported by Pakistan’s large population, increasing birth rates, and growing consumer understanding of the benefits of hygienic products for babies. The Company has rapidly expanded its output over the years and has introduced various brands of the same product catering to different target markets, enabling the Company to compete with established multinational brands. Additionally, management has established and sustained the business’ presence across all regions of Pakistan.
Revision in ratings takes into account margin deterioration and weakening in liquidity profile together with import constraints and increased currency risk. Ratings also reflect rising inflationary pressures and their impact on demand. Top line growth was recorded in FY22, however, it fell short of projections. Margin deterioration was recorded on account of weakening of purchasing power of consumers and a shift towards lower-margin products resulting from significant devaluation of the PKR against the USD. Additionally, the emergence of a commodity super cycle during FY22 led to a significant increase in input costs of imported raw materials, resulting from the global supply chain disruption following the COVID-19 pandemic and further exacerbated by the weakening local currency.
The decline in profitability has impacted cash flow coverages and liquidity indicators. Increasing working capital cycle continues to impact liquidity. Going forward, with the build-up of receivables post year end to support revenue growth is likely to further increase the pressure on liquidity and working capital.
Leverage indicators weakened due to declining profitability and an increase in working capital requirements largely to fund inventory for projected growth during the year, resulting in higher short-term borrowings. Although ABI reduced its long-term debt during the period under review, higher overall debt caused the gearing and leverage indicators to deteriorate in FY22. In the ongoing year, fresh long-term loans have been secured by the Company from banks and directors for additional working capital support, resulting in further increase in the gearing and leverage ratios. Going forward, ratings remain sensitive to improvement in margins and liquidity profile together with maintenance of gearing within reasonable levels.
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/