PACRA Maintains Entity Ratings of Sapphire Retail Limited

Sapphire is a leading and reputable brand, with a history of the last few decades, in the bigger textile space. The group has also built a formidable presence in the retail world under Sapphire Retail. The Company has a wholly-owned subsidiary Designtex (SMC-Private) Limited and is principally engaged in manufacturing, stitching, and trading of textiles and ancillary products. The Company operates a complete range of clothing brands targeting various segments (unstitched, stitched, accessories, etc) of the retail market. With a policy aimed at increasing market share, the company is opening new stores and has a network of 45 stores currently. Apart from the physical stores, the online store is also generating huge traffic. The expanded retail footprint to support growth is expected to contribute towards margin improvement through economies of scale. The Company employs experienced professionals, aided by comprehensive reporting, who look after the operations of the Company with complete autonomy. With higher brand recognition developed over the years, sales have exhibited significant growth of 44% YoY in FY23 and were recorded at PKR 21.4 billion (FY22: PKR 14.9 billion). The rise in marketing and administrative expenses appears to be concomitant with the prevailing inflationary trends as well as the company’s policy to enhance its market share. The company has been able to withhold the cost pressures and was able to pass it on, by the inflationary pressures. Hence, margins were intact. The company is focused on only retailing, thus avoiding the need to rely on short-term borrowings for working capital requirements. Notably, the uptick in financial charges is a result of elevated benchmark interest rates, offsetting any increase in profitability at the net level. The financial risk profile indicates good working capital management and moderately leveraged capital structure. Positive prospects for the retail clothing industry in view of our social demographics, an increase in internet penetration bodes well for the Company, however, in the backdrop of rising inflation and pressure on GDP growth, the sector remains vulnerable to possible demand overhang. During FY23, textile exports were valued at $16.5 billion as against $19.33 billion, reflecting a 15% year-on-year decline – a downward trend seen since the beginning of FY23. Exports declined due to higher energy prices, cotton shortages, and uncertainty in foreign exchange rates. Taming the demand represented by export routes was also a challenge.
The ratings are dependent on sustaining the business profile of the Company by maintaining profitability and margins achieved from core textile operations. At the same time, the sustainability of non-core income and prudent management of surplus funds are important. The sustainability of coverages would remain critical to avoid any drag on the financial profile due to prolonged downturns in capital markets.

About the Entity
Sapphire Retail Limited – a public, unlisted entity – commenced operations in 2014 and engaged in carrying out the manufacturing of textile products by processing the textile goods in outside manufacturing facilities and operating retail outlets to sell the same in Pakistan and abroad through E-store. Sapphire Retail is wholly owned by Sapphire Textile Limited. Sapphire Group is one of the largest vertically integrated textile setups in Pakistan which includes Sapphire Fibers Limited, Reliance Cotton Spinning Mills Limited, Sapphire Finishing Mills Limited & many others. Overall control vests with a five-member Board of Directors, dominated by the sponsoring family: five family members, including the CEO. The CEO, Mr. Nabeel Abdullah, belonging to the sponsoring family, possesses expertise in textiles and has a future-oriented region for the Company.