The Pakistan Credit Rating Agency Limited
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Muhammad Fahad Iqbal

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PACRA Maintains Entity Ratings of Sapphire Fibres Limited

Rating Type Entity
(23-Nov-20 )
(23-Nov-19 )
Action Maintain Maintain
Long Term A+ A+
Short Term A1 A1
Outlook Stable Stable
Rating Watch - -

The ratings reflect Sapphire Fibres Limited’s (Sapphire Fibres) established business profile emanating from a strong presence in the broader value-chain; enabling the company to manage volatility in the textile industry. The business profile has improved on the back of the newly established denim weaving segment despite the negative impact of the COVID-19 pandemic and withdrawal of zero-rated sales tax. During FY20, Company’s gross and net margins mostly remained stagnant while net margin improved on the back of dividend from Sapphire Electric. A sizable investment book (~PKR 10.6bln, ~67% of equity) built over the years by deploying surplus funds augments the Company’s profile. Meanwhile, recent economic conditions and volatility in the stock market diminished trading portfolio performance and ensuing income, despite investment in blue-chip stocks. However, strong core operations have led to continued improvement in profitability. Reduction in policy rates and the moratorium relief by SBP provided respite to the whole sector. The markets gradually opened in some parts of the world towards the end of 1QFY21. Going forward, the second wave of the pandemic has begun its course and lockdowns may be a cause of concern. However, the business community is expecting to continue operations under strict SOPs, both; locally and in most of the export destinations of the Company. The Company took the SBP facility of deferment of the principal amount of the long-term loan. The financial risk of the company is stretched; as the debt coverage remained stretched, however, Company bounced back in 1QFY21 and the coverages improved due to a reduction in finance cost. Free cashflows have shown significant improvement due to better performance in core operations, reflected in improved coverages in 1QFY21 after being stagnant in FY20. The expected continuity of the dividend stream from Sapphire Electric will further supplement the bottom-line and coverages. Ratings incorporate association of the company with well-established Sapphire Group.
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 the surplus funds are important. Sustainability of coverages would remain critical to avoid any drag on financial profile due to a prolonged downturn in capital markets.

About the Entity
Sapphire Fibres Limited - listed on Pakistan Stock Exchange - commenced operations in 1979. Sapphire Fibres is a vertically integrated composite textile unit, manufacturing specialized cotton yarn, fabric and garments. The Company operates with 102,096 spindles. The Company has made separate business units for its business which includes (i) Spinning, (ii) Weaving, (iii) Knitting, iv) Dyeing and (v) Garments; each is profit centre. Sapphire Fibres is the flagship company of Sapphire Group, which collectively owns majority (~85%) stake in the Company; directly through individuals (~33%) and group companies (~52%). Remaining (~15%) stake is well spread among institutions and the general public. Sapphire Fibres has interests in textile, power and cement sectors.

Overall control vests with eight-member BoD, dominated by the sponsor family: five family members, including CEO, two independent directors and one non-executive. The CEO, Mr Shahid Abdullah, belonging to sponsor family, is a business magnate and oversees the company affairs. He is assisted by a professional and experienced management team.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.