The Pakistan Credit Rating Agency Limited
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Kanwal Ejaz

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PACRA Assigns Initial Entity Ratings to H. Sadar Ali Akhtar Ali (Private) Limited

Rating Type Entity
(31-May-24 )
Action Initial
Long Term BBB+
Short Term A2
Outlook Stable
Rating Watch -

H. Sadar Ali Akhtar Ali (Pvt.) Limited (hereafter referred to as "HSA") boasts a long-standing legacy in the leather industry, primarily focusing on the manufacturing and export of high-quality leather. HSA's extensive range comprises finished leather. The production capabilities encompass a diverse array of leather types, including burnished, waxed, and pull-up leather, as well as oily and nubuck leather, among others. Over the years the company developed expertise and started manufacturing value-added finished leather products, such as leather jackets, and gloves, although its impact on revenue is currently modest. HSA is one of the few leather manufacturers in the country having the highest “Gold-Rated” certification by LWG (Leather Working Group). HSA has an advanced and state-of-the-art tanning facility designed to meet the needs of prominent global clientele. Pakistan’s leather industry comprises five different segments i.e. Leather Gloves (31.7%), followed by Leather Apparel & Clothing (31.6%), Tanned Leather (18.9%), Leather footwear (16%), and other leather goods & accessories (1.7%). The tanned leather industry in Pakistan has experienced a downward trend for the past couple of years, with export volumes plummeting from 26 million SQM in FY18 to just 11 million SQM in FY23. This worrisome trend poses a significant business risk for the industry players. However, value-added leather export segments such as apparel & clothing, and footwear registered a humble volumetric growth. Total leather exports of the country also posted a decline of ~7% and recorded at $887mln as compared to $954mln SPLY due to shrinking in global demand caused by high inflation and geographical tensions etc. To address this challenge, HSA undertook product diversification by entering the textile sector, specifically focusing on manufacturing and exporting ready-made denim and non-denim garments. This strategic decision has led to the new division contributing around 40% of the total export revenue. The sponsors have a clear vision for further expansion within this segment to increase market share. The company's governance structure indicates potential for enhancement, notably through the establishment of a formal board structure, board committees, and an independent oversight function. The Company is striving to strengthen its internal control system and recently established internal audit function. The financial risk profile of the company is demonstrated by comfortable coverages, cashflows, and working capital cycle. The capital structure is moderately leveraged, primarily utilizing short-term borrowings to fulfill working capital requirements, further supported by SBP concessionary rates.
The ratings are dependent on HSA's ability to maintain its position in its specific business niches and sustain growth in the face of challenging industry dynamics. Essential factors include bolstering share capital, achieving consistent revenue growth, enhancing margins, and maintaining prudent financial performance in accordance with projections.

About the Entity
The Sponsoring family started the leather business back in 1941. HSA was incorporated in Pakistan on 11th August 1985, under the Companies Ordinance, 1984 (Now Companies Act, 2017). Now the majority of the shareholding has been transferred to the third generation. Mr. Mian Naeem Akhtar is the CEO of the company, and his brother Mr. Mian Saleem Akhtar is the Director, both have decades of professional experience. Mr. Ahsan Ali, Mr. Mohsin Ali, and Mr. Hassan Ali (Directors and sons of Mr. Naeem) are actively involved in the business they are well-qualified with ample industry and business experience.

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.