PACRA Maintains the Entity Ratings of Sapphire Finishing Mills Limited

The ratings of Sapphire Finishing Mills Limited (“SFML” or “the Company”) emanate from the established and robust business profile of the sponsors. Sapphire Group is considered one of Pakistan’s largest manufacturers and exporters of textile products. Over the years, the group has evolved from a spinning business into a textile powerhouse, strategically diversifying its business portfolio with expansions into the energy, dairy, and real estate sectors. SFML, a prominent business venture of Sapphire Group, is engaged in fabric dyeing, processing, finishing and garments stitching. The Company is equipped with state-of-the-art production facilities and cutting-edge processes to manufacture premium products that meet the high-quality standards of the top international clientage. The Company offers a broad range of products in the garments segment, including casual wear and work wear. A predominant portion of SFML’s top line is generated from export sales which represent ~95% of the total revenue. In terms of segment-wise revenue contribution, garments account for the largest share at ~57.6% followed by fabric. During FY24, the Company’s top line demonstrated a modest growth of 4.0%, reaching PKR 44.0bln (FY23: PKR 42.3bln) mainly driven by an increase in local fabric sales volume and higher monetary value generation in garments. The dilution in gross margins is mainly attributable to a bearish trend in the international market, which has impacted product pricing in dollar terms coupled with expensive raw material procurement and an uptick in salaries and wages concomitant with inflationary trends. The Company has optimized its energy cost expense through its steam turbines. The surge in operating expenses and increased finance costs impacted the Company’s net profitability, resulting in a loss after tax of PKR 714.4mln compared to a profit after tax of PKR 3.9bln in FY23. However, the income stream from the strategic allocation of funds in group companies and quoted equity instruments has supplemented the profitability matrix. The Company mainly fuels its working capital requirements through short-term borrowings (STB) followed by internally generated cash flows. The financial risk profile of the Company is considered adequate with a stretched working capital cycle and dilution in the coverages. The Company has maintained a leveraged capital structure. The management is mindful of the current challenges and expects to gain momentum by the end of FY25. Looking ahead, the management plans to enhance its operational efficiency through cost-reduction production processes, and therefore, created a BMR and capacity expansion reserve of approximately PKR 10bln. Further, any retained profits in the upcoming years will be reinvested with no dividend payout to the shareholders. The anticipated low cotton yield in FY25, which heightens the need for imported cotton, along with rising energy costs due to increased electricity and gas tariffs, are key challenges faced by the industry.
The ratings are dependent on the intact business operations under the current economic conditions. The improvement in the Company’s profitability from core operations and maintenance of coverages at a comfortable range remains essential. Adherence to the debt matrix at an optimal level is a prerequisite for assigned ratings.

About the Entity
SFML, a public unlisted Company was incorporated on July 25, 2000. It is operating with three subsidiaries outside Pakistan; Daletec AS, Sapphire Finishing Mills USA Inc., and Sapphire Europe BV. The Company is engaged in the processing, dyeing, finishing of fabric and stitching of garments. The board, chaired by Mr. Mohammad Abdullah, is governed by seven members.