The Pakistan Credit Rating Agency Limited
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Silwat Malik

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PACRA Maintains Entity Ratings of Pak Elektron Limited

Rating Type Entity
(02-Sep-19 )
(09-Mar-19 )
Action Maintain Maintain
Long Term A+ A+
Short Term A1 A1
Outlook Stable Stable
Rating Watch - -

Industry headwinds, intensified by weakening domestic currency, widening fiscal imbalance and strong competition among players has negatively impacted the domestic appliances industry, as reflected by lower volumetric sales. Moreover, dependence on global raw materials adds further pressure. Challenging economic conditions and transition of current government have proved to be an impediment to power industry (transformers and switch gears) growth as well. According to the Pakistan Bureau of Statistics, during 6MCY19, the highest impact was witnessed in refrigerator production which fell by ~28% YoY, followed by air conditioners (~11%) and television sets (~1%). On the other hand, a 31%, YoY, increase was observed in deep freezer production during 6MCY19.

The rating reflects Pak Elektron Limited's (PEL) diversified revenue stream and strong presence in Appliances and Power products market. The Company, by leveraging its brand, has continued to focus on enhancing product slate and revenues with introduction of new products (TV and Water Dispenser). Despite recent revision of prices the Company witnessed a contraction in margins owing to elevated costs arising from a depreciated Pakistani Rupee and high borrowing costs. The Company's cashflows have remained under pressure and, coupled with high quantum of borrowings, resulted in deteriorated coverage ratios. Rising interest rates add further pressure on the Company. PEL is exposed to financial risk owing to its long inventory and receivable cycle. Although an improvement in working capital cycle was observed during 6MCY19, room for further improvement exists. The Company’s capital structure is characterized by intermediate leveraging owing to financing obtained to support high inventory levels. The Company has (March, 2019) issued a Commercial Paper to finance working capital requirements and is currently in the process of issuing a Privately Placed Sukuk for the same purpose.
The ratings are dependent on the management's ability to maintain its market share and margins. Any further deterioration in margins, in turn, profitability may impact the ratings adversely. Meanwhile, close monitoring of working capital requirements to improve cash cycle and debt servicing capacity remain imperative. Maintaining strong coverage ratios and managing financial risk prudently remains crucial for the rating.

About the Entity
PEL is a listed Public Limited Company and was incorporated in 1956. The Company is principally engaged in manufacturing and sale of electrical capital goods and domestic appliances. PEL is majorly owned by Saigol Group (~50%). Other interests of the group include power, textile and real estate. Mr. Naseem Saigol is the Chairman of the ten member Board. Saigol family has prominent presence on Board. Mr. Murad Saigol, MD/CEO, monitors all of the strategic and operational affairs of the Company. He is supported by an experienced and stable 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.