The Pakistan Credit Rating Agency Limited
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Ateeb Riaz

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PACRA Maintains Entity Ratings of Lotte Kolson (Pvt.) Limited, Assigns 'Rating Watch'

Rating Type Entity
(26-Jun-20 )
(27-Dec-19 )
Action Maintain Maintain
Long Term A- A-
Short Term A2 A2
Outlook Stable Stable
Rating Watch Yes -

The ratings reflect Lotte Kolson (Pvt.) Limited’s (Lotte Kolson or 'the Company') association with Lotte Corporation, one of the biggest conglomerates of South Korea. The Company's revenue growth remained limited mainly due to government's CNIC regulations applicable on distributors and an overall contraction in demand in snacks segment. Utilization of the Company’s state-of-the-art ‘Choco Pie’ plant remains low, though improving, due to slow market pick up of the product despite aggressive marketing campaigns. Meanwhile, gross margins have remained suppressed owing to increase in raw material costs leading to losses. The Company is focusing on changing its sales mix to higher margin products, such as pasta, and increasing capacity utilization of new plant through product innovation. The financial profile of the Company is characterized by strong working capital management due to its cash based sales and a moderately leveraged capital structure with long term loan at fixed rate. However, coverages remain weak as the Company's cashlfows came under pressure. Loan deferment facility introduced by SBP will ease the liquidity pressure and provide cushion, going forward. The ratings draw strength from the sponsor's financial strength and demonstrated ability to provide support, if needed.
The 'Rating Watch' signifies uncertainty created by the COVID-19 outbreak in the prevailing challenging economic environment. The Company's production was briefly halted during the initial stage of lockdown despite exemption for food industry. The demand may take time to recover amidst partial lockdown scenario and closure of Malls, schools, restaurants and non-essential shops. PACRA will closely monitor the situation and take action accordingly.
The ratings are dependent on the Company’s ability to improve sales, margins and profitability. Increasing capacity utilization of new plant and gaining traction of newly introduced products will be important. Any further deterioration in margins and/or coverages will increase pressure on the ratings. Continued support from Lotte Confectionery, technically and financially, is critical for ratings.

About the Entity
Lotte Kolson (Private) Limited was incorporated in March, 1975. The Company was formerly known as KS Sulemanji Esmailiji & Sons (Private) Limited and was acquired by Lotte Corporation in 2014. Primary business activity of the Company involves manufacture and sale of five product categories, namely, i) Snacks, ii) Biscuits, iii) Pasta, iv) Cakes, and v) Gum The Company has six production facilities concentrated in Karachi, Lahore and Islamabad.

Major shareholding (96.5%) lies with Lotte Confectionery, a subsidiary of Lotte Corporation which is one of the biggest conglomerates of South Korea. Remaining shareholding (3.5%) lies with Mr. Dong Bin Shin, Chairman of Lotte Corporation. The Company is headed by Mr. Khayyam Rajpoot, who is the Chief Executive Officer. He is ably supported by a professional 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.