PACRA Upgrades the Entity Ratings of Service Industries Limited

Service Industries Limited (“SIL” or “the Company”) operates with a dual profile, functioning both as a holding company and an operating company. As the holding company, SIL has investments in Service Long March Tyres (Pvt.) Ltd (SLM) and Service Global Footwear Ltd (SGFL). Furthermore, SIL holds two wholly owned subsidiaries, Service Tyres (Pvt.) Ltd and Service Retail (Pvt.) Ltd to which it has transferred its tyre/tube and footwear retail businesses respectively as part of the recent demerger. This restructuring has further solidified the holding company aspect of SIL and is expected to enhance efficiency and control emanating from specialized management teams. On the operating front, SIL will focus exclusively on managing the footwear manufacturing facility located in Gujrat. The ratings upgrade reflects the group's leading presence in all segments of its operations, well-established investment portfolio engendering diversity in revenue streams and growing export avenues leading to notable growth in consolidated revenue and profitability. Additionally, a robust governance structure and effective risk management at the group level also lend support to the ratings. In the local footwear retail segment, the group aims to strengthen its market presence by opening new retail shops and expanding its product range. Similarly, in the local tyre & tube business the Company will continue to enjoy a dominant share in 2, 3 wheelers, and Light Commercial Vehicles (LCV) Bias Tyre categories. In the truck & bus radial (TBR) segment, SLM has proved instrumental in capturing a sizeable market share by providing import substitution to the local market. On the export front, SLM and SGFL have also played a pivotal role in the materialization of the group’s vision to enhance its global outreach. CY23 remained a turbulent year owing to various macroeconomic challenges including soaring inflation increased energy tariffs, and elevated interest rates that kept the growth of the LSM sector stagnant and eroded the purchasing power of consumers. However, the situation started to improve gradually in 1HCY24 as reflected by the reduction in interest rates and inflation augmented by PKR/USD stabilization however, high energy prices pose a significant challenge going forward. During 1HCY24, SIL’s consolidated topline registered an impressive growth of ~41% and recorded at PKR 61bln compared to PKR 43bln SPLY primarily on the back of price inflation and improved volumes. Furthermore, the profitability margins also showed improvement at all levels. The revised ratings also take into account the improved financial risk profile of the company which is characterized by adequate coverages, cashflows, and a slightly stretched working capital cycle Further, the capital structure is leveraged as the company has availed concessionary debt to fund its expansion. Going forward, the sponsors are keenly focused on enhancing revenue streams through import substitution and expanding export avenues through sustainable business models.
The ratings are dependent on the sustenance of the Company’s leading position in its respective business niches and consistent growth under a challenging business environment. Profitability in line with business expansion; prudent working capital management and maintenance of coverages shall remain imperative along with sustained dividend flow from the investments.

About the Entity
SIL is a public listed entity, incorporated in 1957. The Company operates under the brand name of 'Servis' across the country. The group is one of the largest manufacturers of tyres & tubes (Agri and 2, 3 & 4-wheelers) and footwear besides being a prominent export player in the country. The majority stake vests with the sponsoring family. The directors, CEO, and their families and through associated concerns collectively hold ~53.42%. The Board comprises nine members, with 3 independent directors, 2 executive directors & 4 non-executive directors.