The Pakistan Credit Rating Agency Limited
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Hina Harram

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PACRA Maintains Entity Ratings of LOTTE Kolson (Pvt.) Limited

Rating Type Entity
(30-May-24 )
(08-Jun-23 )
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 in South Korea. The company's owners have vast international experience and a proven history of successful business ventures. Our company boasts a robust governance structure, with stringent controls in place and a seasoned management team at the helm. The internal audit department operates under the direct oversight of directors. The confectionery and biscuits market in Pakistan is largely dominated by domestically produced products. The industry is highly competitive and products are price-elastic. A major shift has been observed with the opening of a growing number of large retail chains especially in the major cities where a higher concentration of middle and upper-income class exists. However, demand has declined due to inflation outpacing growth in consumer disposable income. Rising inflation has also driven up production costs and raw material expenses, leading to shrinking profit margins across the industry. The reduced demand has led to a decline in actual plant production. As a result, the utilization capacity of the plant dropped to ~32% in CY23, from ~50% in CY22 (CY21: ~58%). On the financial profile side, the Company's revenue emanates from four product segments which include snacks, biscuits, pasta, and gum, with Slanty contributing over ~47.07% of the total revenue. During CY23, due to a volumetric decline in sales, the company experienced a ~4.4% decrease in its topline, clocked in at ~PKR 12.65bln as compared with ~PKR 13.23bln during CY22. This decline was also accompanied by a significant ~45.5% reduction in gross profit, mainly due to challenges stemming from higher raw material costs driven by inflation, both locally and through imports. Operating expenses were notably high, primarily due to increased spending on sales and marketing activities aimed at enhancing product awareness and maintaining competitiveness in the market. Consequently, the company incurred an operating loss. Additionally, elevated finance costs further impacted the bottom line, resulting in an increase of net loss by ~33%. As result, the Company has incurred a net loss of ~PKR 875mln in CY23 (CY22: net loss of ~656mln). To address this situation, the company must focus on increasing sales volume and boosting revenue to offset these losses. The Company is exposed to a high level of financial risk as its financial risk profile is characterized by leveraged capital structure and a huge decline in coverages. Long-term debt is related to expansion activities, whereas short-term debt is related to working capital. The ratings draw comfort from the Sponsor's financial strength, guidance on managing interest rate fluctuation, and demonstrated ability to provide support if needed.
The ratings are dependent on the Company’s ability to improve sales, margins, and profitability. However, any further deterioration in margins and/or coverages will adversely impact the ratings. Continued support from Lotte WELLFOOD Co. Ltd., technical and financial, remains imperative to sustain the ratings.

About the Entity
LOTTE Kolson (Pvt.) Limited was incorporated in March, 1975. The Company was fully acquired by LOTTE WELLFOOD Co. Ltd. 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 WELLFOOD Co. Ltd., a subsidiary of LOTTE Corporation which is one of the biggest conglomerates in 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 CEO.

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.