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The Pakistan Credit Rating Agency Limited

Date
10-Jan-2018
Analysts
Jhangeer Hanif
jhangeer@pacra.com

Muneeb Rashid
muneeb.rashid@pacra.com

+92-42-35869504
www.pacra.com
Applicable Criteria

  • Debt Instruments Rating Methodology (Jun 17)
  • Corporate Rating Methodology (Jul 17)
  • Correlation between long-term and short-term rating scale (Jun 17)
  • Criteria Modifiers (Jun 17)

Related Research

  • Sector Study | Engineering (Jan 18)
  • Sector Study | Household Appliances (Jan 18)
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PACRA Maintains Entity Ratings of Pak Elektron Limited; Assigns Preliminary Rating to Proposed Sukuk; PEL Issued Commercial Paper of PKR 1.2bln
 Rating Type Entity Debt Instrument Debt Instrument
Current
(10-Jan-2018)
Previous
(26-Apr-2017)
Current
(10-Jan-2018-)
Previous
(26-Apr-2017)
Current
(10-Jan-2018)
 Action Maintain Maintain Maintain Maintain Preliminary
 Long Term A+ A+ A+ A+ AA-
 Short Term A1 A1 - - 
 Outlook Stable Stable Stable Stable Stable
 Rating Watch - - - - -

The ratings reflect PEL's strong business profile in its respective markets - Appliances and Power - supplemented by its strong brand. The Company, while aiming to diversify its product base, has continued to focus on improving technology in its key revenue generating products. This resulted in higher sales volumes. The performance of the Company is well supported by healthy business margins, though profits sustained given expansionary market strategy. Cashflows remained largely stable, while supporting the debt servicing ability of the company at satisfactory level.
High working capital needs emanating from long inventory and receivables cycle expose the Company to financial risk. While the management's focused efforts provided relief. Comfort is drawn from sponsors' support to manage these needs (former equity injection and retention of profits).
Meanwhile, the Company has articulated an adequate debt management policy a) total debt would be restricted to 2.5 times of free cash flows [end-Sep17: 1.2x] and b) short-term borrowings would not exceed 50% of net working capital needs [end-Dec16: 39%].
The ratings take into account improving business dynamics in Appliances and Power segments apart from the Company's strengthening business risk profile. Increase in market share with sustainable cash flows have benefited the ratings. Meanwhile, close monitoring of working capital requirements and debt servicing capacity remains imperative to maintain the company's financial health; hence ratings. The Sukuk rating incorporates the management plan of keeping a sizeable cushion in its credit lines over the tenor of the instrument.
About the Entity
PEL, incorporated in 1956, is listed on Pakistan Stock Exchange. The Company is principally engaged in manufacturing and sale of electrical equipment and home appliances. The Company is majorly owned (~51%) by Saigol Group. Other interests of the group include power, textile, and real estate. Mr. Naseem Saigol is the chairman of the ten member board, which includes four members of Saigol family, four nominees of financial institutions and 2 others including CEO. Mr. Murad Saigol, who has been with PEL since 2005, has been elevated as the Chief Executive Officer in 2015. He is supported by an experienced and stable management team.

About the Instrument
PEL intends to issue PPS of PKR 1,500mln, having a tenor of 15 months with a partial/ full call option after 12 months. The instrument carries a profit rate of 3MK + 105bps with quarterly payments.
Sukuk II was issued in Mar08 for PKR 1,100mln. The instrument has a life till Mar19 with 14 equal quarterly instalments outstanding. The profit on issue, payable quarterly, is at 3MK + 100bps. As of Nov17, PKR 413mln is outstanding.
PEL issued short-term, unsecured Commercial Paper (CP) of PKR 1,200mln to finance its working capital requirements. CP, having a tenor of 9 months, carries a profit rate of 9MK + 125bps. The redemption will be at face value at the time of maturity.
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.