PACRA Maintains Instrument Rating of Pak Elektron Limited | CP

Industry headwinds, intensified by weakening domestic currency, widening fiscal imbalance and strong competition among players has negatively impacted the domestic appliances industry. Pakistan’s household appliances sector is largely dependent on imported raw material prices, making it susceptible to external dynamics. Challenging economic conditions and transition of current government have proved to be an impediment to power industry (transformers and switch gears) growth as well. This is reflected by lower production across major categories of household appliances and power during CY18. The highest impact was witnessed in refrigerator production which fell by 12% YoY, followed by television sets (-8%) and deep freezers (-5%).

The rating reflects PEL's 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). The Company witnessed a contraction in margins as it was unable to fully pass on increased raw material costs in CY18. However,margins and an upward revision of prices during 1QCY19, provided some relief to margins and profitability. The Company's cashflows have remained under pressure and, coupled with larger quantum of borrowings, deteriorated coverage ratios. PEL’s capital structure is characterized by intermediate leveraging due to new financing obtained to support higher inventory levels. High working capital needs, emanating from long inventory and receivable cycle, expose the company to financial risk. The rising interest rates create further pressure on the Company. The Company has recently issued a Commercial Paper to finance working capital requirements and is 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 improving coverages, managing financial risk prudently and successful issuance of debt 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.

About the Instrument
The Company issued a privately placed Commercial Paper worth PKR 1,200mln in March,2019, to finance working capital requirements. The Paper has a tenor of nine (9) months and carries a profit rate of 9MK + 125bps. Issuance will be in the form of promissory notes at a discount to face value with redemption at face value in one bullet payment at maturity.