PACRA Assigns Preliminary Rating to Pak Elektron Limited |PPSTS | PKR 2bln

Pak Elektron Limited (‘PEL or ‘the Company) is an eminent engineering corporation in Pakistan which manufactures a range of household appliances and electrical equipment. The ratings reflect PEL’s diversified revenue stream and long-established presence in appliances and power division including, power & distribution transformers, energy meters, and switch gears. In ongoing financial year, the household appliances segment is facing considerable performance challenges owing to high inflation, low FX reserves, policy hikes, and reduced energy subsidies. On the other hand, the emerging challenges to the growth of power division market are high cost of parts/appliances and evolving technology. From demand perspective, in household appliances, it is generated from both first-hand and second-hand markets whilst power sector primarily drives its demand from new projects/orders. Barriers to market entry are moderate-to-high as it is dominated by established brands and requires extensive capital investment. In 9MCY23, the Company recorded topline of PKR 30.6bln (9MCY22: PKR 43.3bln) with net profit locked at PKR 946mln (9MCY22: 1,498mln). PEL’s topline is a mix of ~56.45% (CY22: ~48.18%) power & ~43.55% (CY22: ~51.82%) household appliances. PEL is strategically shifting towards power division owing to better margins. It holds highest share in power transformers segment (~87%), followed by switch gears (~73%), distribution transformers (~25%), and energy meters (~19%). It holds onto a well-thought and sustained brand positioning in both power and home appliances segments followed by the targeted market leaders. PEL expects to sustain its margins despite higher material costs by increasing volume and passing on the price hike to consumers. Coverages are on lower side whereas PEL’s capital structure is characterized by intermediate leveraging, majorly constituted by STBs.
The ratings are dependent on the Company’s ability to sustain its position and revenues amid competitive business environment. Close monitoring of working capital requirements to improve cash cycle and debt servicing remains imperative. Managing liquidity and financial risk are crucial for the ratings.

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's ownership is split between Saigol Group, general public, insurance companies, foreign investors, FIs/NBFIs, and others.

About the Instrument
The Company plans to raise an aggregate of up to PKR 4,000mln (inclusive of PKR 1,000mln green shoe option) by issuing a series of Rated, Unsecured, Privately Placed, Short-Term Sukuk to be issued as instrument of redeemable capital under section 66 of the Companies Act, 2017 and as conferred in Sukuk (privately placed) Regulations. The Sukuk shall be issued in multiple tranches based on Company's requirements. Tenor shall be up to 6 months from the date of disbursement of each issue (s). The instrument will be issued in form of scrip less securities at face value. The profit rate for the instrument will be Base Rate + 100bps per annum (subject to a well-defined floor and cap as approved by shariah advisor). Base rate is defined as 3 months / 6 months KIBOR. Profits will be paid at maturity of each issue.