PACRA Assigns Initial Rating to Pak Elektron Limited's Privately Placed Sukuk Issue of PKR 1,200 Million

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). Despite an upward revision in prices, the Company's could not pass on increased raw material costs due to stiff competition, keeping margins and profitably subdued in 9MCY19. The Company's cash flows have remained under pressure on YoY basis, and coupled with larger quantum of borrowings, impacted coverage ratios. PEL’s capital structure is characterized by intermediate leveraging to support high inventory levels. High working capital needs, emanating from long inventory and receivable cycle, exposes the Company to financial risk. Although working capital management has improved recently, higher interest rates and, ensuing finance cost along with maturity of long term debt, exerts pressure on the financial profile of the Company. The Company has recently issued a Privately Placed Sukuk to finance working capital requirements after redeeming the Commercial Paper issued for 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 coverages and managing financial risk prudently remain crucial for the ratings.

About the Entity
PEL is a public listed company and was incorporated in 1956. The Company is principally engaged in the 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 has issued a Privately Placed Sukuk of PKR 1,200 million with a tenor of 15 months, with a partial/full call option after 12 months. The instrument carries a profit rate of 3MK + 150bps, payable in quarterly installments. Subsequently, the principal amount is to be paid in one bullet payment at maturity. The instrument is secured by first joint pari passu hypothecation charge over current assets of the issuer and personal guarantee of sponsors.