The Pakistan Credit Rating Agency Limited
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Saliha Sajid

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PACRA Maintains Entity Ratings of Cherat Cement Company Limited

Rating Type Entity
Action Maintain Maintain
Long Term A A
Short Term A1 A1
Outlook Positive Positive
Rating Watch - -

The ratings reflect Cherat Cement’s improving profile supplemented by strengthening market share of the company. The company commenced line-II (1.3mln tpa) in Jan-17 and completed another expansion (~2.1mln tpa) in Jan-19, doubling the company’s existing capacity. This will bode well in future years on account of volumetric uptick. The company has already joined league of mid-tier cement players. Upcoming industry wide expansions of 11.7mln tpa (North Region only) majority commissioning by Sep-19 and slowdown in the growth of local demand seems a challenge. The demand needs to be up to secure companies’ margin. Export is another avenue. Industry wide exports (sizeable increase in South Region) have gone up due to muted growth in local demand. A new export window is created in Bangladesh market. Previously, cement exports were seen at its peak after financial crisis in 2008. The company’s revenues witnessed strong standalone growth primarily driven by full year utilization of Line-II. The company’s high utilization levels, developments in achieving cost efficiencies and tapping new markets are a positive. During 1HFY19, industry margins witnessed decline due to lower retention prices especially in the north region, fluctuating international coal prices, pak rupee depreciation and increased import duty on coal. Lately, the coal prices showed downward trend due to cutdown of imports by China- are expected to remain range bound in medium term. The company also incentivized dealers to enter new markets which lead to decline in margins. This will assist in channelling enhanced volumes from new line commenced. The business profile of the company is likely to behave average in medium term on the back of slow demand specially for the north players and squeezing EBITDA. Strong utilization and vigilant channelling of volumes and necessary to uphold margins. Going forward, company is determined to hold its existing position in the market. Leveraging is expected to stay at the same level for a shorter period.
The ratings are dependent on upholding company's market position along with sustenance of business volumes and margins. Company's long-term debt repayment is important to improve financial risk matrix. The company's strong business performance in current stretched economic scenario - challenges on demand front - remains vital for ratings.

About the Entity
Cherat Cement - a Ghulam Faruque Group (GFG) Company - commenced operations in 1985. The company is engaged in the manufacturing, marketing and sale of Ordinary Portland Cement. Presently, the company's installed capacity stands at 4.5mln tpa; market share (8.0%) as at Mar-19. The company is majority owned by GFG through associated companies and family members. GFG - a medium sized group - mainly maintains interest in cement, sugar and packaging.

The overall control of the company vests in eight member Board of Directors (BoD), including the CEO. The BoD comprises seven non-executive directors, including three independent director, out of which four are Ghulam Faruque family members. Mr. Azam Faruque, the CEO, is the grandson of Mr. Ghulam Faruque, and has been associated with the company since 1992. Mr. Faruque is supported by a team of professionals with relevant experience in the cement industry.

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.