PACRA Maintains Rating of Pak Elektron Limited's Privately Placed Sukuk Issue of PKR 1,200 Million, Assigns 'Rating Watch', Outlook 'Negative'

Pakistan’s household appliances sector is largely dependent on global raw material prices, making it susceptible to external dynamics. Amidst COVID-19 outbreak, challenging economic conditions and strong competition have proved to be an impediment to industry growth. The highest impact was witnessed in ACs and deep freezers production which fell by 78%, QoQ, followed by refrigerators (40%) and TV (31%). On the power front, transformers and switch gears production also posted a dip of 28% and 39%, respectively. Sustaining operations and generating cashflows will be tough in current environment. The situation may worsen if pandemic prolongs for a significant time.
The ratings reflects Pak Elektron Ltd.'s (PEL) diversified revenue stream and strong presence in Appliances and Power segments. The Company has continued to focus on enhancing its product slate. The recent slowdown in industry sales, especially appliances division, contracted the Company's revenues. Gross margins posted a dip, as it absorbed the impact of high costs. Sales in power division remained low as PSDP spending and government projects were sparse during 1QCY20. Consequently, the Company suffered a loss in 1QCY20. The profitability is expected to remain under pressure as appliance production was shutdown in line with provincial government directives. The Company has resumed full operations and sales have picked up lately, especially in power division (Power Transformers). The cashflows remained under pressure and, coupled with high quantum of borrowings, resulted in deteriorated coverages. PEL is exposed to financial risk owing to long inventory and receivable cycle. However, the Company was able to reduce inventory and receivable days, creating cushion at trade levels. Capital structure is characterized by intermediate leveraging. Going forward, measures announced by SBP is expected to provide relief in terms of debt servicing and lower interest cost. The Company has issued privately placed Sukuk V (Dec-19) to finance working capital requirements. The management intends to match last years sales on the back of better performance of power division, compensating sales loss in appliance division. The Negative Outlook and 'Rating Watch' signify adverse impact of COVID-19 outbreak, economic slowdown and prevailing uncertainty. PACRA will monitor the prevailing situation and update the ratings accordingly.
The rating is dependent on the management's ability to sustain operations and sales in prevailing challenges. Meanwhile, any significant deterioration in sales and margins will impact the rating. Close monitoring of working capital requirements to improve cash cycle and debt servicing remains imperative. Managing liquidity and financial risk are 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 (~51%). Other interests of the group include power, textile and real estate. Mr. Naseem Saigol is the Chairman of the nine member Board. Saigol family has prominent presence on Board. Mr. Murad Saigol, CEO, monitors all of the strategic and operational affairs of the Company. He is supported by an experienced management team.

About the Instrument
The Company has issued a Privately Placed Sukuk of PKR 1,200 million with a tenor of 15months, 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.