October 25, 2019: VIS Credit Rating Company Limited has reaffirmed entity ratings of Attock Cement Pakistan Limited at ‘A+/A-1’. Outlook on the assigned ratings is ‘Stable’.
The ratings assigned to ACPL take into account the Company’s sizable market share in the South region, strong capitalization and limited leveraging. Weakening in profitability indicators has been noted, albeit these still trend above the peer median. Business risk is viewed as higher, given weak pace of growth in local dispatches amidst the prevailing economic slowdown.
The ratings have also taken into account an element of sponsor support, given single largest shareholding of the Company rests with Pharaon Investment Group Limited Holding S.A.L. (PIGL), which is a diversified business group with presence in Middle East, Europe and Africa.
The cement industry is going through an expansionary cycle whereby 10.7m tons have been added during the past 2 years and 16m tons are in the pipeline to be installed over the next 2 years. However, on the demand side, rupee devaluation and rising inflation has kept construction activity condensed, resulting in a slowdown in industry dispatches.
Given the current economic scenario, VIS does not expect any major uptick in total local dispatches over the short to medium term to absorb the incremental supply. On the other hand, excess supply, rupee devaluation and additional taxation (FED) have kept margins of industry players under pressure.
Despite a difficult operating environment for the cement industry, ACPL posted 29% growth in dispatches in 2019, largely supported by clinker and cement exports. The export driven growth did not bode well for the margins, given that margins in the domestic market are higher. On the contrary, the exports did allow the Company to maintain capacity utilization on the higher end, at 110%. Other constraints on profitability margins included input costs pressures, higher price competition and rising financial cost.
Liquidity indicators have been impacted on account of smaller cash flow, albeit they still compare favorably to peers. Furthermore, sizeable increase in borrowing costs has slightly constrained debt servicing ability, albeit it is relatively considered adequate. Given a prudent dividend payout strategy, we expect the low leverage capital structure to be maintained.
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