December 24, 2018 (MLN): JCR-VIS Credit Rating Company Ltd. (JCR-VIS) has assigned initial entity ratings of ‘A/A-1’ (Single A/A-One) to Al-Ghazi Tractors Limited (AGTL). Outlook on the assigned ratings is ‘Stable’.
Long-term Rating of ‘A’ reflects good credit quality and adequate protection factors. Risk factors may vary with possible changes in the economy, whereas short-term rating of ‘A1’ signifies high certainty of timely payment, excellent liquidity factors supported by good fundamental protection factors. Risk factors are minor, a press release issued by the agency stated on Monday.
The assigned ratings incorporate AGTL’s leading market position in the local tractor industry, diversified product portfolio, wide spread dealer network and industrial collaboration agreement with CNHI Industrial Italia S.p.A (CNHI), one of the leading tractor manufacturers in the world, to assemble and sell ‘NEW HOLLAND’ CNHI tractors in Pakistan.
Ratings also reflect adequate business and financial risk profile and sound corporate governance infrastructure. Ratings are constrained by elevated leverage indicators. However, ratings draw comfort from company’s strong shareholding pattern with 93% of the company’s ownership vested with two foreign companies (Al-Futtaim Group and CNHI) who enjoy healthy financial profile and diversified market presence.
Ratings are underpinned by moderate business risk manifested by significant potential in tractor sales growth given low penetration (number of tractors per acre of land) and mechanization (horsepower per hectare) rate as compared to regional peers, competitive advantage vis-à-vis imports due to low prices of tractors & duty protection, and less prone to currency devaluation owing to higher deletion levels.
However, demand for tractors has depicted variation over the last few years and is largely dependent on farmer’s economic health, crop production which is further dependent on weather conditions, availability of water (water scarcity in the country is a key risk), and assistance from GoP in the form of subsidies.
Assessment of financial risk profile incorporates healthy profitability indicators, strong liquidity profile, and high leverage indicators. Profitability of the company witnessed improvement on the back of higher volumetric sales & average selling prices and efficient cost management. However, expected dip in sales volume due to economic slowdown, lower projected gross margins and higher finance cost are expected to translate into reduced profitability levels in 2019. Liquidity profile of the company is considered strong given healthy cash flows in relation to outstanding obligations, limited trade debts as majority of the sales are on cash and healthy debt servicing ability.
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