January 08, 2020: VIS Credit Rating Company Limited (VIS) has maintained the entity ratings of Askari Cement Limited (ACL) at ‘A/A-1’ (Single A/A-One).
The medium to long-term rating of ‘A’ denotes good credit quality, with adequate protection factors. Moreover, risk factors may vary with possible changes in the economy.
The short-term rating of ‘A-1’ denotes high certainty of timely payment, liquidity factors are excellent and supported by good fundamental protection factors. Outlook on the assigned rating has been revised from ‘Stable’ to ‘Negative’. The previous rating action was announced on August 20, 2018.
The total capacity of Pakistan’s cement industry has recently increased from 59.4m tons to 64.6m tons per annum at end 2019. Current expansion projects are expected to add another 4.6m ton of cement capacities in early 2020.
Overall cement industry dispatches increased during 5MFY20 on account of slightly higher both domestic dispatches and exports. Lower than expected increase in demand coupled with considerable oversupply and range bound exports kept the cement price under pressure. Profit margins of the cement companies were under pressure during FY19, and this trend is expected to continue in FY20 on account of high interest rates, higher coal prices in rupee terms, and largely stagnant demand expected amid glut oversupply.
ACL has two plants with cumulative nameplate cement production capacity of 2.68m tons per annum. The company had 7.3% market share in terms of installed capacity and 6.7% market share in terms of dispatches in the Northern Zone in FY19.
The company installed Waste Heat Recovery (WHR) plant at Wah and completed the balancing, modernization and replacement (BMR) of Nizampur plant during 1QFY19 to enhance efficiencies and reduce bottlenecks, respectively.
ACL is also in process of installing WHR plant at Nizampur to further enhance energy efficiencies. The assigned ratings take into account strong sponsor profile as ACL is a wholly-owned company of Fauji Foundation; one of the largest business conglomerates in Pakistan. While the company has depicted stability in capacity utilization and sustained revenue over the review period, the downtrend in profitability is continuing on account of weak retention prices and increased product costs. Resultantly, the company reported a net loss during 1QFY20.
Going forward, lower than expected increase in demand coupled with oversupply and stressed exports is expected to keep the industry’s retention prices under pressure, especially in the Northern zone. Moreover, the recoupment of decrease in retention price also deems challenging as more capacities are projected to come online.
After considerable improvement during FY19, the debt service coverage ratio (DSCR) has declined considerably owing to lower FFO during 1QFY20. Going forward, the DSCR is expected to remain under pressure given the increase in repayments of long-term borrowings. Moreover, the mobilization of long-term debt for the financing of WHR plant at Nizampur will increase financial charges in the short-term.
The liquidity profile of the company is supported by short-term investments, which provide an adequate safety cushion for scheduled debt repayments amidst lower FFO generation. The ratings are dependent on improvement in profitability and debt service coverage as well as maintenance of leverage indicators at prudent levels.
VIS
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