December 27, 2018 (MLN): JCR-VIS Credit Rating Company Limited (JCR-VIS) has revised the entity ratings of Crescent Steel and Allied Products Limited (CSAPL) from ‘A+/A-2’ (Single A Plus/A-Two) to ‘A/A-2 (Single A/A-Two). Outlook on the assigned ratings has been revised from ‘Negative’ to Stable.
The assigned ratings reflect CSAPL’s diversified operations (exposure to steel, textiles, capital markets and power sectors), low leveraged capital structure, adequate liquidity profile, sound debt servicing ability and strong corporate governance framework.
Ratings are constrained by cyclical business risk of the steel segment which comprises bulk of the company’s revenues. Revision in ratings incorporate slow-down in sales vis-à-vis projected levels due to delay in implementation of a major pipeline projects. Resultantly, projected cash flow coverage of outstanding obligations have been reduced and have been accounted for in current ratings.
Ratings also take into account the high business risk posed by the steel sector. Cyclicality in sales is a significant risk particularly for large diameter pipe manufacturers, given the reliance on public sector projects. Pipeline augmentation projects of gas utility companies and K-4 project are expected to support sales over the short-term but timely commencement of work on RLNG-3 pipeline or other major projects are important for supporting medium term sales. As the only major local large diameter spiral pipe manufacturer in the country, the company is well-positioned to capture a sizeable chunk of the new orders.
Another key risk includes increase in HRC prices post bid submission. This is due to bids being made based on current or expected HRC prices at the time of the contract while contact award and procurement of HRC is done with a time lag. However, given the declining trend in steel prices, JCR-VIS expects margins to remain strong for remainder of FY19. While threat of dumping particularly from China remains a significant risk, duties on pipe imports and high transportation cost has facilitated in partly mitigating competition from imports.
Despite pressure on margins due to rising HRC prices in FY18, profitability of the company was supported by sizeable investment income. Going forward, ratings will remain dependent on maintaining a conservative financial profile and sound debt servicing ability.
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