January 1, 2020: Pakistan Credit rating Agency has assigned Initial Entity Ratings to Pak Suzuki Motor Company (PSMC) at ‘AA-’ for long-term and ‘A1’ for short-term, along with a ‘stable’ outlook.
The ratings reflect strong industry positioning of PSMC in its respective niche. With the presence of up to four decades in the automotive industry, the company has established a formidable forte in the domestic market.
PSMC witnessed sustainable growth in preceding years amid growing middle class with stable margins. The industry is cyclical and prone to adverse macro-economic indicators. This is truer for the customer segment of PSMC.
However, the automobile industry has witnessed a significant dip in volumes from January 2019. The ongoing economic slowdown has impacted the Company's revenues and profitability in 9MCY19, resulting in a net loss. This was primarily due to the slower pace of adjusting the prices upward, hence the impact on volumes is relatively lower. The delta has been reduced now and will reflect positively in 2020.
The ratings draw comfort from the diversity in business streams, integration of supply chain at group level and technical support from the sponsor in accordance with the License Agreement. A sizeable portion of the debt is covered through the assurance / credibility of the Suzuki group, providing support to the assigned ratings. The overall leveraging is expected to get rationalized in the near future, providing relief to the financial profile.
The ratings are dependent on the Company’s ability to improve its financial profile by reducing leveraging and rationalizing its working capital. The management is working on this front and timely materialization of these initiatives is critical. Additionally, maintaining margins and improving profitability from core operations is important. Any significant increase in debt and/or working capital will impact the ratings without any support.