PACRA maintains entity ratings of PSMC

August 07, 2023 (MLN): Pakistan Credit Rating Agency Limited (PACRA) has maintained entity ratings of Pak Suzuki Motor Company Limited (PSX: PSMC) at "AA-" for long term and "Al" for short term with a stable outlook forecast, latest press release issued by PACRA showed.

The ratings take primary comfort from the predominant foreign sponsor (Suzuki Motor Corporation, Japan) to extend all types of support to the company.

PSMC is among the established auto OEMs in Pakistan. Besides, there is a high level of integration with the parent and associates.

The rating incorporates PSMC’s strong position as a prominent industry player in its respective niche with a strong market share.

Having a presence of more than four decades in the automotive industry, the company has established a formidable force in the domestic market.

Pak Suzuki offers various product options in the hatchback car segment ranging from 660CC to 1200CC and caters to the need of different income groups of customer segments.

FY23 was a challenging year for the automobile industry, the sector is heavily dependent on CKD Kits, and import restrictions due to depleting foreign exchange reserves created essential raw material shortages.

This situation led to frequent plant shutdowns and non-production periods, observed by all OEMs.

Furthermore, massive rupee depreciation coupled with high inflation and rising interest rates contracted consumer demand. PAMA’s (Pakistan Automotive Manufacturers Association) latest stats for FY23 revealed a significant drop in automobile sales volumes, where passenger cars sales recorded at 96,812 units as compared to 234,180 units in FY22 depicting a decline of ~59%.

Suzuki Alto sustained its position as a top-selling car with a sale volume of ~35,379 units in FY23. Overall, under passenger car category, the company was able to hold a market share of ~64% (FY22: ~58%).

Nexus to the adverse macroeconomic condition, the financial performance of the company remained distressed and resulted in hefty foreign exchange loss during 1QCY23.

However, assigned ratings take comfort from the financial support undertaking provided by SMC Japan on March 17, 2023, to ensure its continuing operations and to provide sufficient funds to settle liabilities when they fall due.

As of 1QCY23 financial risk profile of the company is characterized by insufficient cashflows and weak coverages.

The capital structure is leveraged, and borrowings are mainly comprised of short-term, for working capital management, and long-term (TERF) for CAPEX.

Sponsor support remains inevitable along with the integration of the supply chain at the group level and technical support from the sponsor in accordance with the license agreement.

The ratings are dependent on the company’s ability to uphold its financial risk profile and rationalization of management strategies to achieve sufficient liquidity and profitability.

Furthermore, the removal of material uncertainty related to going concerns in the annual report for FY22 is important.

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